Q&A: How we’re helping companies in high-emitting industries decarbonise
Throughout 2022 we engaged with metals and mining companies to encourage them to develop robust climate transition plans.
Mining is currently responsible for 4-7% of greenhouse gas emissions globally, according to research from McKinsey & Co.
Other negative effects of the mining industry include deforestation, contamination of soil, streams and wetlands, significant use of water resources and health risks and other social and community impacts.
However, at the same time, minerals including lithium, cobalt, nickel and copper are essential to delivering a transition to net zero. This is because they are components in many emerging clean energy solutions, including wind turbines and electrical vehicle batteries.
In this Q&A, we discuss risks and opportunities in the metals and mining sector in the race to net zero and how we engage with high emitting holdings like these.
Should we still invest in mining even though it is a significant greenhouse gas emitter?
Kimberley Lewis: “Divestment vs engagement was a very popular argument a few years ago: the truth is that we have moved on from binary debate. We believe by remaining invested and actively engaging we can drive sustainable change and enhance the value of the companies we invest in. We have a responsibility to take an active approach to our investments to seek to ensure our clients’ capital is protected and used responsibly.”
What sort of challenges do metals and mining companies face in decarbonising?
Carol Storey (CS): “Over the past year we have engaged with a number of priority companies on the topic of climate change. At the time of our engagement with one company in particular, it had identified a number of operations that it was finding challenging to decarbonise.
“For example, the company’s aluminium production activities were reliant on the generation of very high temperatures, which is extremely energy-intensive. Some of these activities are currently taking place in locations that do not have access to renewable energy infrastructure. The company was also mining the type of coal needed to produce steel (metallurgical coal).”
What sort of opportunities are there in this sector?
CS: “At the same time, this company also had incredible opportunities in transition metals like copper, nickel and silver – used to make things like wind turbines, solar panels and electric motors and batteries.
“We didn’t want to see the company simply sell off parts of its business to meet net zero goals. This is unlikely to result in real world emissions reductions. We also wanted to see the company support workers and local communities that could be impacted by its transition to net zero.
What was your approach to engagement in 2022?
CS: “Our focus was to support the company with its plans to decarbonise the most difficult parts of its business. As investors we must recognise this will take time.”
“Throughout 2022 we engaged with the company a number of times in advance of a Say on Climate vote on its transition plan. These are votes where management of a company asks shareholders to back their climate transition plan.
“We engaged with different company representatives, including the chair and CEO as well as sustainability teams and investor relations.
“Climate disclosure was already quite good relative to peers but, because it is in a harder-to-abate sector, we wanted to see a ‘best-in-class’ transition plan that would address the company’s key challenges and demonstrate it was doing everything it could to decarbonise.
“In the run up to the vote, we provided detailed feedback reflecting our views of good practice for transition plans, and highlighted areas where the company could strengthen its net zero ambition. We were keen to understand further the company’s capital expenditure plans, goals relating to Scope 3 (value chain) emissions, and how the company was interacting with governments and business partners to secure access to renewables and low-carbon fuels.
What was the result?
CS: “Shortly before the vote, the company released its full transition plan. We were pleased to see the company enhance its disclosures along the lines we had discussed, and strengthen its net zero goals to cover Scope 3 emissions. It also went further than expected by making a commitment not to develop or invest in greenfield metallurgical coal projects. We supported management’s Say on Climate resolution.
“Throughout our engagement dialogue, the company’s leadership has demonstrated that climate risk is incorporated into strategic decision-making at the highest levels of the company.
“What we found particularly impressive about this company was the way scenario analysis has been used to identify high-risk business operations, which in turn informs the company’s just transition plans, developed to reduce the potential impact of the transition on workers and local communities.”
The contents of this document may not be reproduced or distributed in any manner without prior permission.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.
This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.