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Changing climate creates risks, opportunities for mining companies

Risks posed by anthropogenic climate change have become real. As an industry generating a high level of greenhouse-gas (GHG) emissions, mining has come under increasing investor and regulatory pressure to quantify and disclose contributions to global warming and their efforts to mitigate emissions. Forward-thinking miners are analysing the implications of human-induced climate change for their future, and crafting smart responses.
Changing climate creates risks, opportunities for mining companies Changing climate creates risks, opportunities for mining companies Changing climate creates risks, opportunities for mining companies Changing climate creates risks, opportunities for mining companies Changing climate creates risks, opportunities for mining companies

Jens Burchardt, Martin Feth, Cornelius Pieper and Marc Schmidt*

In ‘Building uncertainty advantage in a climate of change', our colleagues cited examples of mining companies that are strengthening their position on human-induced climate change and gaining benefits including higher valuation multiples. In this article we introduce a framework developed by BCG that helps mining companies think holistically about risks and changes presented by changes in climate. 

Formulating your response

A holistic response to anthropogenic climate change encompasses three main components: a 2C-resilient low-carbon business strategy; decarbonised and ‘climate-proofed' operations; and an honest, effective climate narrative and stakeholder-engagement strategy (figure 1, below).

Let's look at each.

Craft a low-carbon business strategy

Climate change can transform the environment that mining companies operate in. They must understand how it may affect them—then reinvent their business strategy accordingly.

Purpose, ambition and target-setting. Realign your purpose with a low-carbon economy, and define a strategic ambition for your own 2C transformation. Translate this into actionable targets as part of your corporate strategy (for instance, targets on emissions, and on revenues from low-carbon growth businesses).

Scenarios and portfolio resilience. Global climate change and low-carbon policies can disrupt mining's end-user industries such as power generation, steel and transport—and hence expand or shrink different commodities' profit pools. To stay on the right side of these impacts, develop a range of climate-change scenarios and evaluate each scenario's impact on your business.

Remember, as end-users modify how they work - for example, deploying circular-production technologies - demand for relevant commodities will rise or fall. Prices will fluctuate accordingly, influencing the attractiveness of owning mines in specific commodity markets.

Low-carbon product and growth strategy. Commodity buyers are becoming increasingly aware of climate change and interested in more sustainable sourcing. Consider how you can serve demand for ‘greener' commodities and achieve a competitive advantage by using less energy or water, or by reducing CO2 emissions.

Equally important, look for opportunities in new commodities that support emission reductions in other sectors, such as lithium for e-car batteries or copper for renewables. Also consider new business models—such as ‘urban mining' ventures—that turn a more circular resource economy into a business opportunity.

Ventures, partnerships and ecosystems. Climate change is a global challenge requiring new collaborative solutions. So, forge new partnerships and help coordinate initiatives that include suppliers, customers and even competitors. By doing so, you can reduce the risks associated with decarbonisation and ramp up new, low-carbon technologies at greater scale. Consider HYBRIT, an ecosystem play for fossil-free steelmaking. This cross-sector joint venture between SSAB, LKAB and Vattenfall aims to create a hydrogen-based steelmaking process in northern Sweden by 2035 that uses no coal and emits no carbon dioxide.

Climate-proof your operations

Miners must determine how best to reduce emissions from their operations and mitigate natural disasters' impact on their physical assets. 

Emission reduction and offsetting. Develop an ‘abatement curve' to understand the most cost-efficient path for reducing your emissions in the short term. Also identify required technologies for getting to zero emissions in the longer term (to avoid stranded investments). Explore diverse reduction levers, such as increasing efficiency in your mining and processing operations as well as using renewable power and fuel alternatives like biomass and biofuels.

There is no one best way to reduce emissions; the path depends on the mining operation in question and geographical characteristics. For example, where an operation is located informs whether there is enough sun or wind to provide renewable power and how favourable the regulatory environment is. To determine how best to reduce emissions cost-effectively, understand your operations' starting point and local context.

Sustainable supply chain (scope 3). Scope 3 emissions often make up more than 90% of a mining company's total emissions footprint. Yet most miners struggle to gain transparency into and to reduce these emissions. To tackle this challenge, gain a clear view of your supply chain. Then, with your customers, explore ways to reduce their downstream footprint, especially in highly carbon-intense sectors such as steelmaking.

Infrastructure resilience. The rising number and severity of natural disasters catalysed by global warming will deal a harsh blow to physical infrastructure essential in mining and could lead to water scarcity. Build a thorough understanding of these impacts, and design plans for safeguarding your most at-risk infrastructure.

Financial management and carbon trading. Work to understand, navigate and manage your cost exposure regarding current and potential future carbon pricing mechanisms. Optimise your exposure in offsetting markets when purchasing carbon credits for emissions you cannot (yet) reduce. Additionally, explore low-carbon investment programmes and green bonds as potential sources of capital to finance your emission-reduction investments.

Engage stakeholders with a convincing narrative

To develop an ambitious and value-creating response to a changing climate, companies need an honest and convincing narrative, as well as a strategy for embedding this narrative within and outside of their organization.

Low-carbon governance. Integrate your climate strategy into your standard ways of working, and create better internal transparency on emissions by including them in regular reporting. Also implement an internal carbon price that de-risks your current investments against future regulation changes and that helps you integrate your climate ambition into daily decision-making. In addition, develop new KPIs and set up the right incentives. (For example, link executive compensation to the achievement of emissions-reduction targets.)

Stakeholder narrative and engagement. Describe how your company is helping to address global greenhouse gas emissions. Share data on your emissions and how you've reduced them, during conversations with external stakeholders (investors, policy makers, customers, suppliers) and internal stakeholders (employees, management, board members). Be bold but also honest about challenges you've encountered. Stakeholders today expect transparency on environmental impacts of industry and business, and such communications play a powerful role in their views of your company. For instance, investors' perceptions of long-tail carbon risks influence their decisions about where to allocate funding. Public perceptions of whether a company is part of the solution versus part of the problem significantly affect workplace preferences among talent in the labour market.

Financial disclosure. Establish analytically grounded, scenario-based and TCFD-compliant financial-disclosure practices that document your climate-related financial risks and opportunities to the broader financial market. To do so, you'll need to develop scenarios, model financial impacts, strategically shape the narrative and set up the right processes and tools.

Understanding the climate-change maturity curve

Crafting and communicating an effective response to risks created by unsustainable pollution levels isn't easy. Where to begin? Understand where your company stands now in its journey. Then develop a tailored roadmap for change. Every mining company's journey is unique. But drawing from our research and client work, we've distilled some common milestones, which we've dubbed, ‘Awareness, Table Stakes, Differentiated Position and Competitive Edge'.

With this evolution in mind, try the following self-assessment, to see where on the climate-change maturity path your company currently stands. Be honest!

In our company, we:                   

Understand the long-term climate-related risks to our business   Yes/No

Are aware of our required emissions-reduction target under the Paris Agreement Yes/No

Understand how different climate-change scenarios will affect demand for and pricing of our commodities Yes/No

Pursue new business opportunities arising from global climate-related action  Yes/No

Know what our most economic path to reducing scope 1 and 2 emissions is Yes/No

Engage with our customers to devise ways to reduce scope 3 emissions Yes/No

Understand the physical risks that climate change poses for our operations  Yes/No

Integrate management of carbon emissions into our governance  Yes/No

Regularly engage in productive dialogue about climate with our investors Yes/No

Regularly disclose our climate-related business impact according to TCFD standards  Yes/No

Interpreting your score:

•             1-4 ‘Yes' responses: Awareness

•             5-6 ‘Yes' responses: Table Stakes

•             7-9 ‘Yes' responses: Differentiated Position

•             10 ‘Yes' responses: Competitive Edge

Depending on where along the maturity path you believe your company now stands, you will want to tailor your response accordingly. All this takes time and hard work. But the effort pays big dividends, in not just higher valuations but also a more resilient portfolio and greater access to investment funding and talent.

*Jens Burchardt (Burchardt.Jens@bcg.com) is an associate director for climate impact at Boston Consulting Group's Center for Climate Action; Martin Feth (Feth.Martin@bcg.com) is a partner and associate director for future of natural resources at BCG; Cornelius Pieper (Pieper.Cornelius@bcg.com) is a managing director and partner at BCG; Marc Schmidt (Schmidt.Marc@bcg.com) is a managing director and partner at BCG.