Global Report: Changing Climate Triggers Risk and Investment Issues for Global Mining Industry
Report Suggests Mining Companies are Failing to Fully Recognise Risks Posed by Inevitable Climate Change
According to an Acclimatise report, backed by IBM (NYSE: IBM), over 80% of global mining companies surveyed claim their physical assets would be affected by extreme weather events, yet only 13% report taking action to protect their assets that are critical to business success, attracting financial investment and the safety of employees.
The report findings highlight the critical choices mining companies now face to help prepare their business for anticipated additional costs and challenges created by a changing climate. The challenges facing mining enterprises today are pushing leaders to adapt the traditional ways of thinking about their business to discover and explore new practices that will improve the business of mining.
Without building adaptation measures into their business plans, climatic risks could impact upon a company’s financial and operational performance, potentially increasing operational and capital expenditure. This is particularly true for mining companies where long term investment decisions have to be made. However only 3% of companies surveyed provided evidence that they mainstream adaptation into decision making, highlighting the need for more mining companies to consider action.
Investors and financial institutions recognise the importance of a company’s assets and the contribution they make to overall value. They are taking an increasing interest in the impact of climate change and exploring the implications for their investments, and for lending risk on project finance. If a company’s assets are not adapted to cope with a changing climate, financial projections made today based on current life, performance and value of assets may not be robust, which could impact upon company value and interest from investors.
Potential for change
“The mining industry has been an essential contributor to society and the economy for many years and has continually adapted successfully to changes. IBM believes this rate of change is increasing and many within the industry realise that the modern miner will need to work differently and work smarter to succeed,” said David Carter, Mining Industry Lead, Growth Markets, IBM Global Business Services. “Increasingly companies need to think about the potential impacts from inevitable climate change resulting from past greenhouse gas emissions. Whether this takes the form of adapting to reduce risks, complying with regulations aimed at increasing energy efficiency or reducing greenhouse gas emissions.”
The report titled “Global Mining – The Adaptation Challenge” is based on the Carbon Disclosure Project’s annual request for information that was sent to the world’s largest 144 mining companies (based on market capitalisation) of which 43% sent detailed responses. Analysed using Acclimatisation Index™ Methodology.
Five climate change impacts for cost and revenue
Natural resources under stress: Water is becoming a major cost item for mining companies as global fresh water resources are under increasing stress. However only 16% of respondents indicated they were taking action on water management. Less water, declining water quality and growing water demand are creating challenges in the mining sector. The sector has historically taken clean, reliable and inexpensive water for granted. These trends amplified by the affects of climate change are creating operational issues, restrictions on abstractions, more stringent water quality regulations, pressure to move towards full-cost water pricing, and increased public scrutiny of corporate water practices.
Employee health and safety hazards: Climate change may affect the health of the human capital upon which businesses rely, including staff, labour pools, sub-contractors and commercial partners. This could create additional costs for mining companies through lower productivity, compensation claims and disputes, and business interruption. Under a changing climate, risk of death, disease or injury from heat waves, floods, storms, fires and droughts for mining operatives could increase – but only 19% of respondents considered that there may be an increase in disease risks. The safety and performance of buildings, structures and other assets that may not be climate-resilient could also translate into increased costs to ensure worker safety, comfort and productivity.
Risk to secure energy supplies: Most businesses rely on a secure source of energy for the continuity of their operations. Some industry sectors have critical logistics or operations for which even a short-term disruption in energy supply creates significant losses and lower revenues. Mining is one such sector where disruptions and increases in energy costs could challenge the financial viability of operations. 34% of respondents recognised that climate change may create energy price volatility and security of supply challenges. While only 11% identified the risk to essential utilities.
Additional reputation management measures: Climate change has the potential to create or exacerbate tensions that lead to reputational damage, by modifying the relationships between investments and their surrounding environments and local communities. It is also changing stakeholders’ expectations, and in particular those that are sensitive to social and environmental impacts, for example Institutional investors. Only 18% of respondents reported awareness of reputational issues that could occur if they were not seen to be dealing with climate change.
Increase in operating and transport costs: As minerals are often extracted from remote locations, companies face a logistical challenge in terms of how supplies, workforce and products are transported to and from the mine and onto the customer. A common delay for mining companies is finding spare parts for when an asset or piece of equipment breaks down. Direct maintenance can make up a large proportion of expenditure.
Transport considerations, particularly cost containment and visibility, are typically, vital components of any businesses supply chain. 24% of respondents identified the risks associated with rising sea levels, with 18% referring to potential problems due to their reliance on marine transport and port facilities. 19% recognised that land based transport systems could be vulnerable.
“If ever there was an industry which has to get to grips with the impacts of a changing climate, then it is mining. You can’t invest in long-term capital intensive operations without considering how climate change will affect your operations, your markets, your workforce and your reputation,” said John Firth, CEO and co-founder, Acclimatise.
Legal and stakeholder pressure to adapt
Regulatory and legal drivers: Although new regulatory provisions are being developed in many countries in response to these challenges, there remains a great deal of uncertainty regarding the scope, content and format of future legislation. Greater certainty about the future regulatory landscape is required to encourage companies to invest. New regulatory pricing structures will be required in some countries to encourage greater energy efficiency and demand management measures.
Stakeholder pressure to disclose risks: Investors and other stakeholders, including governments and regulatory agencies, consumers, local communities and NGOs, have started to place much greater pressure on mining companies to address climate risks and opportunities. The status of climate risk disclosure and management is changing, moving from a voluntary to a mandatory requirement. These changes supplement the duty that company directors already have, to disclose future material risks to their shareholders, to regulatory investment authorities and to their insurers.
Political stability and geo-political risks: Mining companies operate in areas with varying degrees of political, legal and commercial stability. Administrative change, policy reform, changes in law or governmental regulations can result in civil unrest, expropriation, or nationalisation. The consequences of instability or changes could have an adverse effect on the profitability, the ability to finance or, in extreme cases, the operational viability of some mining operations.
Future of the mining industry
The challenges facing mining enterprises today are pushing leaders to adapt the traditional ways of thinking about their business to discover and explore new practices that will improve the business of mining.
As inevitable climate change is one of the additional challenges facing mining companies, Acclimatise and IBM have jointly prepared a set of 10 Prepare-Adapt questions to help mining executives take informed steps towards building corporate resilience:
- What are the operational impacts of climate change on your company?
- Have you evaluated the potential impacts of climate change in your business plans and the financial consequences for your long term investments?
- How sensitive are price and product demand to climate change impacts?
- How could current and future climate change regulations and industry standards affect your organisation and its reputation?
- Where are the opportunities for you in a world facing new challenges driven by climate change?
- What benefits could you realise from better managing your response to climate change?
- How clear and effective are your governance processes for dealing with climate change?
- How well structured is your approach for managing climate change?
- How can you ensure that your approach is based on robust information and assumptions?
- How can you demonstrate that your business contingency plans are climate resilient, realistic and financially viable?
“This report shows how important it is for the mining sector to plan for a changing climate. Issues such as operating cost, community impact and reputational risks will impact if not managed effectively. As a result, investors want to know how mining companies are dealing with these risks and planning for them in the future. This report helps answer those questions,” said Paul Simpson, Chief Operating Officer, Carbon Disclosure Project.
For a full copy of the report: http://www-05.ibm.com/uk/green/cdp2009/mining.pdf.
The analysis has been undertaken using the Acclimatisation Index™ methodology. This enables a semi-quantitative analysis of the responses recognising the scope of the questions.
The Index can take into account information from other sources to provide a more comprehensive analysis if needed. The Index also allows a relative score for each company to be calculated, although these scores are not available as part of this project.
The Acclimatisation Index™ has been used to analyse the resilience of global mining companies to climate change in response to questions contained within sections 1 and 4 of the Carbon Disclosure Project questionnaire. It describes how global mining companies understand the risks and opportunities they face as a result of the changing climate, and how they plan to adapt to them.
For more information on IBM log onto www.ibm.com/uk/green:
For more information on Acclimatise:
Acclimatise is a risk management consultancy focused on helping its clients become business resilient to the impacts of inevitable climate change. Founded in 2004 Acclimatise advises some of the world’s largest corporations, banks, insurers and pension funds. It also provides strategic guidance to governments, government agencies and to cities.
For more information on Carbon Disclosure Project:
The Carbon Disclosure Project (CDP) is an independent not-for-profit organisation holding the largest database of corporate climate change information in the world. CDP gathers data through its annual Information Requests on behalf of 475 institutional investors with assets under management of $55 trillion, purchasing organisations and government bodies. Since its formation in 2000, CDP has become the gold standard for carbon disclosure methodology and process, providing primary climate change data to the global market place.
For more information, visit www.cdproject.net.
Web site: http://www.ibm.com/