Investment capital permeates the global economy, underpinning businesses and supply chains across regions and industries. We believe that investors should not only be aware of the potential for their capital to generate returns but its impact on society and the environment. One such sustainability concern is cobalt mining.
Thousands of artisanal miners dig by hand in the Democratic Republic of Congo (DRC). Children, too. They have no industrial tools, no protective clothing, no hard hats, not even facemasks to shield toxic dust or shoes. They are searching for cobalt, the rare-earth metal powering the mobile revolution.
Cobalt is an essential component of rechargeable lithium-ion batteries. The end product may be in your pocket, on your desk, in your garage, or even in your investment portfolio. It powers most electronic gadgets, including smartphones and laptops, and electric vehicles.
Cobalt-rich batteries are seen as a greener alternative to traditional lead-acid batteries. They are smaller, lighter and hold more energy. Favoured by tech giants, including Apple and Samsung, the innovative power packs allow consumers to reap the benefits of truly mobile technology.
Cobalt: The numbers
The price of innovation
As innovation pushes for ever-more-slimline devices and governments look to phase out petrol and diesel cars in favour of their electric counterparts1, cobalt is becoming a highly sought-after metal. In fact, some studies are predicting a 30-fold increase in demand by 20302.This figure may seem high, but it is not unrealistic. Tesla plans to produce 500,000 electric vehicles a year by 2018, and will reportedly require 7,800 tons of cobalt to do so3. The company has even built its own super-sized lithium-ion battery plant, named Gigafactory 14, to help it achieve this goal.
For investors in companies linked to cobalt mining, the most prolific of which is Glencore5, this predicted surge in demand – coupled with the naturally short supply of the rare metal – means that the price of cobalt is likely to continue to rise for the foreseeable future. The flipside of cobalt’s stellar financial performance, however, is tainted by a hidden human toll.
Hermes invests in companies that are connected to cobalt mining, such as Apple. We have a keen interest in improving the transparency of supply chains, ensuring that communities in which miners operate experience economic benefits from production, and eradicating child labour from the industry.
Mobile power, human toll
More than half of the world’s cobalt is mined in the DRC, and the country’s government estimates that 20% of all cobalt production in the country comes from so-called artisanal mines that rely on human muscle (they would be better described as manual mines). In the DRC, there are at least 100,000 artisanal cobalt miners, and according to UNICEF, approximately 40,000 of those miners are children6. But despite being a naturally resource-rich country, DRC is also the second poorest economy in the world7. Life expectancy there is just 47 years for men, and 51 years for women8. That compares to 81.2 years for the average UK citizen9.
While some observers suggest that the expected surge in cobalt demand provides a much-needed source of income for people in the DRC, in reality artisanal miners are barely being paid enough to survive. Recent research by Amnesty International found that children as young as seven are working in cobalt mines, often for less than $2 a day10.
To make matters worse, miners, including children, face constant risk and are ripe for exploitation. They work in wretched conditions that are extremely dangerous to their health - often with no safety equipment or protective clothing, as aforementioned. They are exposed to a near invisible poison, cobalt dust, which can cause fatal hard metal lung disease. Work hours are long, and miners labour in tunnels that are not properly supported. Rainfall can cause large areas of cobalt mines to suddenly collapse. At least 80 artisanal miners died underground in the DRC between September 2014 and December 2015 alone, and the bodies of children and adults alike are often left buried in the rubble.11
A 21st century paradox
The reality of daily life for Congolese cobalt miners is clearly a long way from the lifestyles of the users of the latest tech devices. Furthermore, it seems that technological innovation is in fact fuelling the exploitation of the poor and vulnerable.
So, why are the world’s largest consumer brands willing to buy cobalt under such circumstances?
A large part of the problem is a lack of traceability along the supply chain – and the involvement of unscrupulous third parties. A significant proportion of cobalt from the DRC is sold to Chinese traders and smelters, who are often more concerned with price than with ethics.
The region’s largest cobalt purchaser is Congo Dongfang International, an ancillary of Zhejiang Huayou Cobalt12, which supplies cobalt to the majority of battery manufacturers around the globe. These batteries then make it ‘downstream’ into the supply chains of the consumer electronics firms, but the provenance of the cobalt used in them is often several layers removed from the corporate buyer. The use of subcontractors across the global supply chain only makes matters worse. In this way, it is difficult to determine whether cobalt from artisanal mines entered this complex supply chain.
So, even though many big brand companies claim to have a zero tolerance policy towards child labour, cobalt somehow seems to be the exception to the rule.
A lack of adequate regulation
At present, there is no regulation directly covering the global cobalt market – let alone local practices in the DRC. For example, cobalt does not fall under existing conflict minerals rules in the US, which cover gold, tantalum, tin and tungsten mined in DRC. Activists are, however, calling for cobalt to be added to the list of conflict minerals. Without laws requiring companies to check and publicly disclose the origin of source minerals and those used by suppliers, activists believe corporates will continue to profit from human rights abuses.
Thanks to the efforts of several non-governmental organisations (NGOs) governments across the globe are starting to get the message that more needs to be done to improve the transparency of supply chains, and to stamp out all forms of modern slavery, not least child labour. For example, the 2015 UK Modern Slavery Act applies to all companies conducting any part of their business in the UK that have annual gross worldwide revenues of £36 million or more. Under this regulation, companies must now publish an annual slavery and human trafficking statement which verifies the different stages in their supply chain. Companies must also confirm that none of their corporate’s suppliers are involved in slavery. This includes identifying where and how cobalt in their products was mined.
Interestingly, the statutory guidance of the Modern Slavery Act references the OECD’s Guidelines for Multinational Enterprises, which “provide principles and standards for responsible business conduct in areas such as employment and industrial relations and human rights which may help organisations when seeking to respond to or prevent modern slavery.”13
While the OECD Guidelines are merely recommendations, they are backed by 46 adhering governments. It has also developed a Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, which are seen as the global standard for mineral supply chain responsibility14.
Although the guidance is voluntary, the OECD has actively encouraged its adoption. For example, in May 2016, the OECD met with the Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters (CCCMC), a unit of China’s Ministry of Commerce, for the first time to discuss the application of the OECD’s due diligence guidance in a Chinese context15.
Ensuring ethical sourcing of cobalt from the DRC requires much more than action by policy-makers, however. Industries and investors must also make a stand if the scourge of child labour and horrendous working conditions are to be exposed and eradicated.
Amnesty International and African Resources Watch have lead the charge about human rights abuses in the DRC, particularly in cobalt, and mounted pressure on corporations to do the right thing. In a report published in January 2016, both organisations called on multinational companies who use lithium-ion batteries in their products to “conduct human rights due diligence, investigate whether the cobalt is extracted under hazardous conditions or with child labour, and be more transparent about their suppliers.”16
Controversy in the cobalt supply chain
The report also urged China to put pressure on extractive companies with overseas operations, by investigating their supply chains for unethical practices. It asked them to address any human rights violations within their operations. Huayou Cobalt was identified in the report as a key actor. Both Amnesty International and African Resources believe the firm should confirm the source (who and where) of its cobalt, and ensure child labourers are not involved in the mining process17.
In a follow-up report, published in November 2017, Amnesty International examined the degree to which companies’ cobalt-sourcing practices have improved. It found that only 25% of downstream companies have adopted due diligence policies that make clear reference to cobalt and acknowledge the OECD Guidelines as the recognised standard for conducting due diligence in the cobalt supply chain18. This compares to 2016 when it discovered that the companies it surveyed did not have such policies in place.
While companies like Huayou Cobalt, Apple and Samsung SDI have demonstrated that it is possible to map their supply chains in the DRC since the initial report was published in January 2016, Amnesty International said: “too many others have failed to take any meaningful action.
“Cobalt is still not an explicit target of the supply chain due diligence policies and practices of leading technology brands, including Huawei and Microsoft. The automotive sector is largely falling short, with not a single company yet publicly identifying its cobalt smelters or refiners.19"
The good news is that pressure from NGOs, together with the growing reputational risk faced by companies in the cobalt supply chain, is starting to have an impact.
A number of industry-wide initiatives have emerged. In late 2016, several companies have formed a body called the Responsible Cobalt Initiative (RCI) to help the industry conduct due diligence in line with the OCED Guidance, and eradicate child labour in the DRC. Apple, HP, Huawei, Song, Samsung SDI and Huayou Cobalt are among the members. However, no carmakers feature in the group.
At the same time, the Electronic Industry Citizenship Coalition (EICC) launched the Responsible Raw Materials Initiative (RRMI). Founding members include Apple, Cisco, Dell, Ford Motor, Google, HP, Intel,
Lenovo, LG Electronics, Microsoft, Sony and Samsung. This industry backed initiative aims to not only make a difference to the conditions in which materials such as cobalt are mined, but also commits to meeting current and future market expectations – including mounting pressure from socially-conscious consumers and investors for ethical supply chains.
Another movement, the Global Battery Alliance (GBA), was also established to mobilise and accelerate action for a responsible supply of critical raw materials for batteries. However, industry initiatives are voluntary, and as such, have limitations.
Furthermore, in August 2017, the DRC government made a commitment to eliminate child labour in the mining sector by 202520. But notably, previous government promises on tackling child labour have amounted to nothing.
In fact, in the age of social media, investors wield significant power in driving companies to embrace more ethical sourcing practices. Apple is a case in point. After receiving complaints about child labour in its supply chain, the company updated its Supplier Responsibility Standard in January 2017. It now references cobalt as a mineral that requires supplier due diligence. As such, Apple’s suppliers must now have a due diligence policy consistent with the OECD Guidance. Furthermore, all mineral processors, including smelters and refiners, in its supply chain are required to trace their mineral supplies back to the mining companies or sites. Amnesty International described Apple’s policy as “the most detailed in terms of its articulation of expectations for suppliers and sub-suppliers with respect to risk assessment, risk mitigation and due diligence transparency”, when compared to other tech companies surveyed in its November 2017 report.21
OECD guidance: responsibilites of upstream and downstream companies
As well as demanding greater transparency from companies in relation to their mineral supply chains, investors are increasingly realising the need for more holistic action to address human rights abuses. Simply refusing to purchase unethical cobalt will not solve the problem.
There will always be other buyers. Meaningful change means all stakeholders must come together to take action -identifying and addressing the challenges in cobalt mining, and helping the communities adversely impacted by the activity. At Hermes, we believe that audit and tracking processes around cobalt must improve. Mine-level information must be provided around metrics, including child labour. Investors can play their part too by demanding more granular detail from companies on their supply chain activities.
Movement of cobalt from artisinal mines in the DRC to the global market
Hermes EOS is encouraging companies to keep moving towards supply chain transparency, and we have been actively engaging with automotive companies to facilitate their participation in the wider discussion around cobalt. This discussion includes how the local community will be impacted by blocking out child labour, and what support needs to be put in place for them – medical care, education and job training, for example. We see a need to ensure funding is allocated to community building activities aimed at tackling child and forced-labour issues. Companies must ensure that cobalt mining communities feel the benefit of their presence – and investors will no doubt be keen to see this becoming part of corporate sustainability programmes in the years ahead.
Apple, Samsung FDI and Huayou Cobalt are leading the way in taking this approach, and are actively encouraging other companies to join them, including an innovative manufacturer of electric vehicles. The support of brands such as Samsung FDI and Apple has done a lot to push the industry forward, but there is still a long way to go. Hermes EOS’ position is that harnessing innovative technologies may provide an effective solution in the move towards increased transparency – for example, using distributed ledgers such as blockchain enables supply chains to be monitored from the bottom up, rather than the top down audit approach currently in place. We are keen to see companies following the example of Microsoft and IBM, which have invested in start-ups and incubators in order to continue driving progress.
Should companies fail to increase the transparency of their operations or continue breaking ground in the move towards an ethical supply chain, they will encounter increasing investor pressure, and may suffer considerable reputational harm.
Investors are well-placed to lobby corporates about alternatives to continually sourcing new cobalt. There are, for example, ways for cobalt to be re-used within a circular economy model. Having already been through the human rights due diligence cycle, this approach offers great potential to reduce waste and costs – while lowering the demand on already constrained natural resources.
As part of the wider dialogue taking place around better corporate reporting, investors also have the opportunity to encourage companies to think more carefully about the cost of child labour and its impact on their financial performance. As sustainability reports and integrated reports become more mainstream, these will also turn into vehicles for greater social and ethical accountability among big brands.
Of course, eradicating child labour and poor working conditions from cobalt mining will require co-ordinated action from consumers, governments, mining companies and NGOs. Nevertheless, investors undoubtedly have an important role to play in bringing an end to the 21st century paradox that is unethical cobalt mining.
- 1 “Britain to ban sale of diesel and petrol cars and vans from 2040,” published by The Guardian as at July 2017.
- 2 “Race is on to mine metal powering electric vehicles,” published by Bloomberg as at June 2016.
- 3 “No cobalt, no Tesla?” published by Tech Crunch as at January 2017.
- 4 “Tesla Gigafactory,” published by Tesla as at February 2014.
- 5 “Carmakers’ electric dreams depend on supplies of rare materials,” published by The Guardian as at July 2017.
- 6 “Exposed: child labour behind smart phone and electric car batteries,” published by Amnesty International as at January 2016.
- 7 “The Poorest Countries in the World,” published by Global Finance Magazine as at February 2017.
- 8 “DRC country profile,” published by BBC News as at July 2017.
- 9 “Life expectancy at birth,” published by World Health Organisation as at January 2016.
- 10 “This is what we die for,” published by Amnesty International as at January 2016.
- 11 “Exposed: child labour behind smart phone and electric car batteries,” published by Amnesty International as at January 2016.
- 12 “Exposed: child labour behind smart phone and electric car batteries,” published by Amnesty International as at January 2016.
- 13 “Tackling modern slavery in global supply chains,” published by OECD as at March 2016.
- 14 “Tackling modern slavery in global supply chains,” published by OECD as at March 2016.
- 15 “Beyond tin, tungsten, tantalum and gold,” published by Hermes EOS as at March 2017.
- 16 “This is what we die for,” published by Amnesty International as at January 2016.
- 17 “Exposed: child labour behind smart phone and electric car batteries,” published by Amnesty International as at January 2016.
- 18 “Time to Recharge: Corporate Action and inaction to tackle abuses in the cobalt supply chain,” published by Amnesty International as at November 2017
- 19 “Time to Recharge: Corporate Action and inaction to tackle abuses in the cobalt supply chain,” published by Amnesty International as at November 2017
- 20 “DRC: Government must deliver on pledge to end child mining labour by 2025,” published by Amnesty International as at September 2017.
- 21 “Time to recharge: Corporate action and inaction to tackle abuses in the cobalt supply chain,” published by Amnesty International as at November 2017
Hermes appoints Lin Chew as Business Development Director in APAC