South32: More To Do On Climate Risk Disclosure

PERTH, 23 November 2017

At its annual general meeting in Perth today, mining company South32 came under pressure from shareholders about its reluctance to take more substantial action on climate change.

Earlier this year, South32 became the first mining company in Australia, and quite possibly the world, to publish a report consistent with the recommendations of the Financial Stability Board’s Task force on Climate-related Financial Disclosures.

Entitled ‘Our approach to climate change’, the report is a commendable first step in providing the sorts of disclosure on climate change that both activists and the investment community are looking for.

However, as is the case with these things, the devil is in the detail.

South32 provides some very useful information on its Governance and Risk Management, which suggests that both the board and the company’s senior executive ‘gets’ climate change.

In fact, as early as last year in a speech to the Melbourne Mining Club, CEO Graham Kerr committed not to open any further greenfield thermal coal mines (new basins), a commitment that largely flew under the radar, and puts them way ahead of the rest of the coal industry.

Yet at today’s AGM, CEO Graham Kerr confirmed that the company would continue to expand the thermal coal industry, through further investment in the company’s existing assets. Ruling out new coal mines is great, but the next step must be to rule out any further expansion of the thermal coal industry altogether.

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Despite reducing its Scope 1 and 2 emissions by 7.5% since 2015, the company has set the rather unambitious target of keeping emissions below their 2015 levels by 2021. Responding to a shareholder about this lack of ambition, CEO Graham Kerr made the case that the company’s emissions were projected to be going upwards in 2015, and that shareholders should be satisfied that they have remained flat. While this is good news, it certainly isn’t consistent with an emissions trajectory that would limit global warming to 2°C.

It is widely accepted that the longer economies and companies delay action, the less likely the transition to ‘net zero’ emissions will be smooth. The board were asked why it was deferring more substantial action until 2021, and therefore leaving the next CEO a much larger, more complex problem to deal with. Chairman David Crawford claimed that the company was committed to “stay within the Paris Accord” and that “we are doing as much as we can”, despite refusing to set a meaningful target to reduce emissions before 2021.

South32 is in the unenviable position of providing thermal coal to the South African government owned electricity generator – Eskom – a company itself on the brink of insolvency. The company argues that its Scope 2 and Scope 3 emissions are largely out of its control, and point the finger at Eskom. Deflecting blame, unfortunately, won’t resolve the issue. This is not going to be an easy transition for Eskom or South32, as the utility relies almost completely on coal-fired power. The very least South32 could do is be public in its advocacy for decarbonisation.

South32 has taken the first steps to improving transparency around climate risk. Yet the forecasted impact on its energy coal business (-10% from current levels), are optimistic at best. With limited discussion of the potential disruption from decentralised solar and large scale wind in South Africa, South32 should seek to improve its disclosure in the year ahead.