ENERGY STORAGE

Why reputational risk should be top of storage sector’s agenda

Allegations about battery manufacturers’ links to slave labour have brought the issue of reputational risk in the energy storage sector into sharp focus

BEN COOK

June 13, 2024

  • CATL and Gotion have been forced to deny links to slave labour in China
  • With the vast majority of battery cells sourced from China, the storage industry must tackle reputational risk head on
  • However, most companies do ‘inadequate job’ of managing reputational risk

The issue of reputational risk rocketed to the top of the agenda of the energy storage sector last week. Chinese battery manufacturers CATL and Gotion – two of the biggest lithium-ion battery makers in the world – were forced to deny having links to slave labour following allegations made by members of the US Congress.

A letter sent to the US Department of Homeland Security – which was signed by group of US Congress members including House Committee on Homeland Security Chairman Mark E. Green, MD (R-TN) and House Select Committee on the Chinese Communist Party Chairman John Moolenaar (R-MI) – implicated CATL and Gotion in Chinese Communist Party state-sponsored slave labour and human rights abuses in the Xinjiang Uyghur autonomous region in China.

Moolenaar was unequivocal in his damnation of the two companies. “The Select Committee has uncovered indisputable evidence that Gotion High Tech and CATL have supply chains that are deeply connected to forced labour and the ongoing genocide of Uyghurs in China. That is why the Forced Labor Enforcement Task Force must immediately add Gotion High Tech and CATL to the UFLPA Entity List and block the shipments of these companies from entering the United States. The American people expect companies in the US to avoid all involvement with the Chinese Communist Party’s campaign of genocide.”

CATL reeling

CATL was left reeling by the accusations. In a statement the company said that the suggestion that the company had connections to forced labour were “groundless and completely false”. The statement added that the letter sent by the members of Congress “cites information about suppliers in an inaccurate and misleading way”. It continued: “With some suppliers quoted in the letter, business relations ceased long ago. With other suppliers, business relations have been conducted with different subsidiaries and with absolutely no connection to forced labour or anything that violates US applicable laws and regulations. With still others, we have never procured any products from them and the cited information is simply wrong and misguided. CATL is in strict compliance with all applicable laws and regulations with respect to its operations and business activities in the US.”

Similarly, Gotion took immediate steps to counter the impact of the allegations. Chinese media company Yicai reported that the company had said the claims were “completely unfounded and absolutely wrong, adding that it has always respected human rights and protected the rights of employees”.

Fallout ripples across the storage sector

But the fallout from these allegations ripples far and wind across the energy storage industry. Many senior executives in the sector will have slept rather uneasily in recent days. This is because huge swathes of the energy storage sector do significant amounts of business with CATL. This is best illustrated by the fact that CATL manufactures more than one-third of the lithium-ion batteries produced in the world today (see chart below).

 

Global market distribution of lithium-ion battery makers in 2023 (source: Statista)

Consequently, buyers of CATL batteries will be anxious to ensure that the mud currently being flung at their supplier will not end up sticking to them too.

In November last year, Quinbrook Infrastructure Partners signed a global stationary storage framework agreement with CATL with the aim of deploying more than 10GWh of CATL’s storage systems over the next five years. Quinbrook was satisfied with CATL’s assurances regarding its supply chain, with Brian Restall, Quinbrook’s managing director for Australia and the co-chair of Quinbrook’s global procurement committee, remarking at the time CATL’s product supply chains were “robust”.

Most of the storage industry is buying batteries from China

Though CATL has denied the alleged links to slave labour, the fact that they were forced into issuing these statements has sent shockwaves around the industry. Similarly with Gotion, while the company is not as big a player as CATL, it is still the eighth largest lithium-ion battery manufacturer in the world, with a market share of 2.4 per cent. In a headline-grabbing deal in March this year, Gotion Japan, a subsidiary of Gotion High-Tech Co, entered into a collaborative agreement with Daiwa Energy & Infrastructure Co. Ltd, and CO2OS in Tokyo, Japan for the joint development, operation and maintenance of 1GWh of energy storage projects in Japan.

While China represents a huge market, the global reach of Chinese battery companies should not be underestimated. For example, CATL is the top EV battery maker by share of markets outside China (see chart below).

Source: www.caixinglobal.com

Potential human rights abuses connected to the manufacture of batteries in China should be a concern for the entire energy storage industry. In 2022, China had a 77 per cent share of global battery manufacturing capacity. Simply put, the vast majority of the world’s battery cells are sourced from China.

Battery manufacturing capacity by country in 2022 (source: visualcapitalist.com)

What should be particularly alarming for buyers of CATL batteries in the energy storage industry is that, as the Harvard Business Review (HBR) has highlighted, most companies do an “inadequate job of managing their reputations in general and the risks to their reputations in particular”. Where are they going wrong?  As Robert G. Eccles, Scott C. Newquist and Roland Schatz argued in their HBR article ‘Reputation and its Risks’, most companies “tend to focus their energies on handling the threats to their reputations that have already surfaced –  this is not risk management; it is crisis management – a reactive approach whose purpose is to limit the damage.” Meanwhile, in its 2020 Reputational Risk Management Survey Report, Willis Towers Watson found 68 per cent of clients have no framework in place for reputational risk.

The energy storage sector needs to get on top of the issue of supply chain reputational risk, and it needs to get on top of it quickly. The recent developments impacting on CATL and Gotion will have heightened investors’ awareness of environmental, social and governance issues impacting on the storage sector and will mean they will hesitate a little longer before investing in storage in future.

The reputational risks the storage industry should focus on

What can be done to address the issue of reputational risk? There are four types of reputational risk that the storage sector needs to focus on anew. According to supplier management platform provider HICX, the four types are:

  • Environmental violations

Organisations that fail to properly research suppliers run the risk of forming relationships with those that engage in practices that cause direct harm to the environment. These practices may include using harmful chemicals or illegally dumping waste – either of these situations would have a detrimental impact on businesses in a range of industries and lead to negative publicity and decreases in revenue from end consumers.

  • Human rights abuse

Human rights abuse can be devastating for unsuspecting organisations. This can take various forms, including child or forced labour, both of which equate to forms of modern slavery.

  • Product quality & safety

Issues can arise if suppliers source and provide products that do not adhere to relevant industry regulations. Failure to identify these issues before embarking on a relationship with the supplier can cause problems related to product safety, with the result that products need to be recalled, while there is also a risk of harming the organisation’s end customers.

  • Ethical violations

Ethical violations in supply chains can take the form of unethical practices, including collusion, corruption, and bribery. These could include cases of kickbacks to award a supplier a contract or goods or services being misrepresented. Organisations should be aware that these practices are relatively common and even acceptable in some parts of the world. In instances of corruption, this can also lead to environmental violations and human rights abuses. Once corruption in an organisation’s supply chain becomes public knowledge, the repercussions from the perceptions of end customers and suppliers can wreak havoc on a business’ reputation.

 

  • Tamarindo, the publishers of Energy Storage Report, has launched the Energy Storage Investment Awards 2024 – you can download the entry pack here: https://hubs.la/Q02z4wk50