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ESG Research and the Global Energy Transition

By Calvert Research and Management

Washington - According to Calvert Senior ESG Research Analyst Emily Wagner, there are certain companies in the Materials and Industrials sectors she covers that are critical to driving innovation in the global energy transition away from fossil fuels. Yet certain materials and chemicals produced by those companies can present local and global ESG challenges as part of that transition.

Importance of lithium

Lithium is the key component of the lithium-ion batteries that are used to power electric vehicles (EVs). As we look at companies in the space, we have to be aware of how lithium's benefits to the energy transition can rub against social factors and strain other environmental resources. Specific concerns include community relations and responsible labor and environmental management around water use and waste management.

Lithium is mined and deposits historically have been located in regions with indigenous populations. The use of water in these regions for mining can exacerbate water scarcity for these local communities and impact biodiversity. When we evaluate lithium companies based on our Calvert principles, we carefully assess the balance between environmental and social performance against the benefits to the energy transition. As a part of our evaluation, we look closely at the relationship between the companies and the government and regulatory environment in which they operate.

This relationship with the government in combination with indigenous relationships can negatively impact the social license to operate. For example, over the last few years, Chilean authorities were potentially going to revoke mining licenses for two companies we cover based on the over-extraction of brine. As part of our analysis, we reviewed how each company approached this negotiation and the specific actions taken. While both companies proposed plans that were approved by the authorities, one company announced significant capacity expansions in the region, something we felt would only serve to complicate the issue with Chile.

Lightweighting electric vehicles

Less top of mind with respect to the energy transition and EVs is the importance of "lightweighting." Lightweighting is a common need to meet fuel efficiency standards, especially in California. While EVs do not rely on fuel, the components of an EV — primarily the battery — can actually make the car much heavier, requiring a continued focus on lightweighting to improve battery performance.

Polyethylene and polypropylene are common plastics for battery casings, creating these plastics requires fossil fuels like natural gas — and the process to crack these molecules into plastics requires significant amounts of energy. As we consider the energy transition, we are focused on new technology applications like green hydrogen that could reduce emissions for chemical production. This shift to green hydrogen for heavier industries will be aided by the Inflation Reduction Act (IRA), and our commodity chemicals coverage is focused on opportunities around product circularity and decarbonization.

Developing green and blue hydrogen

As mentioned, the IRA provides an enormous opportunity for green and blue hydrogen in the form of significant production tax credits. Hydrogen is currently used to make ammonia, methanol, iron and steel in an energy-intensive process that converts natural gas to hydrogen, commonly referred to as grey hydrogen. Alternatively, green and blue hydrogen involves less carbon-intensive methods of production, and the IRA has paved the way for both to become cost competitive with grey.

Green hydrogen is made via water electrolysis using renewable power, while blue hydrogen uses the same production method as grey, but adds carbon capture and storage of roughly 85% to 95% of emissions. Production and use of green hydrogen is a critical pathway to Net Zero in hard-to-decarbonize industries like chemicals, fertilizers, steel and aluminum. It is also a potential solution for transportation applications like heavy-duty trucks and buses.

Bottom line: When Calvert evaluates companies in the Materials and Industrials sectors, we have to be aware of how the benefits of certain products to the energy transition can strain social factors and other environmental resources.