Cobalt: saying 'no' to child labour

18/07/2019

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Ama Seery, analyst within the global Sustainable and Responsible Investment (SRI) Team headed by Hamish Chamberlayne, examines the explosive demand for cobalt to power the batteries of mobile devices and the many risks associated with its supply. 

 
If you have a mobile device, it is more than likely that it will be powered with a battery containing cobalt. As we transition to a low carbon economy, the demand for batteries is expected to grow as they are used in more applications from grid scale storage to electric vehicles. According to statista.com, by 2025, it is predicted that annual global demand for cobalt in batteries will amount to 117,000 tons, an increase of almost 210% compared to 2017. While this could change in the future, at the current time, cobalt is currently a key ingredient in the modern economy. However, there are many risks associated with its supply.
 
By a twist of geographic fate, the majority of the world’s cobalt is located in the Democratic Republic of Congo (DRC). Since the mid-1990s, the country has seen continued violence and conflict which has led to a very poor human rights record. It is not uncommon to find children working in and around cobalt mines, in particular extracting the mineral by hand (also known as artisanal mining). Children are denied an education, and their health is put at risk by exposure to dust and increased levels of cobalt in their bloodstream which, at high doses, can be hazardous to human health.
 


 Photo: Getty Images
 
With technological innovation playing an important role in achieving both environmental and social sustainability goals, many of the companies we invest in have either direct, or indirect, exposure to cobalt in their supply chains. Accordingly, we have identified cobalt as a key risk for our strategy and an area for engagement.

Managing risk via engagement

Our approach,as per the UN’s Principles for Responsible Investment (PRI) recommendations, is to address the risk by engaging with companies that have cobalt in their supply chain. We used the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas as a basis for engagement. This document details a five-step framework for ensuring due diligence within a mineral supply chain.
 
1. Establish strong company management systems
2. Identify and assess risk in the supply chain
3. Design and implement a strategy to respond to identified risks
4. Carry out independent third party audit of supply chain due diligence at identified points in the supply chain
5. Report on supply chain due diligence
 
We also consulted with a charity worker from the DRC to gain insight into the challenges involved in implementing the five steps. They mentioned concerns relating to the quality of the auditing, in particular, children being removed from sites when auditors approach. The key concern highlighted, however, was the lack of an alternative for the children working in the mines. While children under 18 cannot legally work in the mines, the law is not widely observed for several economic and societal reasons. Their recommendation was for companies to partner with charities providing day care and schools, and to provide the means for families to send their children there without financial consequences.

Case study: Microsoft

Microsoft's productivity and business software and carbon neutral cloud platform are used in many different ways for the benefit of the environment and society. The power of computing underpins all technological innovation and Microsoft’s mission is to empower every person and every organisation on the planet to achieve more. With its partners, Microsoft has developed solutions spanning education, healthcare, water, buildings, infrastructure, and transportation, to provide essential services to society and help modernise cities in sustainable ways that minimise negative environmental impacts.
 
Microsoft has been a long-term holding in the SRI strategy and, as one of the world’s largest technology companies, it has a material influence on the demand for cobalt. When we first started engaging with Microsoft on this topic, the company had not traced the cobalt used in its supply chain to the original mines. Therefore, we were unable to implement the five-step framework for cobalt.
 
Active engagement sees results
 
Towards the end of 2018 we held a meeting with Microsoft’s Senior Director, Responsible Sourcing and Certifications, in which we discussed changes Microsoft had made to its supply chain and the publication of a new report, Devices Sustainability at Microsoft for 2018. We were pleased to see that Microsoft has made efforts to increase the transparency of cobalt within the company’s supply chain by improving the traceability and supply chain due diligence in line with the OECD’s guidance.
 
Additionally, Microsoft supports Pact, a non-governmental organisation (NGO) that helps companies to address child labour in mineral supply chains. By providing financial support to families and education services, there was a 77-97% reduction in the number of children working at mines in the Manono and Kolwezi regions of the DRC. This programme received international recognition. Microsoft is still on a journey regarding cobalt, and we will continue to engage with the company regarding its progress.
 
Importantly, Microsoft’s actions also make good business sense. By taking responsibility in improving standards further down its supply chain it is reducing the risk of supply disruptions and brand damage. The company is also working ahead of regulation. While there isn’t yet any binding regulation around cobalt, given the regulatory developments around conflict minerals, it is likely that policymakers, particularly in the European Union, will fill this regulatory gap. 
 
From an investment perspective, we believe that businesses which recognise a broad fiduciary duty to all stakeholders will prove to be better long-term investments.
 

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

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Janus Henderson Horizon Global Sustainable Equity Fund

This document is intended solely for the use of professionals and is not for general public distribution.

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03 / 04 CapitaGreen Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Specific risks

  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund follows a sustainable investment approach, which may cause it to be overweight and/or underweight in certain sectors and thus perform differently than funds that have a similar objective but which do not integrate sustainable investment criteria when selecting securities.

Risk rating

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