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

July 23, 2019
Tim Buckley

Australia States only map23 July 2019 (SYDNEY)  — 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.

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, Columbian 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.

BHP has “no appetite for growth in energy coal” according to CFO

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

Instead, CEO Andrew Mackenzie provided increased clarity on his company’s relationship to the thermal coal sector, committing BHP to a $400 million 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.

BHP IS AGAIN PROVING TO BE A POSITIVE PLAYER showing agility 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’s latest move highlights the tough decisions required of big players and the declining legitimacy of thermal coal

While BHP lags that of Rio Tinto’s progressive thermal coal exit over 2014-2018, its latest move highlights the tough decision-making required of big players and the declining legitimacy of thermal coal.

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

In its 2017 Climate Statement, South32 made it clear it saw the thermal coal sector as structurally challenged, and throughout its short life has been working to exit its 25Mtpa South African coal division, with progress slow. Press reports suggest further write-downs are expected, despite a book value of just $70m.

Global group Rio Tinto began its exit even earlier. The company learnt that coal investments can be value-destructive with its 2010 takeover of Riversdale Mining in Mozambique, a 45Mtpa debacle that saw US$3.7bn of shareholder wealth destruction.

As a result, Rio Tinto’s board was instrumental in commencing an orderly coal exit from 2014, allowing a process that maximised shareholder value retention before stranded asset risks were generally accepted. This process was completed in 2018 with the sale of Rio Tinto’s Hunter Valley coal assets to Yancoal and Glencore, and then with the sale of its Queensland coking coal mines to EMR Capital and Adaro Energy.

THIS WEEK IN THE U.S., ANOTHER COAL MINER HAS GONE INTO CHAPTER 11 BANKRUPTCY: Blackhawk Mining LLC owes over US$1bn putting 2,800 workers at risk. This follows the bankruptcy of the sixth largest U.S. coal producer BlackJewel LLC earlier in July 2019, disrupting 1,700 workers and their communities while leaving 20 years of mining at rehabilitation risk. In June 2019, Cambrian Coal also entered Chapter 11.

And in Japan, most trading houses are in the process of exiting thermal coal mine ownership. Marubeni Corp led the divestment process with its landmark new coal exit policy of September 2018. Since then, divestments have been made by Mitsubishi Corp., Mitsui & Co., Itochu Corp and Sojitz.

In July 2019, Chubb became the first U.S. insurer to announce a coal restriction policy

In July 2019, Chubb become the first U.S. insurer to announce a coal restriction policy, recognising the reality of climate change and the need for a transition to renewable fuel solutions. Chubb will not underwrite risks related to the construction and operation of new coal-fired plants, nor for companies deriving more than 30% of their revenues from thermal coal mining.

To date, 114 globally significant financial institutions to-date have announced new policies on thermal coal lending, divestment and/or insurance restrictions or exclusions.

RESTRICTIONS ON COAL FINANCING IS ACCELERATING. There have been 22 coal divestment announcements from globally significant financial institutions in 2019 alone, being either new company restrictions (e.g. MM Group of Netherlands in May 2019) or a tightening of existing coal exclusion policies (e.g. KfW of Germany in July 2019).

In limiting climate change to 1.5-2°C of warming as per the global Paris Agreement, IEEFA notes fossil fuel extraction must rapidly decrease towards zero net emissions. All countries must instead accelerate reliance on sustainable, affordable and renewable sources of energy, and accelerate energy efficiency and electrification of the transport sector as the top priorities to avoid catastrophic global warming.

BHP is showing itself as a company likely to survive the energy transition, while laggards like Glencore, Whitehaven and Adani that continue to invest in a dying industry are creating huge cost burdens for banks, insurers, governments and local communities.

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.

BHP’s statement today is an important milestone

Overall, BHP’s statement today is an important milestone that builds momentum towards global action to better align with the Paris Agreement.

Without that alignment, the future is uncertain and increasingly dire.

Read Tim Buckley’s full analysis: BHP to link executive compensation to reductions in emissions generated from the use of its products

Tim Buckley ([email protected]) is Director of Energy Finance Studies, Australasia

Related links:

IEEFA update: Norway’s GPFG sovereign fund to invest up to $14bn in unlisted renewables

IEEFA update: The global energy transformation is well underway

Rio Tinto’s restructuring signals a global industry step away from coal

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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