Imagine you took two sips from a glass of champagne and poured the rest down the sink. Or ate two pieces of chocolate and threw the rest of the bar away. Or, with 80% of its useful life remaining, you threw away a £5,000 car battery — a battery that contains many rare-earth metals and valuable minerals, is at least 70% recyclable, and could have decades of second life in domestic renewable energy systems. Makes no sense, does it? But without intervention, a landfill will be the fate of most electric vehicle (EV) — and other types — of batteries.
This wasteful use of valuable resources is pushing us to our social, environmental, and economic limits. Finance professionals are well aware of the rising economic costs of scarce resources and the benefits of reducing waste. Waste is simply stuff we have paid good money for but can’t use or sell. But is all “waste” really waste, or does it have hidden value? What if you could create additional value from your waste and save money on raw materials?
This is at the core of circular economy thinking, which follows a long business tradition of reducing costs, managing risk, and optimising value. That’s why I and researchers at the Lloyds Banking Group Centre for Responsible Business at the University of Birmingham in the UK set out to find a circular solution for EV batteries, an industry that has massive opportunities for creating value from waste. But let’s first understand the problem of waste and management accounting’s role in finding solutions.
Accounting systems do not capture benefits of reuse
Those of us who have been around for a long time will remember the culture shock of the total quality management and just-in-time revolutions. However, the momentum of these transformations has dissipated at a time when resource use — including its massive impact on our climate — has become an urgent problem.
Customers, employees, suppliers, regulators, activists, and even investors are all more savvy about the full costs of waste. The tactic of outsourcing waste or environmental impact to your supply chain or passing it on to your customers is becoming socially unacceptable. The visibility of the negative consequences of business decisions has never been greater. And costs are predicted to grow substantially.
Major corporate buyers could face over $120 billion in increased costs in the five-year period to 2026 due to environmental risks in their supply chains, and these are likely to spiral upwards, according to CDP, a not-for-profit group that helps companies and governments disclose their environmental impact.
The problem is that most financial systems and decision protocols are not fully aligned with circular thinking. The long-term benefits of reuse fall outside the visibility of short-term KPIs, whereas short-term increases in costs are captured. Financial reporting rules act against capitalising on product design changes, sustainable procurement contracts, or value from future-life asset sales. This means businesses are restricted in disclosing related benefits or reduced risks.
Very few financial systems integrate the environmental, social, and governance (ESG) performance valued by responsible investors or connect circular initiatives that can drive this ESG performance. Reducing supply chain risks through circular thinking and decarbonisation will save money and create many benefits in the long term but increase costs in the short term.
The management accountant plays a key role in this transition to circular models. There are many techniques and standards in management accounting’s toolkit, including ISO 9000, which focuses on quality management and continuous improvement, and ISO 14000, which focuses on environmental management.
The case of EV batteries
At the Lloyds Banking Group Centre for Responsible Business, we have been researching ways of transitioning to EVs. Generally, most routes to EVs are more sustainable than existing internal combustion vehicles, but some routes are more sustainable than others. One critical component of any EV transition is the battery.
The battery sits at the nexus of costs, risks, social harm, environmental pollution, and performance, and it is a fast-evolving technology. Different batteries have very different sustainability impacts, and these cost and benefit impacts are not always shared equally among businesses in the value chain. This is further complicated by the level of dependency on developments in connected systems, including charging infrastructure and battery remanufacturing.
Our research involved representatives across the EV life cycle from raw material extractors to EV fleet operators. We realised that a major challenge to the development of a sustainable battery was the difficulty connecting the different information systems operating in different businesses across the world in places as far afield as the Central African Republic, China, Indonesia, and Chile.
From a sustainability perspective, a major concern relates to the possibility of a “solution” shifting the problem around the value chain or swapping one negative impact for another. For example, an EV driving around Norway will reduce Norwegian air pollution and carbon emissions. But to enable that EV to drive one kilometre could create massive environmental impacts, industrial injuries, water pollution, and carbon emissions in developing countries.
This is because EV batteries require cobalt, manganese, nickel, copper, and lithium, with their associated risks of irresponsible mining, production, processing, and component manufacture. Even if the environmental net effect across the value chain is positive, this could unintentionally be at the cost of rising social inequality or human rights abuse. That is why we need to use “whole life costing” evaluations across different dimensions of sustainability, using different scenarios.
Evaluating circular value chains
To do this we developed a model suitable for evaluating circular solutions that could be used to map critical sustainability impacts of different end-of-life scenarios for batteries. This model looks to evaluate whether the benefits over the life of the product are greater than the costs of its production. It is effectively an application of payback (the time it takes to repay an initial investment) to profile the life cycle impacts using different production, use, and reuse scenarios. In the “Scenario 1” graphic (below), the columns relate to the standard life cycle categories used in strategic management accounting, and the rows relate to the criteria against which different scenarios are compared.
We have simplified the model to demonstrate the underlying concepts and ideas without getting lost in the details. Also, instead of numbers, we have used a modified traffic light system where red represents a negative impact (the deeper the red the more severe the impact) and green represents a positive impact. Grey cells represent nonmaterial relationships or impacts.
Reading the model on a row-by-row basis allows us to estimate a range of paybacks — on carbon, health and safety, environment, air pollution, and water. However, it is difficult to conceive any circumstances where modern slavery practices could ever be justified or considered to pay back.
Scenario 1: Take-make-use (a battery is made from virgin materials and disposed of in a landfill when it is no longer useful but still has 80% efficiency left)
In this scenario, the only opportunity to offset negative impacts in the value chain is by driving the EV instead of an internal combustion engine. Therefore, the more miles a battery can deliver, the better its overall impact as it increases the possibility of paying back for any damage done.
Scenario 2: Second life
Nana Bonsu, Ph.D., a researcher on our team, identified second-life applications for EV batteries for storing energy generated from renewable energy sources such as wind or solar, particularly in developing countries. In this scenario, the battery is repurposed for domestic solar energy systems in developing countries after it is no longer useful for EVs. (See the “Scenario 2” graphic, below.)
In this second scenario, there are two opportunities for payback. While the second life extends the active use of the battery by decades, the battery is still suitable for further reconditioning or recycling, thus reducing any environmental risks of disposal. As the battery replaces power generated from burning kerosene or wood, it enables a significant greenhouse-gas-reducing impact over decades. Additional environmental impacts in transporting the batteries need to be taken into account, however.
Scenario 3: Infinite cycle of use?
In theory, batteries can be remanufactured indefinitely, allowing multiple opportunities for payback and keeping the battery out of a landfill. In practice, there will be a need for additional materials, with potentially high levels of environmental risk associated with battery remanufacture. However, research indicates that remanufacturing is substantially less damaging environmentally than the original manufacturing. (See the “Scenario 3” graphic, below.)
In this scenario, there are numerous opportunities for payback, but they require additional costs and have additional impact. Therefore, it is important to evaluate the net benefits from each use-remanufacture cycle. Decisions as to how and where the batteries are remanufactured are critical to the overall sustainability of the transition to EVs.
These scenarios demonstrate that sustainable benefits from the consumption of goods and services will inevitably necessitate negative impacts somewhere in the world. Therefore, we need to consider two strategies.
One is to optimise the sustainable benefits through the use and reuse of these goods and services to compensate for any damage incurred from extraction of scarce resources. The second strategy is to minimise the negative impacts at all stages of the value chain.
This form of modelling can identify strategic intervention points. For example, the reputational capital of the whole value chain could be impacted if it was uncovered that there was extensive use of forced child labour in the mining of raw materials for the battery. It follows that removing these practices would benefit all in the value chain. It is important that the costs of forced labour and the benefits of its removal are reflected in the price paid for components.
Circular economy thinking provides greater visibility of critical reputational risks and their associated costs or benefits. It also uncovers new opportunities for value creation and cost saving through more efficient use of resources. There are many other products, services, and resources where circular design principles can help businesses contribute to the development of more sustainable communities and natural systems.
Ian Thomson, ACMA, CGMA, is professor of accounting and sustainability and director of the Lloyds Banking Group Centre for Responsible Business at the University of Birmingham in the UK. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.
Learn how the depletion of finite resources is prompting organisations to reconsider their business models. Explore different types of circular business models to see if any fit your business.