Mining sector faces material business risks if it fails to decarbonise

Out-Law Analysis | 29 Jun 2021 | 2:25 pm | 4 min. read

The Paris Agreement has brought renewed pressure on carbon intensive industries such as mining. Such risks are no longer simply reputational, and may increasingly affect revenue and market share if participants do not act now.

Risks for mining

According to a 2020 report by consulting company McKinsey, the mining sector is responsible for 4% to 7% of global greenhouse gas emissions in terms of direct emissions and those from its use of energy. When emissions from downstream processing, such as transportation, are included, the figure rises significantly to around 28%. It is no surprise that such emissions are coming under scrutiny in the context of Paris Agreement carbon reduction commitments around the world – some of which, including in France, Germany, and the UK, are legally mandated.

Mining companies heavily rely on a ‘social licence’ to operate and carbon emissions which, along with indigenous land rights issues, are perhaps the greatest reputational threats to the industry. However, the risks of failing to reduce carbon emissions have now evolved from branding and profiling consequences, to material risks that can impact profitability and market share. While climate change represents an existential threat generally (and one that board members are increasingly required to consider in terms of business planning), some key short-term risks include climate litigation, investor activism and threats to export markets.

Climate litigation on the rise

Climate change litigation is booming, with more than 1,800 litigation proceedings commenced globally. A recent decision of the Dutch District Court ordering Royal Dutch Shell to slash its CO2 emissions by 45% by 2030 compared to its 2019 levels has sent shockwaves through the oil and gas sector. This case sends a clear message to the private sector that companies must set realistic, achievable, and sufficiently aggressive carbon reduction targets.

Varma George

George Varma

Partner

Mining sector participants must evolve to ensure they maintain their market share by reducing their carbon footprint, and thereby position themselves as a more attractive trading partner

Another recent decision in the Federal Court of Australia found that the Minister for the Environment was legally required to consider the carbon consequences of a proposed coal mine for future generations. The effect of this decision on the Australian mining industry remains to be seen, but could be significant.

Activist shareholders and threats to investment, finance

The average investor in the modern era is no longer driven solely by return on investment – significant value is increasingly being placed on sustainable business practices and social / environmental responsibility.  We have seen the shareholders of companies such as Santos and Rio Tinto pressing for the adoption of climate change targets consistent with the Paris Agreement. Large investment houses, such as BlackRock, have made public statements that they will not invest in businesses that are not sustainable. Banks are also following the same trend following pressure from their investors.  To ensure that mining companies can attract capital from the private sector, they must have robust environmental, social, and corporate governance (or ESG) reporting and focus on decarbonising their business. 

Threats to export markets

To remain commercially competitive and to avoid losing market share to competitors, mining companies will need to have a demonstrable carbon neutral business in the short to medium term, particularly when trading with countries that have legally mandated net zero targets.  It is likely that companies which are able to assist others to achieve their net target goals will be favoured partners, as opposed to carbon intensive operations.  As such, mining companies risk jeopardising their trading relationships if they do not focus on decarbonising their operations.

A change of focus required – circular economy

The business case for mining companies focusing on carbon emission reduction is undisputable. Mining companies must look beyond net present value calculations and start planning and making investments to mitigate against climate change risk.

By focusing on the holistic value of commodities, rather than their short-term economic value, the mining sector can look at investing in efficient production, processing, manufacturing and recycling of resources so that maximum value is achieved from the products that are mined and reduce the need for further extraction. Done right, a focus on the ‘circular economy’ will not only reduce the wasteful and polluting aspects of extraction but will ultimately drive greater shareholder value.

Ways to reduce emissions

There are a variety of ways in which business can decarbonise their operations. Fundamentally, this requires lateral thinking and taking a critical look at how things could be done differently.

Collaborating with industry experts to find solutions for business needs is critical. Developing bespoke solutions to complex problems requires engagement with specialists. For example, in 2020, the Green Hydrogen Consortium (consisting of BHP, FMG, Anglo American and Hatch) pledged to work on accelerating green hydrogen production and facilitate its application to the resources sector and other heavy industries.

Collaboration in renewable energy use and production will be key to decarbonising the sector. Working with technology, energy and other specialists, particularly those falling outside the core business of mining operators, may greatly improve the efficiency and sustainability of mining operations.

Another way to reduce carbon is by utilising renewable energy. While this may seem an obvious solution, implementation has been challenging for various reasons, including the cost competitiveness of renewable energy compared with fossil fuels (particularly diesel fuel for remote operations); security and consistency of renewable energy supply; and the fact that power production is not part of the core business of a mining company and the in-house capability and expertise is often not present.

However, the significant advances in power storage technology (through batteries and hydrogen) has changed things dramatically in this respect. Renewable energy has become more economic, reliable, and consistent, and is now more effective in helping decarbonise the mining sector.

Hydrogen the answer?

Renewable hydrogen – hydrogen produced through renewable energy-powered electrolysers and water – has has come strongly into the mining sector’s focus in the last year or two. This is for good reason. While still a developing industry, renewable hydrogen has significant potential for decarbonising the industry.

For instance, emissions from transportation may eventually be addressed by using hydrogen-powered heavy haulage vehicles, trains and even ships. Utilising low-carbon transportation in the mining sector – not only for operations, but also for delivery – will go a long way to decarbonising the sector and no doubt dramatically improve ESG reporting.

Hydrogen can also be employed in the manufacturing process, by using the heat generated from hydrogen production. This will not only assist with reducing carbon emissions, but also potentially develop new revenue streams or business opportunities. This relates back to the need to collaborate to encourage efficiencies and productivity.

Mining at a crossroads

It is unquestionable that mining is and will continue to be a relevant sector in the long term. However, mining sector participants must evolve to ensure they maintain their market share by reducing their carbon footprint, and thereby position themselves as a more attractive trading partner.

Careful planning and strategic investment will help mining sector participants build a profitable and sustainable business, which satisfies society’s evolving requirement to act in a socially and environmentally responsible manner.