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Douglas Johnson-Poensgen told Fastmarkets that legislation including the EU Battery Regulation, the German Battery Pass, and the US Inflation Reduction Act (IRA), are creating a global regulatory push for digitalization that is becoming intertwined with the lending requirements of the investment community.
“There’s a move to share new potential standards that even China is starting to realize it needs to adopt. We’re in a movement where there’s a desire for greater proof – in which claims need to be underpinned by something beyond just periodic audit,” Johnson-Poensgen said in an interview.
It’s not entirely new; Johnson-Poensgen said that industry has talked about responsible sourcing and worked to exclude less legitimate sources from supply chains for a long period of time.
But there has been a growing clamor for better environmental, social and governance (ESG) data, whether from US regulator the Securities & Exchange Commission or lenders, he noted, with oil and aviation companies that have raised green bonds starting to be called out for not doing enough.
“In many industries, whether automotive, aerospace or construction, the vast majority of emissions are inherited from the supply chain. Frankly, most downstream companies have until now had little more than a hazy view of what was happening in their supply chains,” Johnson-Poensgen noted.
“Although the driving force for monitoring standards has been around greater transparency and decarbonization, we’re now starting to digitalize the deeper tiers of supply chains,” he added.
According to Johnson-Poensgen, once regulators signal intent, the process to achieving their goals accelerates. In the case of batteries, this happens partly because car brands want to adopt standards to drive top line growth, he said.
But there are jurisdictional differences, with regional regulators starting to set different thresholds.
Under the IRA, battery components will need to be 100% made or assembled in the United States or by its allies before the end of the decade in order for electric vehicle (EV) credits to kick in.
At the same time, the lithium, cobalt, nickel, manganese, and graphite used in the production of batteries must through 2023 be 40% extracted and processed in the US; or in any country with which the US has a free trade agreement in effect; or recycled in North America. This percentage rises in stages to reach 80% from 2027 onward.
“Some original equipment manufacturers (OEMs) may qualify some models for the 40% threshold, especially as they’re looking to secure gigafactories in the US and there’s a very active recycling ecosystem in the country already. There are the building blocks of being able to meet the requirements in 2024, but it gets hard as the percentage thresholds increase,” Johnson-Poensgen told Fastmarkets.
“Even starting from 2024, the entire tax credit is null and void if an OEM sources from a foreign entity of concern – that can be a company, a country, or a controlled foreign entity,” he said.
While the battery supply chain is on the right path, Johnson-Poensgen said the pace of change will be different for each individual participant.
“You’re optimizing for cost, risk, and location and potentially carbon if you factor in the Battery Passport in Europe. It’s something that many auto OEMs haven’t even contemplated doing. If you want to sell cars from 2024 you need to be doing this from mid-2023,” he added.
Ultimately, some auto OEMs might not meet the requirements for a few years. “Their model lines are planned, mostly EV, and they aren’t going to get those credits. It’ll mean some tough decisions,” Johnson-Poensgen noted.
A similar story is playing out in Japan and South Korea, where companies are watching developments in the rest of the world to determine where they might fit in, he said, while China is now encouraging voluntary adherence to ESG guidelines.
In Europe, the EU Battery Regulation meanwhile creates metrics for proving responsible and sustainable sourcing, as well as increasing amounts of recycled content. It also requires a Battery Passport through which data about the battery that is placed into service in the EU market is shared with various stakeholders.
Germany launched its Battery Pass project in April with consortium members including Circulor, automotive companies Audi and BMW, technology and recycling group Umicore, chemicals company BASF, research organization Fraunhofer Institute, Germany’s Academy of Science and Engineering Acatech, and technology firms Fiware and Twaice Technologies. The consortium’s goal is to develop and demonstrate cross-industry content and technical standards of an EU battery passport.
The consequent global regulatory push for digitalization is something that most consumers, if they knew, would care about, Johnson-Poensgen said. “Nobody wants to buy a new car and find out there’s child labor in the battery – that’s simply not acceptable,” he added.
At the same time, different communities are trying to create a common set of standards. In batteries alone, these include the Global Battery Alliance, the Responsible Minerals Initiative, and the Initiative for Responsible Mining Assurance, Johnson-Poensgen noted.
“But they can’t all be the definitive approach to anything. It’s a journey, and everybody recognizes the need for consistency. What happens first is solution providers like Circulor are agnostic to which standard is used and seek to allow reporting against different types of standards,” he said.
What is required for the EU Battery Regulation is different to what is required for the US EV tax credit, albeit that it is largely the same data, Johnson-Poensgen told Fastmarkets.
“Both require digital proof – whether that be in the form of a Battery Pass as Europe requires, or documentation to the US Department of Treasury as might be required with the clean vehicle tax credit – OEMs will need proof of their meeting the regulatory provisions along the entire supply chain, and this is what Circulor can provide,” he added.
Circulor, which was set up in 2018, works with partners and clients to build what Johnson-Poensgen describes as a “digital thread” that follows the flow of materials through the supply chain. For the battery supply chain, which has many stages from the mine to the electric vehicle, following that flow can be complex.
“When your supply chain is a series of many relationships, there are multiple threads that eventually find their way into a battery. These digital threads are built from the integrity with which you first record a raw material and then follow it through its many stages in the supply chain,” he added.
This allows companies to underpin claims that their raw materials were responsibly produced with specific carbon emissions and water use, for example, right down to the specific vehicle identification number (VIN), a code assigned to every motor vehicle when it is manufactured, he said.
Companies can also determine whether there are anomalies that identify supply chain risk, such as Russian nickel, something that is particularly important in new regulatory standards.
“The IRA, for example, allows an auto OEM to attribute value to materials and components on their supply chain journey to determine where they were mined, manufactured, and assembled, and whether they meet the criteria to receive tax credits,” Johnson-Poensgen noted.
This is where pressure to demonstrate provenance and ESG credentials to investors is stepping up.
“If you look at the downstream OEMs and their tier-one suppliers, particularly in Europe and North America, they are reporting on stock exchanges, looking to raise green bonds, and they’re going to have to demonstrate what they’re doing,” Johnson-Poensgen said.
“Large lending banks, for example, want to explore how they might impose a covenant using Circulor with financing to be able to ensure their clients are doing what they said they would,” he added.
Meanwhile under the IRA, an auto OEM needs to prove to the tax authorities that its actions justified the tax credit it expects to receive, Johnson-Poensgen noted.
Circulor currently tracks 69 ESG metrics ranging from indigenous rights and water use through to waste-water recycling, energy use and gender diversity.
It is not only operating in battery raw materials and automotive supply chains; the company is also providing traceability to renewable energy supply chains, including solar and wind power. Circulor has also completed projects in the chemical recycling of plastic waste, in industrial leather used by car manufacturers, and in the traceability of mica, used in heat insulation between battery modules.