IAS 1 paras 122, 125, effect of climate change on estimates and judgements

BHP Billiton – Annual report – 30 June 2021

Industry: mining

Significant accounting policies, judgements and estimates (extract)

Climate change

The Group continues to develop its assessment of the potential impacts of climate change and the transition to a low carbon economy. The Group’s current climate change strategy focuses on reducing operational greenhouse gas (GHG) emissions, investing in low emissions technologies, supporting emissions reductions in our value chain and promoting product stewardship, managing climate-related risk and opportunity, and working with others to enhance the global policy and market response. Future changes to the Group’s climate change strategy or global decarbonisation signposts may impact the Group’s significant judgements and key estimates and result in material changes to financial results and the carrying values of certain assets and liabilities in future reporting periods.

The Group’s current climate change strategy is reflected in the Group’s significant judgements and key estimates, and therefore the Financial Statements, as follows:

Transition risks

The Group’s targets and goals

As part of its response to the Paris Agreement goals, the Group has set a target to reduce its operational GHG emissions (Scope 1 and Scope 2 from our operated assets) by at least 30 per cent from FY2020 levels by FY2030 and a goal to achieve net zero operational GHG emissions by 2050. For the FY2030 target, the FY2020 baseline will be adjusted for any material acquisitions and divestments based on GHG emissions at the time of the transaction, and carbon offsets will be used as required. Emissions reduction projects aimed at contributing to the achievement of the Group’s operational GHG emissions target and goal have been incorporated into the forecast cash flows of the Group’s assets.

The Group’s offset strategy is currently being managed at a consolidated Group level and therefore is not currently incorporated into the forecast cash flows of individual assets. Any change to the Group’s climate change strategy could impact these forecasts and the Group’s significant judgements and key estimates.

The Group continues to invest, including in partnership with others, in emissions reduction projects and technology innovation and development in its value chain to support reductions to its total reported Scope 3 GHG emissions inventory. However, while we seek to influence, Scope 3 emissions occur outside of our direct control. Reduction pathways are dependent on the development and upstream or downstream deployment of solutions and/or supportive policy. It is therefore currently not possible to reliably estimate or measure the full potential financial statement impacts of the Group’s pursuit of its Scope 3 goals and targets.

Expenditure under the Climate Investment Program (CIP) which, as announced by the Group in July 2019, aims to invest at least US$400 million over the CIP’s five-year life in emissions reduction projects across the Group’s operated assets and value chain, is recognised in the relevant year of expenditure.

Global transition signposts and commodity impacts

In addition to the Group’s targets and goals, significant judgements and key estimates are also impacted by the Group’s current assessment of the range of economic and climate related conditions that could exist in transitioning to a low carbon economy, considering the current trajectory of society and the global economy as a whole. Despite recent progress, all 1.5°C pathways to 2050 represent a major departure from today’s global trajectory and the Group does not believe the technological, regulatory, or economic foundations for a rapid transition to net zero emissions are currently in place. Acknowledging these signposts, the Group’s current best estimate of the potential impacts of climate change and the transition to a low carbon economy are reflected in the following two scenarios, which consider existing policies, trends and commitments and the Group’s view of the most likely range of futures for the global economy and associated sub-systems:

Central Energy View: reflects, and is periodically updated to respond to, existing policy trends and commitments and currently tracks to approximately 3°C temperature increase above pre-industrial levels by 2100

Lower Carbon View: currently tracks to approximately 2.5°C temperature increase by 2100, and accelerates decarbonisation trends and policies, particularly in easier-to-abate sectors such as power generation and light duty vehicles

These two scenarios are reviewed periodically to reflect new information.

These scenarios are currently being used as inputs to the Group’s planning cases, informing updates to the Group’s supply, demand and price forecasts, capital allocation and portfolio decisions. As such, these scenarios impact certain significant judgements and key estimates, including the determination of the valuation of assets and potential impairment charges (notes 11 ‘Property, plant and equipment’ and 13 ‘Impairment of non-current assets’), the estimation of the remaining useful economic life of assets for depreciation purposes (note 11 ‘Property, plant and equipment’), the timing of closure and rehabilitation activities (note 15 ‘Closure and rehabilitation provisions’) and the recoverability of certain deferred tax assets (note 14 ‘Deferred tax balances’).

The Group continues to monitor global decarbonisation signposts and update its planning cases accordingly. Where such signposts indicate the appropriate measures are in place for achievement of a 1.5ºC Paris-aligned scenario, this will be reflected in the Group’s planning cases.

Sensitivity to demand for fossil fuels

The Group acknowledges that there are a range of possible energy transition scenarios, including those that are aligned with the Paris Agreement goals, that may indicate different outcomes for individual commodities. While not currently an input to the Group’s planning cases, the resilience of the Group’s portfolio to a 1.5°C Paris-aligned scenario (the Group’s 1.5°C Paris-aligned scenario) has been considered, including the impact of Paris-aligned commodity price outlooks under that scenario on the Group’s latest asset plans.

Although all potential financial reporting consequences under the Group’s 1.5°C Paris-aligned scenario are currently impracticable to fully assess, the long-term commodity price outlooks under this scenario are either largely consistent with or favourable to the price outlooks in the Group’s current planning cases, with the exception of energy coal, oil and natural gas.

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 the Group’s 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 the Group’s 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 the positive long-term price outlooks for these commodities, the Group currently considers that a material adverse change is not expected to the valuation, and remaining useful life, of assets and discounting of closure and rehabilitation provisions for assets relating to these commodities under its 1.5°C Paris-aligned scenario.

For energy coal, oil and natural gas, long-term commodity price outlooks under the Group’s 1.5°C Paris-aligned scenario are unfavourable to the price outlooks in the Group’s current planning cases. However, recent portfolio announcements and impairments recognised in FY2021 limit the exposure of the carrying value of the Group’s assets to long-term commodity prices for energy coal, oil and natural gas, as:

  • the Group has announced a merger proposal to combine the Group’s petroleum business with Woodside
  • the Group has announced the signing of a Sale and Purchase Agreement to divest the Group’s 33.3 per cent interest in Cerrejón
  • following impairments recognised in FY2021, the carrying value of the Group’s NSWEC assets is no longer material

Further, as management would alter its operating and investment plans in such a pricing environment for these assets to mitigate cash flow and valuation impacts, it is currently impracticable to fully assess the potential impacts on the significant judgements and key estimates used in the preparation of the Group’s Financial Statements. However, given the factors outlined above, NSWEC closure provisions are considered the liabilities most susceptible to the long-term impacts of the Group’s 1.5°C Paris-aligned scenario as reserves and resources may become incapable of extraction in an economically viable fashion prior to the current best estimate of remaining useful life. In such a scenario, closure activity may be performed earlier than the Group’s current best estimate, impacting the closure provision.

Physical risks

The Group is progressing work to assess the potential impact of physical risks of climate change in line with the Group’s Risk Management Framework. Given the ongoing nature of the Group’s physical risk assessment process, inclusion of adaptation risk in the Group’s operating plans, and associated asset valuations, is currently limited. As the Group progresses its adaptation strategy, the identification of additional risks or the detailed development of the Group’s response may result in material changes to financial results and the carrying values of assets and liabilities in future reporting periods.