The dynamic landscape of corporate sustainability is constantly grappling with the tension between shareholder primacy and sustainability. As the European Battery industry is pushing past its infancy, the tension builds between profitable business cases on the one hand, and environmental and social responsibility, on the other. While the industry empowers the future of green mobility, it faces a crucial question: how will these competing forces shape Europe’s industrial development in the years to come?
The Shareholder Primacy Conundrum
Shareholder primacy – the notion that a company’s primary duty is to maximize shareholder value – has long been the bedrock of corporate governance. Despite being a social norm, shareholder primacy guides strategies and business decisions. While it might have sparked economic growth, it has restrained the considerations of ecological limitations and social needs.
This approach is concerning for the nascent battery industry. Several companies are still struggling to build their business and establish themselves financially, while simultaneously navigating the complex landscape of evolving sustainability legislation. The pursuit of a profitable business case in the short term too often leads to neglecting the long-term environmental and social consequences of the business activities. From responsible sourcing of raw materials, production processes, recycling and engaging with local communities, every aspect of the battery value chain needs attention in order to not jeopardize the possibility of building a sustainable industry from the ground up.
The paradox of green mobility
Transitioning to electric vehicles offers a path toward reduced tailpipe emissions given their ultralow emissions in use. However, the production of the large lithium-ion batteries is the source high embedded CO2 emissions. According to McKinsey & co, an electric vehicle ‘has roughly double the production footprint of a typical internal-combustion-engine vehicle’. This paradox highlights the urgent need for the industry to embrace sustainability from the very start.
The battery industry, like many other sectors, faces serious environmental, social and governance (ESG) concerns. These issues range from environmental damage from mining operations and waste pollution, to social issues like human rights violations and disregard for indigenous people’s rights.
China's dominance in the industry further highlights these concerns. Three-quarter of all lithium-ion battery production takes place in China, which also holds a significant share of the production capacity for critical minerals like lithium and cobalt. This concentration raises alarm, particularly among government officials, due to geopolitical tensions and the security of supply.
Expanding beyond China, sourcing of raw materials raises several concerns. Violations of Indigenous People's rights, workers' rights, and severe environmental impacts are documented in several countries where mineral extraction occurs. The cobalt mining industry in the Democratic Republic of Congo (DRC) serves as a particularly troubling example, with reports of practices compared to modern slavery.
While individual companies may not be solely responsible for the longstanding environmental and human rights issues in the battery value chain, these issues raise questions about the broader industry responsibility and the potential conflict between a rapidly growing industry’s needs and long-term sustainability.
Glimmering Hope
Despite the many and complex challenges, there are encouraging signs of companies taking initial steps towards improving their ESG performance. Tesla, recently under scrutiny for labor practices, has partnered with BHP to strengthen responsible sourcing practices and implement end-to-end traceability for critical raw materials.
While this collaboration displays an intent to address these concerns, concrete results are yet to be fully documented. Similarly, Valmet Automotive's commitment to the Science Based Targets Initiative and their CDP A-rating in 2023 indicate ambition to reduce their emissions. Finally, Polestar's collaborative project aiming to build the first climate neutral car by 2030 showcases a potentially promising initiative with the potential to become a true sustainability benchmark for the entire industry.
While individual efforts made by companies are vital, it’s not enough to fuel the fundamental shift needed. Thus, regulatory bodies play an important role in shaping a more responsible framework for batteries in the future. The recently adopted EU Battery Regulation establishes a framework for the entire battery life cycle, promoting responsible sourcing of raw materials, sustainable production practices, and responsible end-of-life management. The regulation introduces amongst others a ‘battery passport’, which aims to enable tracking and tracing of batteries, and shall contain detailed information about the environmental footprint and battery composition.
However, the EU’s efforts are wider than the Battery Regulation. The EU is developing additional legislation that will frame sustainability efforts throughout the battery supply chain. The EU Corporate Sustainability Due Diligence Directive (adopted by the Council in March 2024) aims to hold companies accountable for environmental and human rights violations throughout their global supply chains, including those related to raw material extraction. However, the turnover and employee thresholds does leave out the majority of European companies outside the scope of the directive. Additionally, the EU is revising its End-of-Life Vehicles Directive. The revised directive proposes increasing the minimum recycling rate for electric vehicle batteries to 70 per cent by weight by 2030 and proposes new measures to track and monitor the flow of electric vehicle batteries throughout their lifecycle, promoting responsible dismantling and recycling practices.
While these regulations may not hold all the answers, they demonstrate EU’s commitment to building a more sustainable battery industry across the entire value chain. EU’s ambition is to integrate economic growth and sustainability. By elevating sustainability to the boardroom level and making companies internalize the environmental and human rights costs associated with their operations, the EU contributes to challenging the traditional focus on shareholder primacy. However, despite pushing for more sustainable businesses practices, there is no empirical evidence that suggest that a complete decoupling of environmental damage and economic growth is even possible, and it not happening anytime soon.
Building a Sustainable Future
Building a sustainable battery industry needs strong collective and collaborate action. Strong government policies that incentivize responsible sourcing and circularity, are essential. At the same time, governments need to provide state aid that empowers companies to invest in and mature new sustainable solutions. Companies, in turn, must embrace sustainable practices and responsible sourcing as a key part of their business strategies, while fostering partnerships between industry, research institutions, and universities to unlock new innovations. Finally, transparency across the value chain is necessary to build trust and accountability. A collaborative approach across industry, academia and government, may position the European battery industry to overcome the challenges it faces, and build sustainable leadership in the years to come.