Climate change disclosures, principal risks, sustainability and climate change, mitigation, UK Strategic Report

BHP Billiton Plc – Annual report – 30 June 2021

Industry: mining

1 Strategic Report (extract)

1.9 How we manage risk (extract)

1.16 Risk factors (extract)

Low-carbon transition

Risks associated with the transition to a low-carbon economy.

Why is this important to BHP?

Transition risks arise from policy, regulatory, legal, technological, market and other societal responses to the challenges posed by climate change and the transition to a low-carbon economy. As a world-leading resources company, BHP is exposed to a range of transition risks that could affect the execution of our strategy or our operational efficiency, asset values and growth options, resulting in a material adverse impact on our financial performance, share price or reputation, including litigation. The complex and pervasive nature of climate change means transition risks are interconnected with and may amplify our other principal risks. Additionally, the inherent uncertainty of potential societal responses to climate change may create a systemic risk to the global economy.

Examples of potential threats

  • Introduction or improvement of low-carbon technologies or changes in customer preference for products that support the transition to a low-carbon economy may decrease demand for some of our products (which may be abrupt or unanticipated), increase our costs or decrease the availability of key inputs to production. For example:

– ‘Green steel’ technologies may reduce demand for our metallurgical coal or iron ore, or electric vehicle penetration may reduce demand for our petroleum products.

– Implementing low-carbon processes or new investments to respond to market demand for products that support a low-carbon economy (such as potential capital spend at our Jansen Potash Project to deliver fertiliser products or at our Nickel West asset to supply the battery market) may increase operating or development costs.

  • Failure to address investor concerns on the potential impact of climate change on and from BHP’s portfolio and operations may result in reduced investor confidence and/or investor actions seeking to influence BHP’s climate strategy.
  • Social concerns around climate change may result in investors divesting our securities, pressure on BHP to divest or close remaining fossil fuel assets and on financial institutions not to provide financing for our fossil fuel assets, or otherwise adversely impact our ability to optimise our portfolio.
  • Perceived or actual misalignment of the resources industry’s or BHP’s climate actions (goals, targets and performance) with societal and investor expectations, or a failure to deliver our climate actions, may result in damage to our reputation, climate-related litigation (including class actions) or give rise to other adverse regulatory, legal or market responses.
  • Changes in laws, regulations, policies, obligations, government actions, and our ability to anticipate and respond to such changes (which may be abrupt or unanticipated), including emission targets, restrictive licencing, carbon taxes, border adjustments or the addition or removal of subsidies, may give rise to adverse regulatory, legal or market responses.

Examples of potential opportunities

  • Our copper, nickel, iron ore and metallurgical coal provide essential building blocks for renewable power generation and electric vehicles, and can play an important part in the transition to a low-carbon economy.
  • Our potash fertiliser options can promote more efficient and more profitable agriculture and alleviate the increased competition for arable land.
  • Increased collaboration with customers and original equipment manufacturers, such as BHP’s partnerships with each of China Baowu, JFE and HBIS for research and development of steel decarbonisation pathways, can provide opportunities for development of new products and markets.

Key management actions

  • Establishing public views and commitments on, and mandatory minimum performance requirements for managing, climate change threats and opportunities, which are set out in our Climate Change Position Statement, our Climate Change Report 2020, our Climate Transition Action Plan 2021 and the Our Requirements for Environment and Climate Change standard.
  • Using climate-related scenarios, themes and signposts (such as monitoring policy, regulatory, legal, technological, market and other societal developments) to evaluate the resilience of our portfolio and inform our strategy.
  • Considering transition risks (including carbon prices) when making capital expenditure decisions or allocating capital through our Capital Allocation Framework, supporting the prioritisation of capital and investment approval processes.
  • Seeking to mitigate our exposure to risks arising from policy and regulation in our operating jurisdictions and markets by reducing our operational emissions and taking a product stewardship approach to emissions in our value chain.
  • Advocating for the introduction of an effective, long-term policy framework that can deliver a measured transition to a low-carbon economy.

FY2021 insights

Our exposure to transition risks increased in FY2021 due primarily to political developments – with the Biden administration renewing the United States’ focus on climate and net zero goals set by China, Japan and the European Union – and greater investor and other stakeholder interest in understanding how climate change might impact our strategy and portfolio.

Stakeholder expectations of BHP regarding disclosure of climate change-related information have grown accordingly (for example, Climate Action 100+ requested information from BHP to conduct its first net zero company benchmark in FY2021). Actions by investors and proxy advisers seeking to hold companies accountable for their climate strategies also accelerated during FY2021.

We anticipate these and potentially other factors will continue to affect transition risks in FY2022, following publication in August 2021 of the first part of the Intergovernmental Panel on Climate Change’s Sixth Assessment Report, Climate Change 2021: The Physical Science Basis. However, our recent proposed portfolio changes would, subject to their completion, reduce our exposure to certain transition risks.

Positioning for future section 1.5

Climate change and portfolio resilience section 1.13.7

BHP Climate Change Report 2020

BHP Climate Transition Action Plan 2021

bhp.com/climate

Sensitivity of our portfolio to demand for fossil fuels

We acknowledge there is a range of possible energy transition scenarios, including those aligned with the Paris Agreement goals, that may indicate different outcomes for our individual commodities. Our most recent portfolio analysis published in our Climate Change Report 2020 demonstrates the Group can continue to thrive over the next 30 years, as the global community takes action to decarbonise, even under our Paris-aligned 1.5°C trajectory.(1)

There are inherent limitations with scenario analysis and it is difficult to predict which, if any, of the scenarios might eventuate and none of the scenarios considered constitutes a definitive outcome for the Group.

The long-term commodity price outlooks under our 1.5°C Paris-aligned scenario are either largely consistent with or favourable to, the price outlooks in our current planning cases, with the exception of energy coal, oil and natural gas.

The long-term commodity price outlooks under our 1.5°C Paris-aligned scenario, excluding energy coal, oil and natural gas, reflect:

  • copper and nickel benefiting from the dramatic pace of electrification over and above our current planning cases
  • iron ore growth underpinned by the benefit to steel demand from the construction of renewables, particularly wind power.
  • potash growth reflecting the potential for greater penetration of biofuels
  • metallurgical coal supported by the limited alternatives in steelmaking over the scenario timeframe

Given these positive long-term price outlooks, a material adverse change is not expected under our 1.5°C Paris-aligned scenario to the carrying values of our assets and liabilities related to these commodities, including property, plant and equipment and closure and rehabilitation provisions.

For energy coal, oil and natural gas, long-term commodity price outlooks under our 1.5°C Paris-aligned scenario are unfavourable compared to the price outlooks in our current planning cases. Price outlooks for these commodities published in the International Energy Agency’s (IEA) Net Zero by 2050: A Roadmap for the Global Energy Sector Special Report (May 2021) (IEA NZE) are also unfavourable to the price outlooks in our current planning cases.

Despite recent progress, all 1.5°C pathways to 2050 represent a major departure from today’s global trajectory and we do not believe the technological, regulatory, or economic foundations for a rapid transition to net zero emissions are currently in place. Therefore, a 1.5°C Paris-aligned scenario is currently not an input into our planning cases. This is consistent with the IAE’s acknowledgement that the window for its Net Zero by 2050 roadmap is narrow, albeit still achievable.

While the price outlooks under the IEA NZE and our 1.5°C Paris-aligned scenario are unfavourable compared to the price outlooks in our current planning cases, recent portfolio announcements and impairments recognised in FY2021 limit the exposure of the carrying value of our assets to long-term commodity prices for energy coal, oil and natural gas, as

  • On 17 August 2021, we announced the proposed merger of our Petroleum assets with Woodside. The merger is subject to confirmatory due diligence, negotiation and execution of full form transaction documents, and satisfaction of conditions precedent including shareholder, regulatory and other approvals. The preliminary terms of the merger did not provide an indicator of impairment for our Petroleum assets at 30 June 2021. The merger is expected to be completed during the first half of CY2022, following which, the Group’s revenue would no longer be directly exposed to long-term oil and gas prices, including those under 1.5°C scenarios.
  • In June 2021, we entered into a Sale and Purchase Agreement to divest our 33.3 per cent interest in the Cerrejón energy coal joint venture in Colombia, subject to the satisfaction of customary competition and regulatory requirements. The divestment is expected to complete in the second half of FY2022;
  • Following the write downs taken by the Group in FY2021, the carrying value of our NSWEC assets is no longer material. Further, the profitability and cash flow of NSWEC assets are immaterial to the Group in FY2021.

In relation to New South Wales Energy Coal (NSWEC), closure and rehabilitation provisions may be susceptible to the long-term impacts of our 1.5°C Paris-aligned scenario. In isolation, and without considering the impact of changes management would make to operating and investment plans, bringing forward the majority of rehabilitation activities by one year could increase the closure and rehabilitation provision at NSWEC by approximately US$10 million.

(i) This scenario aligns with the Paris Agreement goals and requires steep global annual emissions reductions, sustained for decades, to stay within a 1.5°C carbon budget. Refer to the BHP Climate Change Report 2020 available at bhp.com/climate for information about the assumptions, outputs and limitations of our 1.5°C Paris-aligned scenario. 1.5°C is above pre-industrial levels.

1.13 Sustainability (extract)