In this episode of the Minespider's explainer videos Christian Ecker speaks about due diligence and responsible sourcing, reasons why due diligence is important for companies, their consumers and investors, and how to start conducting due diligence. Besides that, this video describes what is due diligence in the EV battery industry.
What is Due Diligence?
Due diligence, in general, means to check, audit, or assess something. In the case of investment, this can be an assessment of the company’s financial health before purchasing shares. In the context of supply chains it means to check whether the products a company is buying have been produced in compliance with relevant national and international regulations.
Usually, due diligence is done along legal requirements as well as a company's individual expectations, for example set out in the supplier code of conduct. In the context of Minespider, this is mostly focused on due diligence of metals and minerals - have they been sourced compliantly, are they living up to the customer’s expectations in terms of carbon footprint and recycling quota, and so on.
Why is it important for the company?
There are three reasons why companies should conduct supply chain due diligence: reputation, reliability, and revenue.
Reputation is an obvious one: No company likes to be in the press because it turns out that companies in their supply chains are linked to child labor or environmental disasters. Due diligence can help companies to identify such risks and pro-actively work on them, together with the suppliers.
Reliability refers to the fact that companies who know their supply chains are able to react more quickly to interruptions. During Covid-19, or when that freight ship got stuck in the Suez Canal, companies became suddenly aware of how dependent they are on the international flow of goods. Due diligence on the involved companies will also reveal where they operate and where products get transported through, thus enabling better planning.
Revenue relates to the results of the former two points: Supply due diligence, and acting on the findings, is a long-term investment which will lead to more efficient and reliable supply chain structures, less risk of legal incompliance and related lawsuits/compensation payments/declining sales. Furthermore it is becoming more and more feasible for companies who demonstrably source their products in an ethical and compliant way, to charge premiums for their products. In any case, a better reputation can lead to higher sales.
Besides that, companies can get other financial benefits from it. Studies show, responsible business practices can increase the market value up to 4-6%.
Why is it important for both consumers and investors?
For customers, responsible sourcing means that the products they purchase are produced using ethical and sustainable methods, ensuring that the products are not harmful to the environment or communities where they are produced. Customers are increasingly conscious of the impact their purchases have on the environment, and responsible sourcing can be a significant factor in their purchasing decisions. According to a survey from McKinsey & Co., 66% of all respondents and 75% of millennial respondents say that they consider sustainability when they make a purchase.
Due Diligence is important for investors. This means that the companies in which they invest are committed to sustainable and ethical practices throughout their supply chains. This can lead to better long-term financial performance, as companies that prioritize responsible sourcing are less likely to face supply chain disruptions, legal and regulatory issues, or reputational damage.
How does Due Diligence work in practice?
Due Diligence involves desktop work, as well as field work. Company officers conducting due diligence on their suppliers would collect and review data such as audit reports and certifications. Furthermore, they might visit the companies and carry out on the ground assessments to substantiate the data collected.
Generally speaking, there are certain foci, depending on the materials and regions in question. Initially, companies might not know where exactly materials are coming from, but they would know that there are certain risks that are typically associated with a certain material. Lithium or Copper products for example require a lot of water in the sourcing and processing stage of the raw material. A lot of Lithium and copper comes from countries like Chile, Peru, Argentina, or Bolivia, where water scarcity is a big problem in many regions - so if a company wants to make sure they source responsibly they want to make sure that whoever is extracting and processing their copper and Lithium does the best they can to operate efficiently, reduce the water usage, recycle the water they use, and don’t pollute any.
Of course there are many other risks, depending on the mineral and geography, for example child labor, deforestation, financing of conflict, etc.
What is responsible sourcing for EV manufacturers?
Similar to other industries, responsible sourcing for EV manufacturers refers to the process of ensuring that the materials and components used in the production of EVs are sourced ethically and sustainably, with consideration for environmental, social, and governance factors. This is especially important for such an industry taking into account the complexity of the EV battery supply chain. The raw materials used in batteries, such as lithium, cobalt, nickel, and graphite, are often mined in different parts of the world, creating a complex global supply chain that involves multiple countries and companies. Besides that, the mining and processing of battery raw materials can be associated with labor and environmental concerns, including poor working conditions, child labor, and environmental degradation.
To ensure responsible and sustainable sourcing, EV brands and battery manufacturers need to work closely with their suppliers to identify and mitigate risks associated with the supply chain, such as labor or environmental concerns, and ensure the safety and quality of the final product.
In the context of the EU Conflict Minerals Regulation, companies need to report on their greenhouse gas footprint. Thus, collecting data on carbon footprint needs to be part of the due diligence process.
How do I know I’m sourcing responsibly?
A good indication are any independent third-party audits a company has undergone. For example, the Responsible Mineral Initiative’s (RMI’s) Responsible Minerals Assurance Program (RMAP) for Conflict Minerals, or an audit against one of the ISO Standards. There are myriad ways for companies to indicate how they are making sure to conduct their business in a responsible manner.
How do I know who am I sourcing from - so I determine whether it’s a responsible source or not?
This is where “due diligence” comes into play. In the context of supply chains and the provenance of goods, this refers to companies making sure they know their products come from a reasonably responsible source
- Can happen by obligating suppliers => passing the responsibility
- Can happen by investigating yourself
- Can happen by commissioning third party service providers to do it on your behalf
- We provide both know-how and technology for that
Depending on the mineral, companies might even be required to follow or provide their documentation following certain standards, such as:
- UN Guiding Principles on Business and Human Rights;
- OECD Guidelines for Multinational Enterprises;
- Ten Principles of the United Nations Global Compact;
- UNEP Guidelines for Social Life Cycle Assessment of Products;
- Convention on Biological Diversity Decision COP VIII/28- Voluntary guidelines on Biodiversity-Inclusive impact assessment;
- ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy;
- Eleven fundamental ILO Conventions;
- ILO Declaration on Fundamental Principles and Rights at Work;
- The International Bill of Human Rights, including the international covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights;
- OECD Due Diligence Guidance for Responsible Business Conduct;
- OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.
Our explainer videos are designed specifically for you to find out what changes you can make today to be fully compliant and ready for the future. Check out our next episodes and learn more about regulations, requirements, and technologies!