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2017-07-20

THE $16BN ENVIRONMENTAL CANARY IN THE COAL MINE

Republished from huffingtonpost.com

 


By CDP



From computers to construction, transport to telecoms mining companies represent the start of the value chain for many sectors. But the carbon emissions their materials generate, when used in wider industries, could have significant implications for the mining companies themselves and the wider economy.

 

That is why today’s new sector report from CDP is so important.

 

It shows that the introduction of even a low carbon price (of US$7/tonne CO2) could result in up to US$16 billion of carbon emissions risk in industries on which the world’s mining giants are dependent - impacting demand for their output and profitability.

 

Unearthing future risks

 

The ‘Digging Deep’ report analyses a US$294 billion group of 12 large mining firms including Anglo American, Glencore and BHP. It finds the emissions generated by the using the miners’ commodities (their scope 3 emissions) are up to 30 times more carbon than the miners’ own operations. The estimated Scope 3 emissions from the 12 companies was 2.36 gigatonnes CO2 last year, equivalent to India’s annual emissions.

 

The report from CDP – voted no. 1 climate change research provider by institutional investors – also reveals that mining companies. spend approximately a quarter of their capital expenditure on fossil fuels and rely on fossil fuels for the majority of their energy needs.  Only one of the companies featured, Australian company South32, has a commitment to fully decarbonize by 2050.

 

Of all the companies assessed UK-listed Vedanta has the most energy and emissions intensive operations, largely down to its significant use of coal as an energy feedstock. It also recently completed a takeover of Cairn India’s oil and gas assets, increasing its exposure to fossil fuel production.

 

‘Digging deep’ also shows generally high exposure to water risk for the mining companies. A quarter of mining production, representing up to US$50bn in annual revenue, is expected to be exposed to water shortages and drought by 2030. Major mining regions such as Chile, Australia and South Africa are likely to be the most adversely affected.

 

Digging themselves out of a hole

 

However, there are also positive trends emerging from the sector. The best performing company is Brazilian extractive major Vale, which retains the top spot from 2015 when CDP first analysed the mining sector. Vale has continued to reduce its emissions, costs and energy significantly from 2010 – an increasingly important cushion against any changes in demand in a low-carbon transition. The company also appears to have low asset exposure to water stress and deploys high water recycling rates at its operations.

 

Encouragingly, there are signs of strategic moves away from thermal coal across the 12 companies. Rio Tinto for example, is divesting from thermal coal leaving their portfolio better positioned in terms of low-carbon resilience, (although Glencore is bucking this trend as evident in its recent rejected bid for Rio Tinto’s coal assets), and more companies are allocating their capital to materials needed in a low-carbon economy such as copper, nickel and cobalt. Operational emissions are on an improving trend too, nine of the 12 companies have taken steps to reduce the emissions intensity of operations in recent years.

 

On the governance front there is still some way to go. Seven of the 12 companies detail climate-linked performance metrics in their CEOs’ remuneration plan, emissions or climate related compensation, however these typically account for only 5% or less of total remuneration.

 

The times they are a changing

 

Of fundamental importance for investors is how these mining firms are preparing for major changes to the world market, including the emergence of carbon pricing in China and the G20 push for better management of climate risk.

 

As the mining sector is heavily dependent on continuing demand for their supply of commodities, it has the potential to be hit hard by China’s proposals for pricing carbon. China’s announced new scheme could be a catalyst for more widespread carbon pricing in commodity consuming countries, disrupting markets and demand for miners’ output. Carbon pricing has already been introduced in mining countries such as Chile earlier this year and it is due to go live in South Africa and Canada in 2018. 

 

Similarly, the recent recommendations of the Mark Carney/Michael Bloomberg Taskforce on Climate-related Financial Disclosure (TCFD) for the G20 have put management of climate risk firmly on the board agenda for most companies and are part of increasing investor pressure for extractive companies to both disclose and manage their transition risk.

 

Like most sectors, disruptive technologies and digital innovations are also have a transformative effect. Miners are beginning to focus more attention on innovative technologies which can deliver future productivity gains and sustainable growth.

 

Looking ahead

 

As a sector with a significant carbon footprint that supplies the wider economy, the low carbon transition presents major challenges to the world’s mining giants. These companies need to adjust their long-term strategies to reflect the changing grounds in carbon regulation and commodity consumption trends in light of events such as China’s proposed carbon pricing scheme.

 

Miners in general have cut operational emissions and costs in recent years as well as scaling down thermal coal exposure, however their significant Scope 3 emissions footprints remain a concern. Some companies are doing more than others to ready themselves for a transition, and investors will want to know what the potential implications are for their portfolios.