The importance of ESG is growing among investors and consumers to differentiate between companies, including in the graphite sector.

China remains the biggest producer and consumer of graphite flake and downstream graphite material. The implementation of ESG policies in China has been greater in the downstream sectors than those upstream, Fastmarkets learned.

Graphite companies serving the new energy vehicles (NEV) sector, meanwhile, tend to pay more attention than those supplying the refractories sector.

Taken as a whole, however, China's setting of standards along the flake graphite supply chain - from mining to concentrates processing, or even to uncoated anode material and finished refractory products - is mostly defined by local government regulations.

As a result, it is not generally a means of differentiating between different producers in the country.

"ESG is more emphasized outside China. There may be the ISO 14001 certificate, and also there's the social responsibility standards to follow, but it is not compulsory," according to a graphite producer in China that primarily serves the refractories sector. "In terms of graphite processing, we have to install standard respirable dust processing, and also systems to transfer tailings. Local authorities carry out annual inspections to ensure mining and operation safety and sustainability."

ISO 14001 sets out the criteria for an environmental management system and can be certified. It maps out a framework that a company can follow to set up an effective environmental management system, according to the International Organization for Standardization.

Guidance and rules mean awareness and incorporation of ESG policies is developing within the graphite industry in China.

There are standards regarding sustainable operation, social responsibility and working environmental safety based on cooperation with downstream users, a spherical graphite producer in China said.

There is a greater awareness of ESG principles among producers allied to products aimed at the sustainability market, such as in the anode material chain.

"As an upstream supplier for green technology, we aim to improve our production sustainability. We have set up a well-established processing system to recycle toxic water from the purifying process of spherical graphite," the spherical graphite producer in China said.

There is increasing awareness for downstream graphite companies to adhere to rules or disclosure reports regarding green development, stakeholders' interests, social responsibility and corporate governance.

Additionally, anode producers that are publicly traded companies can disclose corporate social responsibility (CSR) reports voluntarily to keep stakeholders informed.

"Sustainable development is not only a business opportunity but also a challenge. While we are not required to respond to ESG at the moment, we disclosed the [CSR] for the year of 2020, showing our care for sustainable development, as well as social responsibility and employee welfare," a source at one anode producer in China said.

Refractories and ESG
In Japan, there is muted awareness of ESG policies upstream in the graphite production chain, sources said.

"ESG could be a topic that is more emphasized by downstream buyers. Our downstream buyers in Japan have their respective requirement for suppliers in terms of operation sustainability, corporate governance and social responsibility. And there will be the annual review of suppliers' performance in the above sectors," a second spherical graphite producer in China told Fastmarkets.

ESG policies are not a concern among graphite market participants in the refractories sector who are not dealing directly with end-users, a Japanese graphite market participant said.

In Europe, the take-up of ESG policies within the refractories sector has been mixed and is not necessarily expected to benefit the bottom line in some markets.

“ESG is not compulsory here, although the importance is growing in recent years. But as it is not compulsory or there is not any economic effect from it in companies' accounts, it is something symbolic,” one market participant with a focus on the refractories sector told Fastmarkets.

Additionally, small and medium-sized refractory companies in Europe had little awareness of the concept of ESG.

“As far as I know only big and multinational companies are seriously implementing ESG policies,” he said. “In the refractories sector we see some good intentions but few actions are implemented.”

Anode market developments
While take-up of ESG policies in the established refractories sector has been relatively slow, it appears to be more important for graphite producers serving the anode market.

South Korean steelmaker Posco, which is developing in the anode sector, has launched an ESG purchasing system with the goal to become a global sustainable purchasing leader.

Posco is working with Black Rock on its Mahenge graphite project in Tanzania.

There is a stronger incentive to stress ESG credentials among graphite producers seeking funding.

“It has become impractical for anyone consumer-facing or politically exposed in Europe, the US or Australia to oppose ESG standards. It used to be that the Norwegian sovereign wealth fund made headlines when they would invest in coal or other fossil fuels, for instance, but now the script is being flipped - a fund is more likely to make headlines by not divesting of such assets,” a junior miner said.

The danger of gaining a bad reputation for failure to adhere to positive ESG policies will fail to attract investment, and effectively be rejected by potential investors.

But this process of investors' demands and government legislation will ultimately drive stricter adoption of ESG policies, another graphite producer said.

“A process of exclusions and shutdowns by government to pressure companies to do better will drive a value-in-use price differential for companies with successful ESG adoption,” he said. “But it is not happening quickly.”

Emerging and developing graphite businesses - such as Syrah Resources, Eagle Graphite and Tirupati Graphite - all emphasize their ESG policies.

"Part of the joy of working on this project is that it ticked all of the ESG boxes before anyone cared about ESG. We have access to hydro power. Our processing is not acid generating and we have no tailings, which is virtually unheard of," Jamie Deith, chief executive officer of Eagle Graphite, told Fastmarkets in an interview this month.

Australia's Syrah Resources, which has a flake mine in Balama, Mozambique, and downstream projects in Vidalia, in the US state of Georgia, emphasizes its ESG policies in its communications to shareholders on the Australian Stock Exchange.

“The progress at Vidalia and its vertical integration with Balama is a unique value proposition to governments, auto OEMs [original equipment manufacturers] and battery manufacturers, especially in areas with US battery production, critical mineral security, and [ESG] auditability back to the source,” the company said on May 17, when it announced its first fully integrated production of active anode material.

Companies seeking to secure new financing and are also targeting consumers in the anode market, which have the greatest incentive to meet high ESG standards and avoid reputational risk.

Companies that manufacture car parts, known collectively as OEMs, must be able to demonstrate that they source their materials responsibly.

The process of producing active anode graphite material from graphite flake can be damaging to the environment.

"There are reputational issues surrounding graphite processing, as well as cobalt," Adam Panayi, managing director of battery analyst RHO Motion, said at Fastmarkets’ Battery Materials Europe 2019 conference. "The leaching process of natural flake graphite can pose problems if it is not managed properly."

OEMs are establishing their relationships with suppliers as the NEV market develops and downstream active-anode graphite production develops outside of China.

"I believe this has led to OEMs grudgingly accepting that procurement procedures will need to adapt to a new set of ESG constraints,” the junior producer said. “It's not easy; there isn't any clear set of standards and drawing the battle lines for setting standards and repercussions for defying them has just begun.”

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