Under the Radar Report

Why Sustainability is a Key to Investing Successfully

09 July 2021
Richard Hemming

Unlike any time previously, stock analysis now requires consideration of carbon emission reduction strategies, or more broadly, environmental and sustainability initiatives. Investors will be increasingly cautious of a lithium company which is itself a heavy carbon emitter. These issues will influence the decisions of investors such as pension funds, financiers such as banks as well as customers.

What is the Electric Vehicle conundrum?

Here’s what we know. Electric Vehicles (EV) have negligible greenhouse emissions when being used, contrasted with the high emissions from petrol cars and trucks whose mode of power is the internal combustion engine.

On the other hand, the manufacture of an EV requires a great deal of energy and produces more emissions than producing a petrol vehicle. Lithium-ion battery manufacturing is energy intensive due to the cost of lithium extraction and its processing into battery grade.

What is changing for investors is increasing supply chain risk for producers of EV components. This is the risk that emissions generated in the production of EV components are higher than they should

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What is the European Union's life cycle assessment? 

Despite being emission intensive, EVs have much lower life-cycle greenhouse gas emissions than petrol vehicles. On top of this, world leading regulatory authorities including the European Union, recognise the importance of maximising the life-cycle benefits of EVs.

They understand that in order for EVs to make a meaningful contribution in improving the environment over their entire life, there needs to be minimal emissions i.e. in both their production and consumption. On this front, “Life-Cycle Assessment” is used by the EU and others to monitor and reduce emissions. Key statistics are provided for stakeholders such as car buyers and governments.

Have you heard of the new carbon tax?

The EU is enacting its carbon tax initiative, which also acts as a contract tracing mechanism when it comes to carbon emitted in processes for goods imported. The EU’s “Carbon Border Adjustment Mechanism” requires that exporters to the EU pay a levy based on the amount of carbon used in making and shipping products. This necessarily requires information being provided on the carbon footprint of every component from the mine gate to final product supply chain, as part of an “electronic product passport”.

For example, the battery alone could represent in the region of 30% of carbon emissions in an EV lifecycle. Mechanisms such as the CBAM and similar schemes elsewhere in the world create an imperative for miners and others in the supply chain to reduce emissions.

Where is the evidence of sustainability and reducing emissions?

We are seeing the impetus for carbon emission reductions in annual reports, in company updates and in proposals for future projects, such as scoping and feasibility studies.

Many wide-ranging emission reducing strategies are being adopted or considered for lithium mines and production facilities. These include solar power generation, the electrification of vehicle fleets, the use of green hydrogen power and downstream processing to reduce transport related emissions.

Other initiatives related to the environment have both positive environmental benefits as well as cost savings and include water usage and water table considerations.

Lithium stocks in the box seat

In this week's Small Cap Report we update on winners such as Pilbara Minerals (PLS) and include more details on the merger of Orocobre (ORE) and Galaxy Resources (GXY). We also include 3 lithium stocks to invest in right now that our resources analyst Peter Chilton says are at the quality end of the spectrum and represent good value. These are stocks that are poised to take off, and yes, he includes analysis on sustainability initiatives.

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Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.