BHP: Climate Risk and ESG Ratings

We talk to Dr. Fiona Wild, Head of Climate Change and Sustainability at BHP in Melbourne, Australia about the company’s approach to sustainability and the challenges posed by climate risk.  She also discusses how ESG disclosure, ESG ratings and engagement with investors and ratings agencies can combine to provide an accurate picture of a company’s true sustainability profile.

 

Do you speak to ESG ratings agencies on a regular basis?

Engaging with ESG ratings agencies is not a constant process but we do engage with some groups such as the CDP and we assess the benefits of this platform and others. We do engage with companies such as Sustainalytics and MSCI. They might share their analysis with us and we can then clarify points or provide them with more information, although the outcome remains at their discretion. With other agencies it’s more of a one way street as they will publish their findings on us without any consultation.

If providers issue a rating without any input from us then we do try and engage to ensure they have the latest information. For example, the reporting year in Australia is different from the UK’s so when we report on sustainability issues for the previous year so we need to make sure the reporting period is clear to agencies. There can be some publically available information that can be missed. Our website contains a lot of information on sustainability including our annual report and other bespoke reports.

To what extent do you compare BHP’s ESG ratings with those of your competitors?

We do keep an eye on what our competitors are doing with sustainability but comparing BHP ratings with companies such as Rio Tinto and Anglo American can be a problem because of issues in the transparency of ratings and rankings which can make it difficult establishing what everyone else is doing. Rankings for climate change and risk cannot easily be encapsulated in one metric.

Yes, there is a quite a lot of benchmarking that goes on. I used to work at BP and we used to do a lot of benchmarking, both looking within the oil and gas sector and also across sectors. As far as I know, everyone compares their ratings with their competitors and looks for opportunities for improvement. For this, transparency in ratings and rankings is helpful. If ratings don’t have transparency, then you have a score but no substance as to how that score was arrived at. It’s often hard to work out what other firms are doing to improve their ratings and what you can do to improve yours. For climate change, agencies should look at positioning, strategy and delivery to get the overall picture.

Are you under constant pressure to increase or improve your disclosure?

Yes, but that’s nothing new. While there has always been pressure for BHP to disclose sustainability developments, a very significant part  of this has been driven by BHP ourselves: we conducted a major 2C analysis in 2015 and have undertaken various scenario analyses since then.

I would like to stress that the importance of investor engagement beyond just ratings. Ratings are really only half the story. Investors need to engage with companies in order to come to an informed view. Some ratings providers don’t have adequate resources and enough analysts to cover all companies in depth. Moreover, a lot of ESG and sustainability performance is open to interpretation. We report in line with TCFD recommendations.

We continue to look for a proxy metric for climate risk but it’s very hard to find one, as the range of risks is broad and ever-changing. Ratings are not necessarily the best reflection of this. The market will probably conclude which metrics work best.

Companies should aim to disclose their scenario analysis regarding climate risk.  Disclosure is very important for BHP and we have been a first mover in this area starting with our first 2 degree C scenario analysis back in 2015.

What about an ESG rating you are unhappy with or disagree with?

I sit on the Task Force for Climate-related Disclosures (TCFD) and we have had a lot of discussions on what the right metric might be for assessing climate risk. The problem is that it’s very difficult to find simple metrics that capture complex issues, especially with regard to climate change. In ESG ratings, there can be a lot of subjectivity and the metrics may not necessarily be the best reflection of how risk is actually being managed. We will engage with a ratings agency if we believe our available information is being misinterpreted. We prioritise which agencies we speak to because to engaging with them all would take a huge amount of time and resources.

What about a firm having two completely different ratings from two agencies? 

There is not one magical metric which is a proxy for climate risk that enables simple comparison. I think investors build a relationship with a company and this can help them understand the range of risks to which the company is exposed and how well they are being managed. This is a matter of deep engagement and not just looking at a simple metric, such as an ESG rating. This is an important process that often gets forgotten as the ESG ratings very often seems to dominate people’s thinking.

To get an idea about a company’s sustainability performance, it is often best to first go to the firm’s own disclosures and follow up directly with them. This allows an investor to form their own views and not just rely in ratings. They may then look at the ESG ratings providers’ scores to check they haven’t missed anything. In effect, the ratings become confirmatory, or can help to pick up any areas of disparity for further investigation.

How valuable are ESG ratings in their own right?

An agency looking at 3000 companies with only a few analysts cannot cover firms accurately and in-depth. They need to assess factors ranging from climate change to human rights and that is a very labour intensive business. Very often information we give them is not taken up because they don’t have the resources to process the information into our ratings score. As such, I think it’s now necessary for firms to actively engage with agencies to improve the flow of information.  The resources needed to look at thousands of companies are beyond the scope of most, if not all, agencies.

What are BHP’s current projects with regard to climate change?

Our operational footprint (Scope 1 and 2 emissions) is around 15m tonnes. Emissions from our value chain (Scope 3) are much higher than this.

Our Climate Investment Programme is an AUD 400 million commitment over the next five years to reduce Scope 1, 2 and 3 emissions. The Programme will focus on reducing emissions from electricity by switching to renewables. Also targeted are emissions that come from diesel use in trucks etc, and fugitive emissions from our coal and petroleum operations. We will also look for opportunities to address greenhouse gas emissions from steel making and other sectors in our value chain.

For example, there is the opportunity to reduce greenhouse gas emissions from steel making, even though this is one of the most challenging industries in which to reduce emissions. However, you can introduce energy efficiency improvements, along with carbon capture and storage in the short and medium-term. In the medium to longer term, hydrogen may play an important role.

We recently funded a project with Peking University regarding the technological, policy and economic challenges of carbon capture and storage deployment in the Chinese steel sector.

Will we see a metric for climate risk anytime soon and where might it come from?

I don’t think we will ever find one magical metric for climate risk. Rather, it will be a group of useful metrics and the market will coalesce around those which are deemed most useful. For example, at the moment in our industry we have Scope, 1, 2 3 emissions metrics. However, it is still difficult to directly determine the financial impact of these. It’s still an evolving area and so impossible to narrow down to one metric because the range of climate risks is very broad.

With regards to third party operators that you use in your mines, how do you go about holding them accountable and how far down the supply chain do you look?

If we have onsite operators then they are required  to work to the same standards as BHP. If we are directing their work we expect them to abide by our standards. Further down the supply chain we are working more with our customers to influence emissions from the use of our products. This relates to Scope 3 emissions goals which we are committed to achieving. We have adopted a broader stewardship role and have taken on the task of setting Scope 3 goals across the value chain.

Once the product has gone to the customer we still have a stewardship role to play in order to reduce the emissions associated with the use of our products. We are not saying, however, that we won’t sell to a customer that doesn’t have the same ESG standards as BHP.

Does BHP’s position in voting against climate industries lobby groups present a PR challenge? Does that contradict your ESG policy?

We have actually done a lot of engagement with lobby groups on climate. Climate change is a very divisive issue in Australia but we have formed the view that, in certain cases, being inside an industry association is the best way to push for change even if there are disagreements and challenges in the short-term.  However, we keep all of our industry association memberships under review and we are not averse to taking action if we see a material difference in our relative positions on tackling climate change.

What is BHP doing to address emissions from shipping? Shipping is often pinpointed as a major source of emissions and BHP is the largest cargo ship charterer in the world.

As far as BHP is concerned, shipping makes a relatively small contribution to Scope 3 emissions at around 5%. However, this can still be reduced by preferentially chartering ships that meet minimum emission standards. In 2019, BHP launched a bulk carrier tender for LNG-fuelled transport for up to 27 million tonnes of its iron ore (around 10% of total shipped volume) which would reduce the carbon emissions from its bulk carrier fleet by about 25%. A decision on the winning tender is due this year.

At your mines in Australia and Chile, what opportunities are there for the use of renewable energy sources?

Costs are falling and technology has improved but investment is still required to switch to renewables. We are committed to looking for opportunities to decarbonise our electricity, and the Climate Investment Program is an important catalyst for that.

Perhaps most significantly, last year, we signed four renewable energy supply contracts in Chile that will provide the energy requirements of our Chilean operations at Escondida and Spence from 100% renewable energy sources from around the middle of this decade. The contracts will effectively displace 3 million tonnes of CO2 per year from 2022 compared to the fossil fuel based contracts they are replacing – equivalent to the annual emissions of around 700,000 combustion engine cars.