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BHP to link executive compensation to reductions in emissions generated from the use of its products

July 01, 2019
Tim Buckley
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Key Findings

BHP is again proving to be a positive player showing agility in decision making when the going gets tough: they did it twenty years ago exiting steel in Australia, they did it more recently exiting shale in the U.S. (albeit not before destroying $20bn of shareholder wealth), and now the company appears to be limiting its losses in the thermal coal sector.

BHP started its coal exit with the spin-off of South32 from BHP Billiton in 2015 following shareholder approval for a different investor trajectory. 

Today’s announcement shows BHP is aiming to be progressive and better able to respond to rising shareholder and community concerns by taking responsibility for significantly reducing polluting emissions and addressing global warming and future energy needs.

Executive Summary

BHP Group announced plans today to link company executive compensation to reductions in the total emissions of its product portfolio, with the landmark decision to include Scope-3 emissions – the carbon emissions generated by customers’ use of BHP products like coal, oil and gas.

CEO Andrew Mackenzie today also called on governments to introduce regulatory and policy responses to prevent emitters from outsourcing their carbon footprint to others – a position at odds with current Australian government policy.

In addition to gas (LNG), oil and its coking coal mines that supply the steel sector, BHP’s remaining exposure includes thermal coal mining (used for power generation) from its 18 million tonne per annum (Mtpa) Mt Arthur mine in New South Wales, Australia and its 33% stake in the 30Mtpa Cerrejón, Columbia mine.

BHP’s move to evaluate and disclose the entire value chain of products the company is involved in will provide significantly enhanced transparency and is a key step towards helping to implement a global climate solution aligned with the Paris Agreement.

While BHP’s Chief Financial Officer Peter Beaven announced in May 2019 that BHP had “no appetite for growth in energy coal regardless of asset attractiveness”, little comment was made of this today.

Instead, Mackenzie provided increased clarity on his company’s relationship to the thermal coal sector in a piece penned in the Financial Times, committing BHP to a $400m 5-year climate-related investment program to research and implement global warming actions in addition to the Scope 3 emissions reductions.

IEEFA considers this entirely logical. When reviewing an asset’s retention strategy, it is best not to box the company into a particular path or timetable ahead of time, particularly given the diminishing market appetite for an increasingly technologically challenged asset such as thermal coal. Retention is a potentially sound strategy in the absence of strong buyer interest. This allows for an orderly optimisation, closure and clean-up path from a well-capitalised and credible firm, potentially also best protecting stakeholders - including the workforce.

Please view full report PDF for references and sources.

Press release: IEEFA Australia: BHP to link executive compensation to reductions in emissions generated from the use of its products

Tim Buckley

Tim Buckley, Director, Climate Energy Finance (CEF) has 30 years of financial market experience covering the Australian, Asian and global equity markets from both a buy and sell side perspective. Tim was formerly Director Energy Finance Studies, Australia/South Asia, IEEFA, and was a Managing Director, Head of Equity Research at Citigroup for 17 years until 2008.

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