By James Hulse
Next week sees the start of the long-awaited COP21 climate negotiations in Paris, with high-polluting sectors such as energy in the spotlight. A new report for investors this week highlights the extractives sector as potentially one of those hardest hit by tougher climate regulations.
The research – produced by the Carbon Disclosure Project (CDP), the global environmental disclosure system – shows that some of the world’s largest mining companies are failing to adequately manage carbon and water risks. For example, although several companies use an internal carbon price of $50 per tonne, the analysis concludes that such a price would cost the leading mining companies US$10bn (or 15%) of earnings and yet there is little evidence that the sector has a strategy to adapt by decarbonizing their assets. Indeed five of the 11 large miners in CDP’s report – collectively worth around $330bn – have yet to report meaningful emissions-reduction targets.
The report follows the recent tragic Samarco mining disaster in Brazil earlier this month, which raises a broader red flag for investors as to whether big extractive companies are managing sustainability risks more generally. The analysis from CDP shows a worrying trend of at least 47 major tailings dam incidents in the last 25 years.
Obstruction to climate regulation
In contrast to many positive corporate commitments to tackle climate change ahead of COP 21, the vast majority of large mining firms appear to oppose new climate regulation. Glencore, for example, is a clear laggard due to its opposition to carbon pricing and dismissal of the concept of stranded assets. Rio Tinto and Anglo American also scored poorly in this area.
What can investors do?
Climate legislation risk is steadily rising up investors’ priority lists, brought into focus by examples of significant shareholder losses such as VW and the US coal sector. While research such as CDP’s links climate and environmental legislation with earnings impacts across the highest-emitting sectors and provides a valuable guide for investors to understand the risks and opportunities that are being created by the transition to a low-carbon economy, the responsibility lies with investors to ensure that climate risks are factored into their investment process and that they are engaging with those companies in their portfolio who are failing to managing these risks.
For the mining sector, CDP suggests a number of areas for engagement with companies. Energy efficiency is key to increasing margins and remaining competitive, especially given the current bear market in commodities, and there are opportunities to take advantage of improved technology in prospecting, ore crushing and grinding. Companies can also explore the use of renewable energy sources in captive power plants, which can help mitigate energy security risk in remote mining locations.
Water management is also an important area for improvement. For the world’s biggest miners, almost 50% of company facilities are located in areas with medium or high water stress and investing in better infrastructure for water use is a vital requirement to retain a license to operate and to increase resilience of production.
As a first step, CDP suggests that all the large miners should be following the example of BHP Billiton in stress-testing their business model under various assumptions, including a 2 degree scenario with its significant implications for commodity demand, as well as developing meaningful GHG emissions-reduction targets to protect shareholder value as legislation accelerates following COP21.
James Hulse is head of investor initiatives at CDP
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