Rio Tinto plc – Annual report – 31 December 2024
Industry: mining
About the presentation of our consolidated financial statements (extract)
h. Impact of climate change on the Group
The impacts of climate change and the execution of our climate change strategy on our financial statements are discussed below.
Strategy and approach to climate change
In 2021, we put the low-carbon transition at the heart of our business strategy, setting a clear pathway to deliver long-term value as well as ambitious targets to decarbonise our business.
Our target to reduce our net Scope 1 and 2 emissions by 15% by 2025, 50% by 2030 and to reach net zero emissions by 2050, all relative to our 2018 equity baseline, remains unchanged. We have now reduced gross operational emissions by 14% below our 2018 levels; and have a pipeline of projects and committed investments that support our 2030 target. Our gross emissions reductions are expected to be at least 40% by 2030, and the use of carbon credits towards our target will be limited to 10% of our 2018 baseline. While there is no universal standard for determining the alignment of targets with the Paris Agreement goals, we concluded that our Scope 1 and 2 target for 2030 was aligned with efforts to limit warming to 1.5°C when we set it in 2021. To reduce our decarbonisation footprint we focus on renewable electricity, transitioning from diesel and our processing emissions. Nature-based solutions (NbS) and carbon credits complement our decarbonisation activities. To accelerate these activities, in 2023 we established the Rio Tinto Energy and Climate Team led by our Chief Decarbonisation Officer. To deliver our decarbonisation target, we estimate that we will require around US$5 billion to US$6 billion in capital investment between 2022 to 2030, unchanged from the prior year. This includes voluntary carbon credits and investment in NbS projects but excludes the cost of carbon credits bought for compliance purposes.
Our approach to addressing Scope 3 emissions is to engage with our customers on climate change and work with them to develop and scale up the technologies to decarbonise steel and aluminium production.
Our forecast growth capital expenditure captures new growth opportunities with a focus on materials that are expected to see strong demand growth from the low-carbon transition. This includes our investments in Simandou, Matalco, Rincon, Oyu Tolgoi and the recent agreement to acquire Arcadium Lithium plc. Our budget for central greenfield exploration mainly focuses on copper with a growing battery materials program.
Decarbonisation investment is derived from the Group’s capital allocation framework and aligned to our 2025 and 2030 Scope 1 and 2 emissions targets. Decarbonisation investment decisions are made under a dedicated evaluation framework, which includes consideration of the value of the investment and its impact on the cost base, the level of abatement, the maturity of the technology, the competitiveness of the asset and its policy context, and alternative options on the pathway to net zero. Projects are also assessed against our approach to a just transition, with consideration of the impact on employees, local communities, and industry.
Further details on our approach and progress are provided in the front half of this Annual Report: our Climate Action Plan on pages 41 to 75.
Scenarios
We use scenarios to identify and assess climate-related risks and opportunities that may affect our business in the medium to long term. We do not undertake climate modelling ourselves, rather we determine the approximate temperature outcomes in 2100 by comparing the emissions pathways to 2050 in each of our scenarios with the Shared Socio-Economic Pathways set out in the Intergovernmental Panel on Climate Change Sixth Assessment Report. We also consider the carbon budgets associated with different temperature outcomes. Our scenario approach is reviewed every year as part of our Group strategy engagement with the Board. This year, we updated the scenario framework used to assess the resilience of our business under different transition-related scenarios.
Our Conviction scenario is now our central case. In the prior year, our central case comprised the Competitive Leadership and Fragmented Leadership scenarios. The Conviction scenario underlies strategic planning and portfolio investment decisions across the Group, is used in commodity price forecasts, valuation models, reserves and resources determination, and in determining estimates for assets and liabilities in our financial statements. In the prior year, our central case comprised the Competitive Leadership and Fragmented Leadership scenarios. In this scenario, countries will decarbonise at a moderate pace, real gross domestic product (GDP) grows at 2.5% between 2023-2050, but energy intensity of GDP reduces approximately 2.7% per year due to sectoral shifts and greater efficiency. In Conviction, climate policies become more ambitious and effective over time resulting in a temperature rise of 2.1°C in 2100.
Resilience scenario, which limits temperature rises to around 2.5°C by 2100, is a sensitivity analysis that is designed to test our annual plan and investment proposals. Weaker governance, declining global trade, and lower economic growth lead to less effective climate action. Real GDP growth only averages 1.6% between 2023 and 2050.
Neither of the Conviction or Resilience scenarios above are consistent with the expectation of climate policies required to accelerate the global transition to meet the stretch goal of the Paris Agreement. Despite global agreements on climate change reached in Glasgow and Dubai, emissions today continue to rise, making the 1.5°C goal of the Paris Agreement unlikely to be achieved. As our operational emissions targets are in line with 1.5°C, so too are our decarbonisation investment decisions. In 2022, we developed a Paris-aligned scenario, referred to as the Aspirational Leadership scenario. The Aspirational Leadership scenario reflects a world of high growth, significant social change and accelerated climate action. The Aspirational Leadership scenario is a commodity sales price and carbon cost sensitivity, with all other inputs remaining equal to our central case. It is built by design to reach net zero emissions globally by 2050 and helps us better understand the pathways to meet the Paris Agreement goal, and what this could mean for our business. We do not use the Aspirational Leadership scenario in our broader strategic or investment decision-making.
Importantly, none of the above scenarios are considered a definitive representation for our assessment of the future impact of climate change on the Group. To assess transition risk, we use market analysis for our short-term outlook, and our Conviction and Resilience scenarios for our medium- to long-term assessment. For physical risks, we use an intermediate and high emissions scenario. Scenario modelling has inherent limitations and, by its nature, allows a range of possible outcomes to be considered where it is impossible to predict which outcome is likely.
In addition, as our macroeconomic modelling involves a range of variables, isolating and measuring the impact of specific climate risks and opportunities is challenging. We do not publish the commodity price forecasts associated with these scenarios, as to do so would weaken our position in commercial negotiations and might give rise to concerns from other market participants.
Low-carbon transition risks and opportunities, financial resilience of our portfolio
The low-carbon transition is at the heart of our strategy. This mitigates risks associated with stricter carbon regulations and changing consumer preferences and positions us to capitalise on the growing demand for transition materials. With higher GDP growth and a faster low-carbon transition, our economic performance is stronger in Conviction than in Resilience. Higher carbon penalties and the potential impact on demand for mid and lower grade iron ore result in weaker economic performance in Aspirational Leadership than in Conviction. Overall, the economic performance of our portfolio would be stronger in scenarios with higher GDP growth and proactive climate action, and is resilient under scenarios aligned with 1.5°C, 2.1°C and 2.5°C outcomes.
We carefully monitor and manage transition risks linked to our operational Scope 1 and 2 emissions and value-chain Scope 3 emissions. In particular, we expect the decarbonisation of our assets to benefit from the implementation of new technologies. The pace of technological development is uncertain, which could delay or increase the cost of our decarbonisation efforts.
Physical risk impacts
In 2022, we launched the Physical Resilience Program across the Group, starting with the asset-level resilience assessment in the Pilbara and Saguenay-Lac-St-Jean. We continue to make progress in a Group-wide, top-down assessment to further understand the risks and opportunities associated with physical climate change and to quantify any financial impacts, in addition to the site-specific, bottom-up assessments, which will continue in the foreseeable future. Asset-level resilience assessments conducted to date as part of a broader multi-year program, as well as our ongoing review processes, including impairment assessments, have not identified any material accounting impacts to date. For example, no write-offs were necessary in the Pilbara, where certain infrastructure assets, such as transmission lines, that have reached the end of their natural lives are being replaced with climate-resilient infrastructure. In 2024, we continued to make progress on the climate-resilience assessment process for our tailings storage facilities, enhanced our water risk management, and operationalised analytics that provide real-time natural-hazard monitoring for 50% of our supply chain.
In addition, we do not foresee the renewal of our contractual water rights in Canada that have been classified as indefinite-lived intangible assets to be at risk from climate change (note 12). Further, closure planning considers future climate change projections at each step of the process to support safe and appropriate final landform design.
NbS and carbon credits
While prioritising emissions reductions at our operations, we are also investing in high-integrity NbS in the regions where we operate that can bring benefits to people, nature and climate. We will voluntarily retire associated carbon credits to complement the decarbonisation investment, but will limit the use of voluntary and compliance offsets towards our 2030 climate target to up to 10% of our 2018 baseline emissions. We source carbon credits in three ways: we develop new projects, invest in and scale up existing projects, and source high-quality carbon credits through spot carbon credit purchases and long-term offtake agreements. This will complement our abatement project portfolio and support our compliance with carbon pricing regulation such as the Safeguard Mechanism in Australia. In 2024, we finalised offtake agreements for high-quality human-induced regeneration (HIR), as well as with savanna fire management project developers, and progressed feasibility studies on other projects.
In 2024, we purchased US$50 million (2023: US$61 million) of carbon credits. They have been acquired for our own use and are accounted for as intangible assets (note 12).
Accounting impacts from executing our strategy
Global decarbonisation and the world’s energy transition continue to evolve, with the potential to materially impact our future financial results as our significant accounting judgements and key estimates are updated to reflect prevailing circumstances. In response, carrying values of assets and liabilities could be materially affected in future periods. Our current strategy and approach to decarbonise our operations and achieve our Scope 1 and 2 emissions targets are considered in our significant judgements and key estimates reflected in these financial results.
Progressing our strategy to grow in materials needed for the low-carbon transition
As part of our strategy to grow in materials essential for the energy transition, we approved “notice to proceed” for the Simandou high-grade iron ore project in Guinea and the Rincon lithium project in Argentina (note 12). We have also continued to invest in our copper portfolio. These projects follow our existing accounting policies on undeveloped properties and cost capitalisation. In 2024 we also announced a definitive agreement to acquire Arcadium Lithium plc (note 5).
In 2023, we entered into an agreement with Giampaolo Group to form the Matalco joint venture, equity accounted, to meet a growing demand for recycled aluminium solutions, and invested in a copper project known as Nuevo Cobre, accounted for as an investment in a partially owned subsidiary (note 5).
Decarbonising our portfolio
As part of our decarbonisation programs, we invested US$283 million (2023: US$191 million) comprising capital projects, investments and carbon credits referred to above, capitalised on balance sheet. Our operating expenditure on Scope 1, 2 and 3 energy efficient initiatives and research and development (R&D) costs, inclusive of our equity share of R&D related to ELYSISTM, was US$306 million (2023: US$234 million), recognised in the income statement (note 7). Our capital commitments at the end of 2024 relating to decarbonisation totalled US$114 million (2023: US$123 million) and included the Amrun renewable PPA classifed as a lease not yet commenced (note 37).
We invested US$89 million (2023: US$36 million) in entities specialising in decarbonisation and related technology, accounted for as financial assets, such as the Silva Carbon Origination Fund, a developer of high integrity Australian Carbon Credit Units (ACCUs) and I-Pulse, a developer of decarbonisation applications. In 2023, this included an investment in Australian Integrated Carbon (AIC), a leading developer of high-quality carbon credits, which is an equity accounted unit.
Given the significant investments we are making to abate our carbon emissions, we have considered the potential for asset obsolescence, with a particular focus on our Pilbara operations where we are building our own renewable assets and are prioritising investment in renewables to switch away from natural gas power generation. No material changes to useful economic lives have been identified in the current year as the assets are expected to be required for the transition (note 13). As the renewable projects progress, it is possible that such adjustments may be identified in the future.
Large-scale renewable power purchase agreements (PPAs) require judgement to determine the appropriate accounting treatment and may result in a lease, a derivative or an executory contract depending on contractual terms (refer to note 21 for further information on significant judgements in lease assessment). The renewable solar and wind PPAs at Richards Bay Minerals (RBM) are accounted for on an accrual basis as energy is produced, while the renewable offtake arrangements at QIT Madagascar Minerals (QMM) and Amrun are leases.
As part of the program to develop renewable energy solutions for our Queensland aluminium assets, we entered into 2 long-term renewable 2.2GW PPAs: the Upper Calliope solar farm and the Bungaban wind farm, at the end of 2023 and in 2024 respectively, to buy renewable electricity and associated green products to be generated in the future. In 2024, our New Zealand Aluminium Smelters signed long-term PPAs with electricity generators for a total of 572MW of hydro electricity. We also signed the Monte Cristo Wind PPA in the US, which will account for about 20% of Kennecott Scope 2 emissions abatement. These contracts are recorded as level 3 financial derivatives, with net unrealised losses of US$111 million recognised in the current year (2023: US$nil) (note 24 (iv)). These derivatives require complex measurement over the contract’s term, with inputs such as unobservable long-term energy prices being key sources of estimation of uncertainty (note e).
No adjustments to useful lives of the existing fleet have been identified to date as a result of planned mining fleet electrification in the Pilbara. The solutions are still in development or pilot stages and the gradual fleet replacement is intended to be part of the normal lifecycle renewal of trucks. Depending on technological development, which is highly uncertain, this could lead to accelerated depreciation in the future. Similarly, our target to have net zero vessels in our portfolio by 2030 has not given rise to accounting adjustments to date, as the replacement is planned as part of the lifecycle renewal. The expenditure on our own carbon abatement projects and technology advancements follows existing accounting policies on cost capitalisation, research and development costs.
Impairment – sensitivities to climate change
In our impairment review process we consider the risks associated with climate change.
The Gladstone alumina refineries are responsible for more than half of our Scope 1 carbon dioxide emissions in Australia and therefore have been a key focus as we evaluate options to decarbonise our assets. In 2023, we recorded an impairment of Queensland Alumina Limited (QAL) refinery with the recoverable amount largely dependent upon the double digestion project, which was at the prefeasibility study stage of project evaluation. This major capital project improves the energy efficiency of the alumina production process and significantly reduces carbon emissions. In 2024, continued studies for this project have indicated an increased capital cost compared with our previous assumption and therefore we recognised further impairment and provided a sensitivity to the cost of carbon credits (note 4). Following the impairment in 2022, we continue to evaluate lower emission power solutions for the Boyne smelter that could extend its life to at least 2040. In such circumstances, the net present value of the forecast future cash flows could support the reversal of past impairments.
As noted above, we anticipate increased demand for copper in the low-carbon transition. Whilst we have tested Rio Tinto Kennecott cash-generating unit for impairment utilising our Conviction price assumptions, that are not aligned with the goals of the Paris Agreement, we have also provided a sensitivity using our Paris-aligned Aspirational Leadership scenario (note 4).
Under the Aspirational Leadership scenario, which is not used in the preparation of these financial statements, nor for budgeting purposes, the economic performance of copper and aluminium is expected to be stronger under supply and demand forward-pricing curves, which we believe will be consistent with the Paris Agreement. It is possible therefore, under certain conditions, that historical impairments associated with these assets could reverse.
In the Aspirational Leadership scenario, the prices for lower-grade iron ore are supported in the medium term by an assumed underlying increase in GDP-driven demand. However, in the longer term, we assume the pricing for lower-grade iron ore to be weaker than in our Conviction scenario and will depend on the development of low-carbon steel technology, the pace of which is uncertain, but is expected to be offset by higher prices for higher-grade iron ore. As was the case in the prior year, this is very unlikely to give rise to impairment triggers in the short- to medium-term, due to the high returns on capital employed in the Pilbara and the slow deployment of low-carbon steel technology.
Use of Paris-aligned accounting
Forecast commodity prices, including carbon prices, incorporated into our Conviction scenario are used to inform critical accounting estimates included as inputs to impairment testing, estimation of remaining economic life for units of production depreciation and discounting closure and rehabilitation provisions. These prices represent our best estimate of actual market outcomes based on the range of future economic conditions regarding matters largely outside our control, as required by IFRS. As the Conviction scenario does not represent the Group’s view of the goals of the Paris Agreement, our commodity price assumptions used in accounting estimates are not consistent with the expectation of climate policies required to accelerate the global transition to meet the goals of the Paris Agreement. As described above, we use our Aspirational Leadership scenario to help us better understand the pathways to meet the Paris Agreement goal, and what this could mean for our business.
Closure dates and cost of closure are also sensitive to climate assumptions, including precipitation rates, but no material changes have been identified in the year specific to climate change that would require a material revision to the provisions in 2024. For those commodities with higher forward price curves under the Aspirational Leadership scenario, it may be economical to mine lower mineral grades, which could result in the conversion of additional Mineral Resources to Ore Reserves and therefore longer dated closure.
We completed the divestments of our coal businesses in 2018 and no longer mine coal, but retained a contingent royalty income from these divestments. Recent favourable coal prices exceeded contractual benchmark levels and resulted in the cash royalty receipt of US$45 million during 2024 (2023: US$38 million). We also carry royalty receivables of US$252 million on our balance sheet at 31 December 2024 (2023: US$214 million), measured at fair value (note 24). The fair value of this balance may be adversely impacted in the future by a faster pace of transition to a low-carbon economy, but this impact is not expected to be material.
Overall, based on the Aspirational Leadership scenario pricing outcomes, and with all other assumptions remaining consistent with those applied to our 2024 financial statements, we do not currently envisage a material adverse impact of the 1.5°C Paris-aligned sensitivity on asset carrying values, remaining useful life, or closure and rehabilitation provisions for the Group. It is possible that other factors may arise in the future, which are not known today, that may impact this assessment. Additional commentary on the impact of climate change on our business is included in the following notes:
Accounts examples 