Cobalt Supply Chains: An Assessment of Companies' Disclosure Efforts

My co-author Priya Sreenivasan and I are glad to share that a version of this article was recently published on Global Mining Review. Following on from that, below is additional analysis that throws more light on the current state of the cobalt supply chain in addition to the challenges and gaps hampering compliance with human rights provisions.

This article covers:

1. Governmental efforts to address cobalt supply chain issues

2. Private sector efforts to address cobalt supply chain issues

3. Cobalt supply chain disclosure efforts of leading battery companies

Governmental Efforts

Earlier this week, United States Representative Chris Smith (R-NJ) introduced bill H.R. 7981 Stop China’s Exploitation of Congolese Children and Adult Forced Labour through Cobalt Mining, which has bipartisan backing. The bill aims to prevent products that contain cobalt that was extracted or processed using child or forced labour in the Democratic Republic of Congo (DRC) from accessing the United States market. The bill is the most recent to add to the growing discourse and awareness of the issues that plague the cobalt mining and refining industry. The two key facts that underline the issues are that 70% of the world’s cobalt, including the highest grade cobalt (~20%), is mined in the DRC. Second, the cobalt mining industry in the DRC is rampant with child and forced labour, inhuman working conditions, violence and environmental pollution that damages land and the health of the people.

These facts are made more grim when viewed in the context that none of the top cobalt mining and refining companies, cobalt commodity traders, battery manufacturers and consumer electronics manufacturers can claim isolation from the DRC cobalt supply chain. Consequently, all the top companies in the value chain are enabling, promoting or contributing to the irresponsible sourcing of cobalt in the DRC. These companies have often used supply chain complexity as an excuse to abdicate accountability and hide complicity.

The issues that underpin the the cobalt supply chain are neither new nor unexpected. The expectation of companies to have supply chain due diligence systems in place to trace and disclose the risks associated with conflict minerals is laid out in the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, which is the recognized as the guiding framework for companies that have regulatory or investor-driven requirements to engage with transparency and risk assessment of their critical minerals supply chain.

The OECD guidelines operate on a 5 point structure:

1. Establishing a strong company management structure that includes company policy for minerals coming from conflict regions which is communicated to suppliers and other stakeholders

2. Risk assessment

3. Designing a strategy in response to the risks identified and chart out an implementation plan

4. Third party auditing of the supply chain due diligence system

5. Public reporting

Private Sector Efforts

The Responsible Minerals Initiative (RMI), a coalition of industry members and entities that use and or trade in raw materials, produces the repository of tools involved in the assurance and reporting of conflict minerals supply chains. RMI’s assurance processes focuses on “pinch points”, predominantly midstream players including smelters and refiners. RMI conformant smelters are de facto considered audited and assured for alignment to OECD guidelines. It remains unclear if companies that use conflict minerals have their own independent supply chain audits over and beyond RMI compliance. Furthermore, it appears that RMI does not perform auditing of upstream activities (mining), a part of the supply chain engulfed in untold suffering.

Dodd-Frank Act

The need for supply chain oversight had moved beyond voluntary frameworks to regulatory requirements over a decade ago in the United States. In 2012, the US Securities and Exchange Commission (SEC) adopted a new disclosure form (Form SD – Specialized Disclosure (SEC) ), following the mandate passed in section 1502 of the Dodd-Frank Act, requiring companies to disclose their use of “conflict minerals”. The Act defines conflict minerals as the 3TG metals (tin, tantulum, tungsten and gold) or “any other mineral or its derivatives the US Secretary of State may designate in the future”. The imperative of the rule is to ensure that trade in minerals does not inadvertently fund armed groups engaged in violent conflict and contribute to human rights violations.

Form SD requires companies to determine and report on the source of the minerals, and if the minerals are from the DRC, the company is expected to disclose systems in place to conduct due diligence on the source and chain of custody of the conflict mineral.

As a result of the Dodd-Frank Act, companies listed in the US have publicly available disclosures of the smelters in their supply chains, the countries they are located in and if they conform to RMI. However, the SEC does not explicitly list cobalt as a conflict mineral. As such, most companies do not address cobalt in disclosure reports.

Regulation EU 2017/821

The European Union’s regulation for conflict minerals (Regulation(EU) 2017/821 of the European Parliament and of the Council), introduced in 2017, takes its cues from Section 1502 of the Dodd Frank Act. It addresses the 3TGs, in the context of DRC, but does not obligate companies to report their due diligence systems in place for cobalt. The consequence of the lack of stringent regulations to ensure transparency on the cobalt supply chain is that most companies have a varied level of disclosure of their systems to identify and manage the human rights risks in their cobalt supply chains.

Company Disclosure Efforts

Cobalt is a core component of lithium-ion batteries (LIBs). Battery energy storage systems (BESSs) are a crucial component of the modern electric grid. As the penetration of renewable energy grows, storage technologies provide a solution to the intermittency of generation resources, primarily solar and wind. DNV’s North America Energy Transition Outlook 2023 estimates that the deployment of LIB capacity in both standalone and solar plus storage configurations will soar by 2050.

The companies that make BESSs are called integrators. This market is dominated by 3 Chinese companies (a combined market share of 34%) and 2 US companies (30% of the total market share, combined).

The table below captures the cobalt supply chain disclosure efforts of the leading BESS companies and Contemporary Amperex Technology Limited (CATL), the leading cell manufacturer. Five levels of disclosure are covered as follows:

1. Policies stating adherence to OECD guidelines (“Level 1“)

2. Disclosure of the existence of a supply chain due diligence system (“Level 2“)

3. Disclosure of RMI conformance of suppliers (“Level 3“)

4. Availability of SEC SD- conflict minerals report (2022) (“Level 4“)

5. Detailed disclosure of cobalt supply chain including mines and smelters (“Level 5“)

The patchwork of disclosure underscores the inconsistency in the levels of transparency across the battery supply chain in the industry, which further exacerbates the problems and human rights violations on-ground at the mines. And with the growing EV and utility-scale storage systems that are reliant on LIBs, the greater the exposure to the risks of complicity with human rights violations that are rampant in the mines across DRC.

Capital investment and mergers and acquisitions (M&A) activity in the energy storage industry has been propelled by the incentives for the renewable energy sector in the inflation reduction act (IRA) as well as independent system operators (ISOs) plans to stabilize the grid to support the growing renewable capacity. It is likely that the supply chain risks associated with cobalt will face greater scrutiny, and companies involved in the metal’s supply chain will likely see demands for disclosure that go beyond regulatory requirements. This will usher in an era of improved due diligence systems and heightened scrutiny into on-ground conditions around the cobalt mines in the DRC.