Climate Strategy: A Top Priority for Mining Investors

Climate change strategy has moved from a supporting to a lead role in mining companies’ pitch to investors and shareholders.

In April 2019, Rio Tinto put green credentials at the forefront of its pitch to shareholders at its annual meeting in London. The decision made headlines, since it was the first time the company - or any other mining company - led a shareholder meeting with its environmental focus instead of returns and dividends.

“Our history and experience tell us that we will not be able to create long-term, sustainable, value for our shareholders unless we also deliver lasting benefits for the communities in which we operate,” said chairman Simon Thompson. “These beliefs are the foundation of our views on sustainability. This year, we took stock of our activities, and how we contribute to the achievement of the UN Sustainable Development Goals. The result was a refreshed approach that ensures that sustainability considerations are integrated into all of our operational and strategic decisions.”

Since the Paris Agreement and the drafting of the United Nations’ Sustainable Development Goals (SDGs), mining investors are much more focused on climate strategy. Rio Tinto alone has reduced its emissions intensity footprint by almost 30% since 2008, as well as deciding to exit coal. According to its 2019 Climate Change Report, renewable energy is now used to produce nearly three-quarters of the electricity used by the miner.

It is clear that climate and low-carbon energy strategies are now critical for mines to retain and attract investment. Leonidas Howden, Partner at Medea Capital Partners, a boutique merchant bank advising and investing in mining companies, explains: “Fundamentally, people who are making investments into mining companies, or lenders interested in providing debt capital, want to see that the projects themselves are being done in the least environmentally impactful way, from landscaping and planning all the way to the energy used to produce the raw materials.”

“Within the next five years, you’re going to really struggle to raise money for any type of mine if the environmental credentials aren’t there,” points Geoffrey de Mowbray, Chief Executive and Founder of Dints International, a company offering supply chain solutions for mines in Africa, as well as helping them access financing.

SHAREHOLDER ACTIVISM

Over the past few years, investment funds have flexed their muscles to force energy-intensive companies to define their climate strategies. Launched at the end of 2017, Climate Action 100+ is a coalition of over 320 investors with more than US$33tn in assets collectively under management, lobbying the world’s largest emitters to take action. Its engagement resulted in green commitments by oil and gas firms such as Shell and Equinor, and, importantly, the February 2019 decision by Glencore to freeze coal production, in line with the Paris Agreement.

Climate Action 100+ has an initial target of convincing 100 systemically important greenhouse gas emitters to make the transition to clean energy. It’s a big task, but the work accomplished so far by the organization proves that activism is very effective when led by shareholders.

“We see increasing demands from shareholder activists in terms of the value they are going to place on organizations with regards to the role they play in climate change. We’re also seeing elements of superannuation funds or large investment funds effectively looking at carbon as a key consideration in their investments, so organizations as a whole want to make sure they are attractive to investors,” says James Arnott, a Partner at KPMG Australia.

CLIMATE-RELATED DISCLOSURES

There is also strong momentum building to regulate and guide how mining and other energy-intensive industries disclose the financial impact of climate change. The most relevant for mines being the Task Force on Climate-Related Financial Disclosure (TCFD) which has issued recommendations about how companies should disclose the potential impact of climate change on assets.

“If you are a mining company with a business process dependent on water, for instance, then water scarcity may be an issue, and as the world gets hotter it might increase, therefore the underlying ability of the asset to perform might be at risk,” explains Arnott.

Currently, 14 metals and mining companies endorse the TCFD and plan to include such disclosures in their processes. Among them are Anglo American, ArcelorMittal, Barrick Gold Corporation, BHP, BlueScope, Glencore, Gold Fields, Norsk Hydro ASA, Rio Tinto, Tata Steel, and Vale. While these guidelines are currently just recommendations adopted on a voluntary basis, TCFD is expected to become the standard in climate-related disclosures.

In its 2018 annual report, BHP, whose vice-president of sustainability and climate change, Fiona Wild, is a member of the TCFD Task Force, made it clear that broader adoption is necessary in the sector: “We believe the TCFD recommendations represent an important step towards establishing a widely accepted framework for climate-related financial risk disclosure and we have been a firm supporter of this work. We are committed to continuing to work with the TCFD and our peers in the resources sector to support the wider adoption of the TCFD recommendations and the development of more effective disclosure practices within the sector.”

REPUTATIONAL RISK

On the lending side, the move to adopt TCFD recommendations is also being driven by the banking sector’s need to repair its reputation following the financial crisis. Since 2008, “reputational risk” is a top concern for banks and its influencing disclosure and investment strategies.

“More stringent environmental aspects are being driven by pressure on banks not to be seen to be lending to industries with a negative environmental impact, ”points Medea Capital Partners’ Howden. “On the mining finance side, lenders are not focusing on individual mining operations, for example. They are preferring to provide capital to companies that will be used on a broader basis, so there’s no real connection between the lending and a particular project if there was an environmental incident.”

Reputational risk is what drove about 20 banks worldwide, including BNP Paribas, Crédit Agricole and Santander, to stop financing new coal developments, for example. It’s also leading financial institutions to avoid jurisdictions considered risky and focus on countries where mining is transparent and regulated, and there is a base of environmental standards they can use for their assessment.