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

BHP Billiton – Annual report – 30 June 2022

Industry: mining

Significant accounting policies, judgements and estimates

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.

During FY2022, the Group completed the merger of the Group’s Petroleum business with Woodside and the divestments of the Group’s interests in BHP Mitsui Coal Pty Ltd (BMC) and the Cerrejón non-operated energy coal joint venture. In addition, the Group announced that it will retain New South Wales Energy Coal (NSWEC) in its portfolio, seek approvals to continue mining at NSWEC beyond its current mining consent that expires in 2026, and intends to proceed with a managed process to cease mining at the asset by the end of FY2030. While climate change and the transition to a low carbon economy remain key considerations in the Group’s significant judgements and estimates, the portfolio updates during FY2022 have reduced the Group’s exposure to fossil fuels. Following the updates, the potential risk to the carrying value of the Group’s assets and liabilities from long-term price estimates for oil, gas and energy coal is largely limited to the impact of those commodities on the Group’s supply chain.

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 has been adjusted to reflect the divestment of the Group’s Petroleum and BMC operations and will be adjusted for any material future acquisitions and divestments. Approved 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 use of carbon offsets will be governed by the Group’s approach to carbon offsetting, with the Group’s offset strategy currently being managed at a consolidated Group level and therefore 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, with a particular focus on steelmaking and maritime emissions. 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. Where possible, the financial impact of the Group’s activities in support of Scope 3 reduction pathways is reflected in the financial statements, for example the Group’s chartering of LNG-fuelled vessels. It is however 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.

The Climate Investment Program (CIP), 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. Spend under the CIP, along with capital expenditure in support of operational decarbonisation at our operated assets, is recognised in the relevant year of spend.

Global transition signposts

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. Signposts do not yet indicate that the appropriate measures are in place to drive decarbonisation at the pace or scale required for the Group to assess achieving the aims of the Paris Agreement as the most likely future outcome. However, as governments, institutions, companies and society increasingly focus on addressing climate change, the potential for a non-linear and/or more rapid transition and the subsequent impact on threats and opportunities increases.

The BHP Climate Transition Action Plan 2021 references the Group’s divergent climate scenarios across a range of temperature outcomes. The Group currently uses two of those scenarios, being the Central Energy View and Lower Carbon View1 as inputs to the Group’s operational planning cases. The use of these two scenarios reflects the Group’s current estimates of the most likely range of future states for the global economy and associated sub-systems. These operational planning cases inform updates to the Group’s supply, demand and price outlooks, capital allocation and portfolio decisions.

Given the complexity of climate modelling, these scenarios are reviewed periodically to reflect new information, with developments in the periods between scenario updates being reflected in updated internal long-term price outlooks.

Investment decisions and asset valuations also incorporate carbon price assumptions for major Group operational, competitor and customer countries. In determining the Group’s forecast, factors such as a country’s current and announced climate policies and targets and societal factors such as public acceptance and demographics are considered, with the Group forecasting the global range of regional carbon prices to reach between US$0-175/tCO2-e in FY2030 and US$10-250/tCO2-e in FY2050, and US$10-175/tCO2-e in FY2030 and US$100-250/tCO2-e in FY2050 in BHP’s current major operational and market countries.

The operational planning cases, price outlooks and cost of carbon assumptions, 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’) and the timing of closure and rehabilitation activities (note 15 ‘Closure and rehabilitation provisions’).

In addition to the operational planning cases, the Group utilises a range of scenarios, including its 1.5°C Paris-aligned scenario2, when testing the resilience of its portfolio, forming strategy and making investment decisions. While a 1.5ºC Paris-aligned scenario does not currently represent one of the inputs to the Group’s operational planning cases, the Group has, during FY2022, systematically integrated the Group’s 1.5ºC Paris-aligned scenario into the Group’s strategy and capital allocation process to test the extent to which its capital allocation is aligned with a rapidly decarbonising global economy. Specifically, the Group applies the Group’s 1.5°C Paris-aligned scenario to assess whether future demand for the Group’s products under that scenario supports ongoing capital investment. The internal allocation of capital under the Group’s Capital Allocation Framework and all major investment decisions now require an assessment of investment viability under the Group’s 1.5°C Paris-aligned scenario.

1 Central Energy View reflects, and is periodically updated to respond to, existing policy trends and commitments. Lower Carbon View accelerates decarbonisation trends and policies, particularly in easier-to-abate sectors such as power generation and light duty vehicles. BHP’s Climate Change Report 2020 describes these scenarios in more detail.

2 This scenario aligns with the aims of the Paris Agreement and requires steep global annual emissions reduction, sustained for decades, to stay within a 1.5°C carbon budget. 1.5°C is above pre-industrial levels. BHP’s Climate Change Report 2020 describes this scenario, including its assumptions, outputs and limitations, in more detail.

The Group continues to monitor global decarbonisation signposts and update its operational planning cases, price outlooks, and cost of carbon assumptions and assessments relating to strategy and capital allocation 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 operational planning cases.

Sensitivity to demand for the Group’s commodities

The Group acknowledges that there are a range of possible energy transition scenarios, including those that are aligned with the aims of the Paris Agreement, that may indicate different outcomes for individual commodities. The resilience of the Group’s portfolio to a 1.5°C Paris-aligned scenario (the Group’s 1.5°C Paris-aligned scenario) continues to be considered, including the impact of Paris-aligned commodity price estimates under that scenario on the Group’s latest asset plans.

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.

However, the long-term commodity price estimates under the Group’s 1.5°C Paris-aligned scenario reflect the world needing around twice as much steel, copper and potash and four times as much nickel in the next 30 years as in the last 30. In addition, the Group’s portfolio is transitioning towards higher quality iron ore and metallurgical coal that enable steelmakers to be more efficient and operate with a lower emissions intensity.

As such, 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 for iron ore, copper, metallurgical coal, nickel and potash are either largely consistent with or favourable to the price outlooks in the Group’s current operational planning cases.

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.

While energy coal long-term commodity price outlooks under the Group’s 1.5°C Paris-aligned scenario are unfavourable when compared to the price outlooks in the Group’s current operational planning cases, following impairments recognised in FY2021, the carrying value of assets at the Group’s remaining energy coal operations at NSWEC is no longer material.

Further, the Group’s closure provision for NSWEC reflects the announcement in FY2022 of the Group’s plans to seek approvals to continue mining at NSWEC beyond its current mining consent that expires in 2026 and intention to proceed with a managed process to cease mining at NSWEC by the end of FY2030. While the closure provision remains subject to estimation and assumptions, the timing of closure is no longer considered materially susceptible to the long-term impacts of climate change.

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. In FY2022, the Group conducted a physical risk identification process that prioritised key potential climate hazards for more detailed analysis including, for example, risks associated with higher sea levels disrupting port operations and extreme rainfall impacting the stability of tailings storage facilities. 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, including risk evaluations planned for FY2023, 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.