Headwinds for e-car manufacturers - What matters now: BYD, Volkswagen, First Phosphate

Volkswagen hardly plays a role for many professional investors

"The share is not an issue for us at all". With this quote, Handelsblatt opens an article about Volkswagen, and in it addresses managers of sustainability funds who have turned their backs on the Company or have never been invested in Volkswagen. The newspaper refers to a study by Morningstar, according to which the VW share is not included in 14 ESG ETFs and another 3 ETFs have limited the share of VW in their fund or at least plan to reduce the position. Morningstar could not find out any details about another 3 ETFs. The investigation comes at an inopportune time for Volkswagen: on June 21, the Company plans to present its strategy for the future at a capital market day.

Volkswagen has been unpopular among investors with a clear ESG focus for years. Even before the diesel scandal, factors such as lack of transparency and other issues led to deductions in the "Governance" category. Today, Volkswagen's business relations with China and manufacturing in the Middle Kingdom are causing downgrades in the ESG metrics of fund providers. Handelsblatt cites Union Investment and Deka as examples. While Volkswagen aims to be CO2-neutral by 2050 at the latest, that alone may not be sufficient to become ESG-compliant across all levels.

BYD: China penalty could be expensive

BYD is also likely to have a bad hand in the sustainability considerations of many investors. The Company mainly manufactures in China. In addition, many raw materials that BYD uses indirectly also come from China. The extraction conditions there are considered to be in great need of improvement. In addition, electric cars from China could also have disadvantages in terms of production. Recently, plans were made according to which France could make the promotion of new cars dependent on their sustainability. The planned law is designed in such a way that it will primarily affect manufacturers who produce outside Europe and use non-sustainable materials.

First Phosphate: New battery technology scores with sustainability

If France's plans catch on, car manufacturers could soon be forced to implement their ESG visions even faster. The easiest way to do this is to purchase certain primary products from ESG-compliant sources. In the case of e-cars, the battery is considered very resource-intensive. Lithium from South America and cobalt from Africa are a no-go in the eyes of many climate-conscious customers and investors anyway - good reasons, then, to look around for new sources. The Canadian company First Phosphate is betting on the trend towards lithium iron phosphate batteries (LiFePO). These batteries rely on a cathode made of lithium iron phosphate and an anode made of graphite. The technology allows more charging cycles without significant wear, does not require the discredited cobalt and is not suspected of "exploding" due to differences in the chemical reaction. Leading car manufacturers have long been relying on the technology, and analysts expect rapid growth by 2030. First Phosphate wants to extract and refine high-purity phosphate for batteries in Canada in an ESG-compliant manner and thus score points in the market.

"First Phosphate plans to mine phosphate from anorthosites. Phosphate deposits from igneous rocks have the advantage of not containing radioactive elements, so the process after phosphate extraction is straightforward and does not lead to contamination. In our process, there will be no large tailings piles as there are when phosphate is extracted from sedimentary rock. Consequently, we will be able to operate a high quality and sustainable phosphate mining practice and thus have all the ESG prerequisites to attract the automotive industry as a customer," First Phosphate CEO John Passalacqua said in an interview months ago. Scheduled for 2023 is the completion of an economic evaluation study on the Lasc-à-l'Orignal project, results from past drilling and new exploration. First Phosphate has already found an industrial partner in the Belgian company Prayon and plans to cover larger parts of the value creation around LiFePo batteries.

After a successful IPO this year, the share corrected but is finding a bottom. Given the ever-increasing pressure on carmakers to make their business sustainable, ESG-compliant sources of raw materials have a future. While projects must be profitable first and foremost, First Phosphate's project makes a good impression. Investors can expect more details from the upcoming PEA study.