Decarbonization: A strategic opportunity to build long-term value

As originally published on Canadian Mining Magazine.

Mining & metals companies are being called to address their carbon footprint by making big changes in how they operate and collaborate.

Treating decarbonization as a strategic opportunity to build long-term value

Mining and metals companies are facing a two-fold scenario with the energy transition. They’re being called on to address their carbon footprint and reduce emissions, while providing the minerals and materials needed to help companies in adjacent industries do the same. Balancing the two is becoming increasingly complex. And with recent calls from the UN Climate Change Conference of the Parties (COP26) demanding all businesses to take action, the pressure is mounting for Canadian mining and metals companies to accelerate their decarbonization efforts.

Though climate change action is not new news to the sector — COP26 just brought heightened awareness and urgency to it. The EY Top 10 business risks and opportunities report finds companies rank environment, social and governance (ESG), decarbonization and licence to operate (LTO) as the top three risks for 2022. The results are a testament that leading with purpose, long-term value and sustainability at the heart of decision making is no longer a competitive advantage, it’s just business as usual. It will be those businesses that can meet climate targets, while transparently communicating progress with stakeholders, that will gain an upper hand in the fight for capital and new assets.

Addressing the full scope 

Abating scope 1 and 2 emissions should be high on the agenda for miners, if not already in progress. These are either direct emissions from company-owned and controlled resources or indirect emissions from the generation of purchased energy. There are several opportunities for miners to reduce scope 1 and 2 emissions on-site. Renewable energy — solar and wind for example — is the most cost-effective abatement initiative and can reduce emissions significantly depending on site conditions. Plus, switching to renewables can be a smart use of the land that surrounds the mine.

Fleet electrification and replacing diesel with zero-carbon fuel options across the value chain are also opportunities to decrease on-site emissions. But these measures alone will not fully decarbonize a mine. Emissions from processing, ventilation, heating and cooling and backup power generation remain significant. Carbon capture and storage will be needed to achieve a net-zero target, potentially alongside other forms of carbon offsets.

The real game changer will be abating scope 3. These are indirect emissions that occur in the value chain and not owned by the company, making it difficult to track and reduce. Reducing scope 3 emissions will require mining and metals companies to make big changes in how they operate, collaborate more with clients to decarbonize the whole value chain and articulate the value to stakeholders. This last mile of decarbonization is hard, and data collaboration poses potential limitations to the accuracy and completeness of data needed to support targets. For miners, the key challenge will be to encourage and empower parties across the value chain to be carbon neutral.

Communicating transparently to drive lasting value

The Canadian Securities Administrators published proposals in the fall that would introduce climate disclosures for public companies that are largely in line with the standards set by the Task Force on Climate-related Financial Disclosures (TCFD). And similarly, the US Security and Exchange Commission, is reviewing proposed regulation for mandatory climate risk disclosures for public companies, which is expected to be implemented in early 2022.

With climate risk moving up the agenda, companies need to be prepared for climate-related disclosures to be added to the scope of their external audits. Though research by the EY Global Climate Risk Barometer finds that Canadian companies are responding to the recommendations of the TCFD and producing more robust disclosures around their climate change and governance strategies than their global peers, they still have work to do. One of the biggest missing elements was that identified risks and opportunities are not tied to scenario analysis.

Within the TCFD framework, scenario analysis is the critical planning stage that turns theory into tangible, actionable strategies. It’s vital for leading-class reporting because climate change risks are inherently longer-term and more complex than traditional business risks. Taking a robust climate risk scenario analysis, looking carefully at the broad risks and opportunities that climate change presents to the business and the industry as a whole, will be important in delivering trusted and financially material reporting insight to help stakeholders better understand the company’s long-term value strategy.

Amid uncertainty around emerging carbon legislation, miners need to respond appropriately to shareholder pressure to meet climate targets and avoid committing to potentially unrealistic goals. Sharing their road map to net zero and their successes along the way will be key to gaining investor confidence and, potentially, competitive advantage.