Posted: 01 Dec. 2020 3 min. read

Responsible business: no longer if but when

How can extractive companies reorient their portfolios and make sustainability a strategic priority?

Becoming a responsible business: The time is here

Expectations of businesses have changed; the world now expects them to be responsible as well as profitable. This evolution is demonstrated by the recent actions of many major extractives firms: BP, Shell, Rio Tinto and BHP have all committed to net zero emissions. Such a fundamental redefinition of the future of these companies reflects the material change in both stakeholders’ and wider society’s expectations of them. Being a responsible business is no longer a nice to have, it’s critical to survival.

In this blog, we look at the advantaged portfolio concept introduced by Monitor Deloitte in 2015 and how extractives businesses must now reflect on how being responsible impacts their corporate portfolio.

The advantaged portfolio: strategically sound, value-creating, and resilient

Our Monitor Deloitte team found that the most successful portfolios exhibit three broad characteristics;

  1. Strategically sound;
  2. Value-creating; and
  3. Resilient.

In recent years, however, the voice and influence of stakeholders, such as investors, governments, media, employees, and consumers, has grown louder and louder. They want businesses to be more responsible.

The concept of being a responsible business has risen up the board agenda and is now widely considered a strategic priority by many organisations. Being one is considered to create and protect organisational value. This will be even more prevalent as we try to recover from the COVID-19 pandemic.

A successful portfolio is also responsible. And acting responsibly will touch all three characteristics of an advantaged portfolio.

An advantaged portfolio is considered as a system rather than individual components. So in the case of a diversified extractives company, how the combination and relative size of commodities work to the advantage of the business. The composition of a responsible advantaged portfolio will reflect a company’s aspirations. We expect to see a move away from commodities that don’t support a sustainable future through companies actions, products and services.
 

Commodities of the future and their trade-offs

The concept of an advantaged portfolio is particularly complex for the extractives industry. Commodities are at the heart of industrialisation and building a modern world. For example:

  • fossil fuels drive much of our transportation and provide an affordable base load energy mix; and
  • our daily lives – and particularly technology – are facilitated by a huge array of metals and minerals.

As we look to the future, we recognise that the low-carbon transition will bring about a new Future of Energy. Fluctuations in the energy sector seen over the last decade are set to continue, with increasing global energy demand and climate change accelerating the need to decarbonise. New challenges and opportunities will come about as our global energy mix continues to change, forming new ecosystems, and requiring growth in both technology and infrastructure that will support the transition.

This will increase demand for mined materials needed to support the transition. For example, to increase renewable energy generation, support electrification, and roll-out at scale battery storage and hydrogen fuel cell technologies.

These markets create advantageous opportunities for extractives. They restructure portfolios in line with expected growth in demand for certain commodities, as well as play a critical role in supplying the products that our society needs to meet global sustainable development goals.

Conversely, some fossil fuel and metals products won’t fare so well in a low-carbon economy, creating indisputable financial risks to companies’ present day balance sheets.

The changing climate and rise in extreme weather patterns puts a number of physical extractive operations at risk, including the safety and livelihood of the workforces that operate them and the welfare of the communities that they serve.

Recent commitments to bold climate ambitions, such as net zero by 2050, have contributed to significant impairments to fossil fuel assets announced by upstream companies, exemplifying how balance sheets are already impacted by the low-carbon transition.

The most recent campaign by Climate Action 100+ (a group of institutional investors collectively managing US$47 trillion assets) will undoubtedly accelerate this in the decades to come. The investors have asked the top 161 emitting companies globally (accounting for around 80% of global greenhouse gas emissions) to set strategies for decarbonisation across their whole value chain. Notably, this is targeting strategies for operational decarbonisation through net zero targets, along with targets for scope 3 emissions from the end-use of their products. The group has developed a framework to benchmark these companies’ progress and performance, which will publicly hold the companies to account regarding the strength of their climate strategies and their implementation.

These products undoubtedly facilitate our daily lives and will continue to do so in the future at varying levels. This means that extractives will have to build portfolios for future commodities that are strategically sound and resilient.

This is not a simple task. Beyond climate risk there is a complex web of societal and environmental trade-offs associated with extracting and processing these products.

For example, there are significant ethical and human rights concerns associated with the extraction of cobalt, a key metal used in producing lithium-ion batteries. At present, over half of the global production of cobalt comes from the Democratic Republic of Congo – where both illegal and artisanal mining practices are endemic. This means there is a substantial risk that responsibly mined products are mixed with metals that were mined illegally resulting in human rights abuses or child labour.

Even products central to the low carbon transition, such as wind turbines, bring challenges. For example, risk to quality of life for communities located near wind farms, as well as environmental issues both in their construction (turbines require a significant amount of mined materials to produce) as well as biodiversity loss.

Building an advantaged portfolio responsibly can generate positive externalities

This web of trade-offs brings a significant responsibility to extractives in how they manage their own operations as well as their downstream supply chain.

There are many examples of initiatives which deliver on both a responsible agenda and operational efficiencies, such as the use of onsite renewable energy and digitised extractive technologies.

Similarly, a restructuring of assets in line with a strategy that supports both operational decarbonisation, as well as the broader societal agenda to transition to a low-carbon economy, offers the potential for a more financially, operationally and reputationally resilient organisation. A restructured portfolio, competitively positioned for responsible business, will reduce the exposure of balance sheets to oil price fluctuations and the risk of impairment to fossil fuel assets, as well as delivering on the objectives of the global sustainability agenda.

Moving towards a truly responsible portfolio will also bring new strategic challenges. The advantaged portfolio concept highlights the need to ensure portfolios are ready to survive scenarios.

Today, resilience under different climate scenarios is a core challenge for the extractives sector. Some of the more ambitious climate scenario pathways represent upending of key commodity markets and drastic price shifts over the coming decade and beyond.

With greater societal and environmental responsibility and the increased focus on the future of the industry, organisations can expect more scrutiny on how they choose to sell their products. It is not enough to make decisions through only an economic lens, a truly responsible business should challenge themselves to ensure that their products are sold to those who share a commitment to responsible usage.

Extractives have a unique capacity to generate wealth and support development if well managed. For example, consider the metals required to make a smart phone or tablet. A responsible miner may opt to sell to those with recycling commitments, or commitments to ensure the technology is enabling improved communication or education.

Similarly, efficient vehicles will allow for greater utility to be obtained from petroleum products, presenting oil companies with a challenge to act responsibly and seek out markets which promote and reward efficient fuel usage, even where the net result of this maybe a lower demand for petroleum products.

 

The question is no longer “If…”, but “When…”  

Designing advantaged portfolios requires hard work  to analyse data, compare trade-offs, and make tough choices. Incorporating a responsible lens presents an even greater challenge; to understand the product lifecycle in such detail to ensure optimal societal value is derived, and have the confidence and conviction to empower decisions on this basis. Taking these responsible decisions, however, will deliver a reputationally resilient organisation and facilitate a societal licence to operate.

Investors increasingly expect boards to articulate with sophistication how their value chains are competitively advantaged and respond to climate change. Becoming a responsible business is no longer a matter of debate: Both industry and financial services have to realise the real value of their businesses that could be at risk as we transition to an economy and society which promotes long-term planetary sustainability and survival.

Parts of the extractives industry have started to progress towards a more responsible business model, as evidenced by net zero commitments. However, there remains tough choices for the industry ahead, and the most resilient organisations that will build the greatest competitive advantage will be those leading rather than following or lagging. 

If you would like to discuss any of the issues and opportunities discussed in this blog, get in touch.

Sign up for the latest updates

Key contacts

Mike Barber

Mike Barber

Partner

Mike is a senior Risk Advisory partner.  He advises client on governance, risk and controls topics with a particular focus on ESG and leads Risk Advisory’s regional practice. He has been a partner since 2008 and has led the development of our ESG practice to becoming a multi partner, multi-disciplinary capability.  Formerly an auditor, he is a member of the Institute of Chartered Accountants of England and Wales and chairs the Audit and Risk Committee of RNIB.  Mike helps clients understand and respond to the opportunities and risks associated with ESG, setting strategy and targets, designing ESG programmes and working cross service line to help clients implement change, measure and communicate their ESG impact. He regularly speaks externally and at the Deloitte Academy on topics such as Climate, Decarbonisation, Carbon Offsets, Nature Based solutions, Carbon capture and storage and Biodiversity.

Helen Hodge

Helen Hodge

Senior Manager

Helen is part of the Reputation, Crisis and Resilience team. She specialises in analysing the external risk environment and supporting clients to develop their contingency arrangements to build resielince. Helen has over 15 years of understanding, quantifying and explaining risks. She has deep expertise in working with clients to uncover vulnerabilities and develop pragmatic solutions. Helen has experience across sectors and industries.