29 October 2019
One of Australia’s biggest iron ore miners is falling behind its peers when it comes to managing the risks posed by its emissions-intensive value chain.
Earlier this year, Fortescue Metals Group CEO Elizabeth Gaines said scope 3 emissions should not be considered in government project approvals processes.
Scope 3 refers to greenhouse gas emissions generated downstream of a company’s operations as customers use its products. For a major iron ore producer like Fortescue, the scope 3 emissions caused by customers turning its iron ore into steel represent its major contribution to climate change, and therefore its greatest exposure to climate change risk.
Fortescue’s annual report confirms the company’s support for “the UN Framework Convention on Climate Change which mandates that individual nations take responsibility for emissions within their own borders.”
Big investors haven’t asked @FortescueNews to disclose climate change scenario analysis or downstream (scope 3) greenhouse gas emissions. So how exactly are they managing climate risk through engagement? @ACSI_ESG @AustralianSuper pic.twitter.com/gln1axJ2jA
— Market Forces (@market_forces) October 29, 2019
However, this raises considerable risks for Fortescue. For example, China is due to update its commitments under the Paris Agreement next year. If its targets are brought into line with the Paris Agreement’s overarching goals, which our company supports, China’s emissions would need to fall by at least 30% by 2030.
When asked how these risks are being managed, both Ms Gaines and Chair Andrew Forrest could only point to efforts to reduce the company’s operational emissions, which pale in comparison to its downstream emissions.
These efforts fail to address the financial risks posed by the fact that the market for Fortescue’s iron ore will need to either decline or decarbonise as the world moves to meet its climate commitments.
Super funds asleep at the wheel
Fortescue’s big mining peers have started moving on scope 3 emissions. BHP has committed to set independently verified, Paris-aligned public goals to address its scope 3 emissions in 2020.
For its part, Rio Tinto has partnered with its biggest iron ore customer to investigate ways to reduce emissions. While this is a far cry from Paris-aligned targets, at least Rio have put something on the table to address the considerable risks posed by its scope 3 emissions profile.
At the other end of the spectrum, Fortescue doesn’t even disclose it’s scope 3 emissions, nor any analysis of demonstrating how our markets would fare under a Paris-aligned, carbon constrained scenario. Shareholders were rightly concerned about being left in the dark about the level of climate change transition risks facing Fortescue.
But it seems institutional investors, including our super funds, have failed to act on this major climate risk exposure. Mr Forrest confirming at today’s meeting that Fortescue’s big investors had not asked the company to disclose scope 3 emissions nor detailed scenario analysis.
What will it take?
After the Fortescue board was further challenged over its failure to set targets to reduce scope 3 emissions in line with the climate goals of the Paris Agreement, the issue of shareholder resolutions was raised.
BHP’s commitments saw the company avoid a shareholder resolution calling for scope 3 emission reduction targets. Rio faced one of these resolutions earlier this year, and is expected to face a similar one again next year.
A shareholder put it simply to the board: “Will it take a a shareholder resolution for Fortescue to make a commitment like BHP’s?”
Given the board’s apparent failure to consider scope 3 emissions as a risk management issue, perhaps it will.