Publication BHP Climate Transition Action Plan Analysis

BHP Group Ltd/Plc

(ISINs: AU000000BHP4, GB00BH0P3Z91)

Assessment of Climate Transition Action Plan
AGM date and location: 14 October (UK), 11 November (AU)

Summary

In August, BHP Group (ASX:BHP) announced that it would provide shareholders with an advisory vote on its Climate Transition Action Plan (a ‘Say on Climate’). In its notice of meeting, BHP proposed that it would hold an advisory vote on its climate plan every three years.^[1]

ACCR believes there is sufficient reason to vote against the approval of BHP’s Climate Transition Action Plan. While BHP has made progress in recent years, its transition is not aligned with the Paris Agreement.

Our key comments on BHP’s transition plan are:

• Say on Climate votes should be primarily determined by alignment with the Paris Agreement;
• BHP’s emissions reduction targets are not aligned with a 1.5°C pathway;
• BHP’s emission reduction targets omit its largest sources of Scope 3 emissions, most notably those from steelmaking;
• BHP’s operational emissions increased 2% in FY2021, and were 11% higher than its FY2017 baseline;
• The potential scale of offset use in BHP’s decarbonisation strategy is unclear and uncapped, with frequent references to use of offsets “as required”;
• BHP is seeking to extend the mine life of thermal and metallurgical coal mines and is also pursuing new metallurgical coal mines;
• BHP’s intention to divest its Petroleum division to Woodside will likely lead to adverse climate outcomes;
• BHP has not committed to align its capital expenditure with a 1.5°C pathway;
• BHP remains a member of 11 industry associations whose lobbying practices are misaligned with the Paris Agreement, and four that are potentially misaligned.

Voting recommendation: AGAINST

Say on Climate: Paris alignment is paramount

The success of the ‘Say on Climate’ mechanism will be determined by investors. Sir Christopher Hohn has remarked: “it is in the hands of investors where this goes – it can be as powerful as investors want it to be”.^[2]

The Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report—described as the “code red for humanity”^[3]—concluded that “we are at imminent risk of hitting 1.5°C in the near term” and that “the only way to prevent exceeding this threshold is by urgently stepping up our efforts and pursuing the most ambitious path.”^[4]

With this sense of urgency, ACCR strongly encourages investors to use alignment with the Paris Agreement, particularly the goal to limit warming to 1.5°C, as the primary measure to assess BHP’s climate transition action plan. Rewarding transparency and the ‘direction of travel’, or relative performance in a sector that is underperforming, is simply not good enough. We are in a critical decade for action and the time for incrementalism and gentle encouragement has passed.

BHP’s contribution to climate change

BHP has made a considerable contribution to the accumulation of greenhouse gases in the atmosphere over the last century.^[5] In 2020, the Climate Accountability Institute found that between 1965 and 2018, BHP was the 19th largest carbon emitter in the world.^[6],^[7]

Whilst BHP has divested several carbon-intensive assets in recent years, including South32 and its US onshore petroleum assets, its emissions footprint remains significant (see Figure 1) and is characterised as follows:

• Scope 3 emissions represent 96% of total emissions;
• The processing of iron ore (Scope 3) represents 62% of total emissions;
• Metallurgical coal produces 45% of Scope 1 emissions, driven by diesel consumption and fugitive methane emissions;
• Copper is the largest source of Scope 2 emissions;
• The planned divestment of the BHP Petroleum division will decrease BHP’s total carbon footprint (including Scope 3) by approximately 9%, and Scope 1 and 2 emissions by 5%.

Figure 1: BHP Group emissions by commodity, FY2021 (MtCO2-e)

BHP’s performance against its short-term target

BHP’s short-term target is to maintain operational emissions at or below FY2017 levels by FY2022.^[8] Following the divestment of its US onshore petroleum division in 2018, BHP adjusted its FY2017 baseline to 14.6 million tonnes CO2-e.^[9] BHP’s operational emissions have been higher than its baseline for every year since FY2017 (see Figure 2), contributing an additional 4.2Mt CO2-e to the atmosphere over four years (excluding US onshore petroleum emissions).

In FY2021, BHP’s operational emissions (Scope 1 and 2) were 16.2Mt CO2-e, an increase of 2% from FY2020 and 11% higher than its FY2017 baseline (see Figure 2).^[10] This increase since FY2017 was primarily driven by a 20% jump in Scope 1 emissions, due to increased diesel consumption from 76 to 92 petajoules per annum, mostly in the Coal and Iron Ore divisions.^[11]

Despite this significant increase in emissions, BHP claims that it is “currently tracking in line with our FY2022 and FY2030 targets”,^[12] likely due to several renewable power purchasing agreements that are due to commence in FY2022 (discussed further below in decarbonisation strategy). However it is important to note that this does not negate the additional accumulation of atmospheric greenhouse emissions that has occurred since FY2017 as a consequence of BHP’s activities. For all companies setting emissions targets, the focus must be on a continuous ratcheting down of emissions from the baseline year.

Figure 2: BHP Group operational emissions, FY2017-21 (Mt CO2-e)

BHP’s medium and long-term targets

BHP’s emissions reduction targets (see Table 1) are not aligned with the goal of limiting warming to 1.5°C, according to the Transition Pathway Initiative’s (TPI) assessment for the Climate Action 100+ Net Zero Company Benchmark.^[13] This same assessment found that BHP’s targets do not cover the company’s most material Scope 3 GHG emissions.^[14] In fact, BHP’s updated net zero targets for direct suppliers and shipping of products represent just 5% of BHP’s FY2021 Scope 3 emissions.

Table 1. BHP Group emissions reduction targets and goals^[15]

By way of comparison (see table 2), Fortescue Metals Group has committed to reach net zero operational emissions by 2030^[16] and net zero Scope 3 emissions (including steelmaking) by 2040, primarily through the production (and ultimate end use) of green hydrogen.^[17] Additionally, Glencore has committed to reduce its total emissions—Scope 1, 2 and 3—by 50% by 2035 ^[18] and Anglo American has a net zero target for 2040.

Table 2. Medium and long-term GHG targets of BHP’s peers

Decarbonisation strategy

Within BHP’s plans to meet its Scope 1 and 2 operational targets, there is a strong focus on decarbonising electricity supply, which constituted 38% of total Scope 1 and 2 emissions in FY2021.^[25]

In FY2020, BHP entered into four renewable power purchase agreements (PPAs) to supply electricity to its Escondida and Spence copper mines in Chile.^[26] The contracts are expected to displace 3Mt CO2e per year from FY2022, approximately 18% of BHP’s FY2021 operational emissions, beginning in August 2021 and January 2022.

In FY2020, BHP also signed a renewable PPA to meet half of its electricity needs across its Queensland coal mines.^[27] The contract is expected to displace 1.7Mt CO2e between FY2021 and FY2025 (340,000 t CO2e per year). Queensland’s state-owned CleanCo will supply electricity from its portfolio of hydroelectric and gas generation from January 2021, with new solar and wind generation expected to progressively supply electricity from late 2022.

BHP expects that the renewable PPAs in Chile and Queensland will deliver sufficient emissions reductions required to meet its short term target of maintaining operational emissions at or below FY2017 levels by FY2022.

A focus on increased renewable energy capacity will complement the electrification of haulage and transportation at mine sites, which will help to address diesel consumption in material movement, which comprised 40% of FY2021 operational Scope 1 & 2 emissions.^[28]

BHP’s operational emission sources with limited abatement options include fugitive methane emissions from coal mining and oil and gas (13.5% in FY2021).^[29]

As detailed in the Climate Transition Action Plan (CTAP), BHP also has a range of partnerships relating to green hydrogen, energy efficiency, carbon capture utilisation and storage (CCUS) and steel decarbonisation.^[30]

BHP states that offsets will be used to meet its scope 1, 2 and 3 targets^[31] “as required”, however, the exact quantity is unknown. This potential over-reliance on offsets to achieve its targets is concerning. Recent research found that a “CO2 emission into the atmosphere is more effective at raising atmospheric CO2 than an equivalent CO2 removal is at lowering it”,^[32] meaning that there is an “asymmetry”^[33] between emissions generating activities and offsets, reinforcing the need to prioritise emissions avoidance above all else. The International Energy Agency (IEA) Net Zero scenario has demonstrated an ambitious 1.5°C pathway without the use of offsets.^[34]

It is worth noting that BHP has a long track record of divesting carbon intensive assets, having previously spun off coal-heavy South32 in 2015^[35] and its US shale gas business in 2018.^[36] The issues with divestment are discussed further below.

Coal divestment, new mines and extensions

Recent research published in Nature found that, at a global level, 60% of oil and gas reserves and 90% of coal reserves must remain unextracted in order to limit warming to 1.5°C.^[37] The authors emphasise that due to the study being based upon a 50% probability, the findings are very likely to underestimate the production curtailment that is actually required. This study followed the IEA Net Zero Scenario which concluded that no new oil, gas and coal projects (including mine extensions) can be approved after 2021 in order to ensure a pathway to net zero emissions by 2050.^[38]

BHP currently part-owns and operates 10 metallurgical coal mines in Queensland (one in care and maintenance, see Table 3), with BHP’s share of production at 59.9 Mt in FY2021. Two of these mines are earmarked for divestment,^[39] along with three potential new mines (including Wards Well^[40]) as part of the planned BHP Mitsui Coal (BMC) divestment. There are many decades of available metallurgical coal production within BHP’s remaining portfolio^[41] and BHP is seeking to extend the mine life of several assets, including the Caval Ridge mine, by 31 years to 2056.^[42] BHP also has two potential new metallurgical coal mines—Red Hill Mining^[43] and Saraji East^[44]—with a combined potential production of 25 million tonnes per annum.

BHP has announced its intent to divest its thermal coal assets.^[45] In June, BHP announced the sale of its one-third share in the Cerrejón thermal coal mine in Colombia to Glencore.^[46] BHP is still seeking a buyer for its Mt Arthur thermal coal mine in NSW. To support the sale, BHP is seeking to extend the mine life of Mt Arthur from 2026 to 2045.^[47]

BHP’s pursuit of new coal mines and mine life extensions is entirely at odds with limiting warming to 1.5°C. Divestment of coal assets might decrease BHP’s emissions footprint but it presents no benefit to the climate if those assets continue producing for decades to come. To align with the Paris Agreement, BHP must cease efforts to expand and extend coal production and responsibly manage down assets like Mt Arthur.

Table 3. BHP’s operational and proposed coal mines^[48]

For operational projects, reserves = proved + probable; for proposed projects, resources = indicated + inferred

Petroleum divestment

BHP announced in August 2021 that, subject to shareholder and regulatory approvals, it intends to merge its Petroleum division with Woodside.^[49] Woodside sees this merger as a great opportunity to increase “cash flow and financial strength to fund near-term projects and new energy sources”.^[50] Woodside is particularly keen to pursue the Scarborough LNG and Pluto Train 2 development in Western Australia. The merger will increase the likelihood of the project proceeding by improving Woodside’s capacity to fund the project without needing additional capital^[51] and removing BHP as a barrier to final investment decision.^[52] Carbon Tracker has determined that Scarborough and Pluto Train 2 are “inconsistent even with a 2.7°C world”,^[53] demonstrating that the merger with Woodside has major climate consequences.

The merger will also see BHP divest itself of a series of ageing Australian assets with considerable decommissioning liabilities, along with a large portfolio of producing and growth projects in the Gulf of Mexico and Trinidad and Tobago.^[54] Just prior to the announced merger, BHP approved $544 million in capital expenditure to execute the Shenzi North oil project in the US Gulf of Mexico.^[55]

Selling carbon intensive assets may reduce BHP’s emissions inventory and transition risk exposure but it will do nothing to minimise its physical climate risk exposure as the divested assets continue to generate significant greenhouse gases. In fact, there are many examples where divestment of fossil fuel assets has prolonged their life.^[56] If BHP genuinely believes that a 1.5°C pathway is better for its business, then it should avoid further divestments and confront the urgent need to wind-down fossil fuel assets.

Scope 3 emissions from metallurgical coal and steelmaking

Steelmaking emissions represent approximately 7-10% of global greenhouse emissions^[57] and BHP’s Scope 3 emissions from the processing of iron ore and use of metallurgical coal represent 72% of the company’s total greenhouse inventory. BHP states that it cannot set a firm target for these scope 3 emissions because steel decarbonisation is “dependent on the development and downstream deployment of solutions and supportive policy”.^[58] Until recently, the steel sector has had limited options for decarbonisation,^[59] however there still are valid questions to be asked around whether BHP, a company that achieved record profits in FY2021^[60] and which has significant metallurgical coal interests, is being sufficiently ambitious with regard to the decarbonisation of steel production.

BHP’s primary steel decarbonisation goal is to “support the industry to develop technologies and pathways capable of 30% emissions intensity reduction in integrated steelmaking, with widespread adoption expected post-2030”.^[61] In support of this goal, it has invested ~US$10 million in steel decarbonisation startup Boston Metal^[62] and has committed up to $65 million through its Climate Investment Program in partnerships with China Baowu^[63], JFE Steel^[64] and HBIS Group Co^[65]. BHP has also developed a Steel Decarbonisation Framework to “examine the stages the industry must pass through in its decarbonisation journey.”^[66] Notably, there is no time frame associated with these stages.

There are divergent views on the rate that steel can be decarbonised between BHP and its competitors, particularly Fortescue Metals Group. BHP has previously stated that “the use of traditional blast furnaces and basic oxygen furnaces would still account for over half of global steelmaking by 2050”.^[67] In contrast, Fortescue Metals Group Chairman Andrew Forrest “believes that coal-fired blast furnaces will be extinct by 2050”^[68] and has recently committed to a target for net zero emissions from steelmaking by 2040^[69].

Modelling by BloombergNEF^[70] suggests that by 2050, green hydrogen-based direct reduction paired with electric arc furnaces (H2DR-EAF)^[71] and molten oxide electrolysis (MOE)^[72], both zero-carbon processes, will be more cost-effective than coal or gas-based production. The modelling also suggests that the most expensive net zero option in 2050 will be traditional blast furnaces combined with CCUS and offsets.^[73] This analysis in part supports Fortescue Metals Group’s view of the steel decarbonisation landscape between now and 2050.

To conclude, ACCR does not deny that significant supportive policies and collaboration between a broad range of stakeholders will be necessary to decarbonise steel production. However, as an owner of metallurgical coal mines, some of which are on the market, there are financial risks to BHP for being ambitious about the rate of steel decarbonisation prior to divestment, providing an incentive to limit positive messaging and firm commitments around the opportunity.

Assessing capital alignment with 1.5°C

Prior to the announcement of the merger of the Petroleum division with Woodside, BHP stated that it was focused on three global mega-trends: decarbonisation, electrification and population growth.^[74] This focus explains BHP’s pivot away from fossil fuel production, even if the emissions from those assets will continue to be produced by another party. It also explains BHP’s most significant growth initiative, the Jansen potash project. BHP has estimated capital expenditure of US$5.7 billion on Jansen, with first production expected in 2027.^[75]

Even though BHP is prioritising decarbonisation in its group strategy, its capital allocation policy does not align with the Paris Agreement’s objective of limiting global warming to 1.5℃. This is despite BHP conceding that its portfolio would benefit from an accelerated decarbonisation pathway.^[76] The Climate Action 100+ Net Zero Company Benchmark assessment of BHP confirmed this misalignment, and BHP’s recent Climate Transition Action Plan^[77] continues to forgo a firm commitment to alignment with a 1.5℃ pathway.

While BHP intends to integrate ‘one or more Paris-aligned scenarios’ into its capital prioritisation processes beginning FY2022, capital expenditures forecasted for FY2022 do not align with this account.^[78] BHP’s forecast capital and exploration expenditure in FY2022 includes US$6.7 billion for minerals, including US$600 million for coal^[79] and US$2.3 billion for petroleum.^[80] BHP is also planning to develop new metallurgical coal mines, towards which further capital will be allocated. This is in stark contrast to the company’s capital allocation to its Climate Investment Program of US$400 million over five years to invest in GHG reductions across its operated assets and value chain.^[81] This includes US$65 million towards partnerships with BHP’s customers in the steel sector.

The table below provides detail on the capital that BHP’s peers are allocating to the climate transition, which clearly demonstrates that Fortescue Metals Group, Rio Tinto and Vale are allocating significantly more funds towards decarbonisation than BHP.

Table 4. Peer analysis on climate investments

Just transition

The importance for the climate transition to be both fast and fair is recognised in the Paris Agreement, which emphasises the necessity to reduce emissions but also considers “the imperatives of a just transition of the workforce and the creation of decent work and quality jobs in accordance with nationally defined development priorities.”^[88] As defined by the International Labour Organization, “a just transition for all towards an environmentally sustainable economy … needs to be well managed and contribute to the goals of decent work for all, social inclusions and the eradication of poverty.”^[89]

BHP has not explicitly committed to decarbonising in line with just transition principles and is currently relying on the development of a “common understanding of a just transition”^[90] to allow companies such as itself to “make clear commitments.”^[91]

BHP highlights the “opportunity to demonstrate a planned and purposeful approach to closure and rehabilitation through the life cycle of [its] operated assets,”^[92] and that, “where value cannot be generated from divestment, the best option to balance financial, workforce and community considerations may be to retain an asset and transition it towards closure.”^[93] The company’s reported financial provisions for closure and rehabilitation amount to US$11.9 billion.^[94] However, BHP’s approach to its NSW coal mine, Mt Arthur, is illustrative of its approach to legacy fossil fuel assets. The mine has rehabilitation costs of approximately US$1 billion^[95] and rather than winding down production and commencing rehabilitation, it is seeking to divest. BHP has also reportedly forced workers from its wholly-owned labour-hire subsidiary, Operations Services, to accept transfers to interstate mines or resign from their positions.^[96]

Climate policy engagement

UK think tank InfluenceMap rates BHP’s climate policy footprint ‘D’^[97] (scale A-F), and in 2020 ranked BHP the second most oppositional company on climate and energy policy in Australia.^[98] BHP remains a member of 11 groups with climate lobbying practices that are misaligned with the Paris Agreement, and four that are potentially misaligned.^[99]

BHP’s industry association review^[100] does not assess its industry associations’ advocacy for consistency with the Paris Agreement; it narrowly focuses on policy positions and cosmetic support. BHP’s industry associations have sought to exploit the COVID-19 pandemic and the Australian Government’s approach to climate policy has been heavily influenced by BHP’s industry associations, including:

• its lack of ambition to 2030;
• the ‘gas-fired recovery’ prioritises gas expansion;
• its ‘technology not taxes’ approach is intended to prolong the use of coal and gas.

On balance, the impact of BHP’s industry associations on Australia’s climate and energy policy remains overwhelmingly negative, and there has been little improvement since it published its first review of industry associations in 2017.

Climate governance

BHP’s approach to climate change governance appears to be industry-leading, with a Climate Change Team that advises the Executive Leadership Team, which also collaborates with the Sustainability committee, Audit and Risk committee and the Board.^[101]

While the assessment of climate competence of any board is challenging, the primary industry experience of BHP directors is varied and recent appointments have experience from outside the resources sector.

In terms of remuneration, climate change now forms 10% of the Cash and Deferred Payment (CDP), which was increased from 4% under the previous Short Term Incentive Plan (STIP).^[102] In summarising the FY2021 performance under the CDP, BHP states that performance was “slightly above target”.^[103] In effect, senior executives were rewarded with short-term incentives despite BHP’s operational emissions in FY2021 being 11% higher than its FY2017 baseline, and well above the FY2017 baseline for four years.

BHP’s remuneration report states that “for FY2021, we improved on our operational GHG emissions target of 17.0 Mt, with an actual result of 16.2 Mt”.^[104] The reference to a 17.0 Mt target in FY2021 is misleading as it is a forecast prepared at the start of the year rather than a target (the FY2017 baseline of 14.6 Mt CO2-e remains unchanged). The use of a forecast essentially shifts the goal posts by potential use of conservative assumptions and/or accommodating predictable increases in emissions.

The remuneration report referred to “steps in place” to meet its short-term target of maintaining operational emissions at FY2017 levels by FY2022, being the renewable energy PPAs in Chile and Queensland. It also referred to the partnerships with Asian steelmakers.

As BHP’s operational and Scope 3 emissions targets are not Paris-aligned, BHP risks rewarding incremental progress rather than incentivising the step-change required in the decade to 2030.

Conclusion

ACCR believes there is sufficient reason to vote against the approval of BHP’s Climate Transition Action Plan. While BHP has made progress in recent years, incrementalism and the ‘direction of travel’ is insufficient to approve its current approach to reducing emissions. BHP must seek to align its emissions reduction targets with the Paris Agreement.

Contacts

Dan Gocher | Director of Climate and Environment | dan@accr.org.au
Harriet Kater | Climate Lead - Australia | harriet.kater@accr.org.au

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Publication information

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Author

Dan Gocher

Published on

5th October 2021

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