Trend 5: The path to decarbonization Miners’ role in reducing emissions
7 minute read
03 February 2020
Driven by pressure from stakeholders and the strengthening business case for decarbonization, most mining companies are taking steps to reduce their greenhouse gas emissions. While the path isn’t expected to be easy, the commitment is necessary if miners are to contribute to the mitigation of risks associated with climate change and create value for customers, investors, governments, communities, and employees.
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Recent years have heralded a growing acceptance of the scientific data linking the release of greenhouse gases (GHG), such as carbon dioxide, with global warming. This has put companies in carbon-producing industries, such as mining, under greater pressure to reduce their GHG emissions. The pressure is coming from a number of fronts:
- Vocal investors are challenging mining companies to rethink their portfolios and future capital investments, and amp up disclosure of their sustainability performance. This is often translating into demands for companies to share clear and defendable positions with respect to their climate-related financial risks in line with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) framework.
- Some financiers and insurers have begun to “green” their portfolios by adopting clean lending targets and, in some cases, denying insurance coverage to coal miners.
- Various local communities, which are often directly affected by the environmental impacts of mining operations, are demanding corporate adherence to higher standards of social responsibility.
- Many in-demand employees want to work for companies that are creating a better future, not those that could be perceived by some as “dirty” or dangerous.
- Customers across the supply chain want access to low-carbon commodities, such as “green” nickel for batteries or carbon-neutral copper for electrification. Demand for green steel in the automotive space and other “clean” commodities might not be far behind.
- Regulators around the world are setting carbon reduction targets, not only at national levels, but geared toward key industries as well, in an effort to meet the emissions reduction goals set out in the Paris Agreement on climate change.
Building the business case
This groundswell is converging with several market factors that seem to be strengthening the business case for decarbonization. For instance, as technology prices drop, the economic case for diesel replacement and electrification becomes stronger. Since 2012, the levelized cost of energy (LCOE) for lithium-ion battery storage has fallen by 76 percent.1 The decline in solar power costs is even more extreme, dropping 99 percent since 1980.2
“It’s about more than just technology though,” says John O’Brien, Partner, Financial Advisory, Deloitte Australia. “Decarbonization makes sense operationally because the electrified mine is easier to automate, and the automated mine is easier to electrify.”
The cost benefits of decarbonization also can’t be ignored. For example, although there are capital costs to setting up the infrastructure to support the generation of renewable power, the consumption costs associated with renewable energy are negligible. This price dynamic has the potential to radically alter the cost basis of mining. In traditional mining operations, energy is generally the first or second most significant spend, accounting for 15 to 40 percent of operating expenses. “If we fast-forward to a world where energy has no marginal cost, the sector stands to unlock a huge wave of opportunity,” O’Brien stresses.
What stakeholders are asking
Critical questions being asked of organizations, specifically those with exposure to carbon-intensive operations, products, and supply chains include:
- Market resilience: How resilient will demand be for key commodities in the medium to long term, and what modeling and analysis has been done internally to validate this level of confidence?
- Changing physical environment: To what extent have projections of potential future climate (including changes to temperature, water availability, extreme events, and precipitation) been factored into operations, infrastructure resilience, future planning, capex planning, crisis management, and impairment analysis?
- Financial implications: To what extent have the risks flowing from changes in market demand (driven by policy, regulation, customer preferences, and physical climate) been factored into impairment and cost of capital disclosures in financial reporting?
- Governance: What governance structures are in place to ensure the board and executives appropriately consider climate-related risks and opportunities, and challenge the adequacy of mitigation responses? To what extent is the company’s participation in industry associations consistent with its public climate change commitments and policy statements?
- Seizing opportunities: With the shift taking place to a global low-carbon economy, how are R&D investment, portfolio management, and the implementation of digital business processes being used to develop products and innovative business processes that will be in high demand in this new, evolving context?
Times are changing
Recognizing these realities, many mining companies have begun to make strides toward decarbonization. Since 2008, for instance, Rio Tinto has reduced its Scope 1 and 2 emissions (those generated within its operations) by 24 percent, and the company recently committed to substantial decarbonization by 2050.3 For its part, BHP has set a goal of achieving net-zero operational GHG emissions by mid-century and has been making news for its commitment to work with customers and suppliers to help reduce Scope 3 emissions,4 which are those generated along the value chain (see case study).
Case study: Decarbonization at BHP
BHP has been setting targets since the 1990s to reduce its Scope 1 and 2 emissions, which are those generated from fugitive emissions from coal and electricity consumption and diesel use at its operations. In July 2019, however, the company upped the ante by committing US$400 million to reduce not only operational emissions, but Scope 3 emissions as well—which are those generated by customers and suppliers along the value chain.
As BHP’s former CEO Andrew Mackenzie noted in his seminal speech, “The evidence is abundant: global warming is indisputable. The planet will survive. Many species may not.… Use of emissions-intensive products from the resources industry has contributed significantly to global warming.”5
To counter these risks, BHP has begun integrating climate-related decision-making into its strategic and risk management processes. For instance, before new capital investments can be approved, company stakeholders must demonstrate how the investment will help to reduce the company’s carbon footprint—or at least achieve carbon neutrality. The company is also strengthening the alignment of its executive remuneration to emissions performance.
“It’s like what companies were doing a few decades ago around safety, or a few years ago around automation,” notes Ian Sanders, Mining & Metals Leader, Deloitte Australia. “Just like all decisions must now be zero harm, all future decisions will likely need to help reduce the corporate water, pollution, and carbon footprint or at least be carbon neutral.”
To turn this vision into reality, however, companies could need to transform the way they source, use, store, consume, and think about energy.
“Despite the business case in support of decarbonization, many mining companies continue to see it as a cost rather than an opportunity—making it difficult for proponents to unlock the capital required to move forward,” explains Tim Biggs, Mining & Metals Leader, Deloitte UK. “A massive shift toward electrification could also change the way employees work, requiring companies to obtain buy-in not only at the management level, but at the operations level.”
Laying the groundwork
This transition won’t happen overnight. But there are steps companies can take to start laying the groundwork for decarbonization.
Mining companies can begin by understanding how the various scenarios related to climate change might affect their local operations. Using advanced predictive analytics, it’s possible to leverage data released by leading authorities such as the Intergovernmental Panel on Climate Change (IPCC) and track its likely effect on a business. Armed with this understanding, miners can start to set targets to reduce their emissions in response to the future scenarios they consider most likely.
Of course, to track emission reductions, companies would require insight into their historical data so they can set a baseline. Aggregating this data at an enterprise level is generally easier said than done, but it’s an important first step for companies to forecast their anticipated emissions over the useful lives of their assets.
Next, miners should assess how to integrate a carbon neutral approach into their business-as-usual processes. Often at this point, companies realize that there’s a gap between their emission reduction targets and their plausible decarbonization pathways (figure 1). To close that gap, companies typically need to revise their operational processes (e.g., through fuel switching), recalibrate their asset portfolios, and invest in new technologies.
While the path won’t be easy, miners can act to reduce their emissions. As Biggs notes, “Beyond creating value for customers, investors, governments, and communities, committing to decarbonization can make mining companies more attractive to employees, empower them to make a greater societal impact in the countries where they operate, and contribute to global sustainability.”
How to lay the foundation for decarbonization
- Take a multifunctional approach. Given the impact of climate risks in the mining sector, this issue can’t be dealt with as an add-on to be managed by sustainability and corporate social responsibility (CSR) functions. Rather, environmental, social, and governance (ESG) issues should be integrated cross-functionally into operational, strategic, and financial decision-making and into corporate risk management processes. To bolster this cultural shift, some leading companies are even linking remuneration to ESG performance metrics.
- Prioritize abatement projects. To operationalize decarbonization, companies should begin by assessing the full range of potential abatement and offset opportunities that exist across all operational activities. Once this is understood, they can prioritize projects that confer the greatest abatement and strategic benefits at the least cost.
- Plan for the future. As decarbonization becomes a global rallying call, mining companies may need to revise their portfolios accordingly. To avoid being caught off guard, companies can review the signals and signposts of changing macroeconomic trends, government policies, and technical advances to identify adjacent projects that may exist outside the core carbon-intensive mining business.
Energy, Resources & Industrials
Deloitte’s Global Energy, Resources & Industrials specialists provide comprehensive, integrated solutions to all segments of the Oil, Gas & Chemicals, Power & Utilities, Mining & Metals and Industrial Products & Construction sectors. Offering clients deep industry knowledge and a global network.
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Get in touch
- Andrew Swart
- Global Mining & Metals Leader
- Deloitte Canada
- aswart@deloitte.ca
- +1 416-813-2335
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