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Rio Tinto

Moving to a low-carbon economy

Rio Tinto is one of the world’s largest global mining and metals groups and has been in business for more than 140 years. It produces a diverse range of products, including iron ore, bauxite, aluminium, copper, coal, borates, uranium and diamonds. The scale of its operations, combined with the energy intensive nature of mining and processing results in a large carbon footprint of over 30 million tonnes of CO2 each year. The company is therefore exposed to policy efforts to tackle climate change, which could impose additional operating costs through a rising cost of carbon and changing demand for key commodity groups.

Background
Although the company operates in 40 countries, 85% of its assets are located in relatively mature OECD markets where climate policy is likely to tighten earlier than in other countries. For these reasons, the company has focused on climate change for the last decade and has often taken a leadership role on this issue. However, investors have remained concerned to understand the level of the company’s risks in relation to climate change and whether its actions are sufficient.

Our engagement
In 2013, Hermes EOS co-signed a letter from a large number of investors requesting information about the company’s exposure to climate change, including, in particular, the strategic risks to its assets. The company’s reply to this letter outlined the actions it has been taking on climate change but proved an ineffective form of engagement by which to elucidate greater detail on the processes it applies to assess climate risks or the scenarios and assumptions used.

In 2015, following growing concern about the exposure of mining companies to climate change risks, Hermes EOS, together with other investors who are part of the Aiming for A coalition proposed filing a shareholder resolution, similar to those co-filed at oil and gas companies earlier in the year requesting further information about the process by which the company manages the risk of climate change to its portfolio. The shareholder resolution and its supporting statement requested enhanced disclosure of Rio Tinto’s approach to climate change risk, including its management of operational greenhouse gas emissions, strategic portfolio resilience to low-carbon scenarios, research and development of low-carbon solutions, its public policy position on climate change and overarching corporate governance framework and link to key performance indicators.

At a meeting with the company’s chair to discuss the proposed resolution, we explained our concern that climate change appears to be a particularly material risk for the company and its long-term investors. The chair expressed his understanding of these concerns and committed to taking the resolution to the Rio Tinto Board for discussion and a decision as to whether the company would formally support the resolution. Together with other Aiming for A[1] investors, we set about demonstrating the level of shareholder support. By the deadline of 31 December 2015, we had achieved the necessary support of more than 100 individual shareholders and Rio Tinto’s board subsequently confirmed its support for the resolution.

At Rio Tinto’s AGM, we spoke in favour of the resolution, focusing on the opportunities available to the company from the move to a low-carbon economy, including the potential to reduce costs through energy efficiency. This has the potential to future-proof the business against the risks from a rising cost of carbon, as well as improve its cost-competitiveness and enhance its energy security. We have since encouraged the company to set out details of its energy efficiency metrics and investments and highlighted the value of conducting a detailed scenario-based analysis of its asset portfolio resilience to low-carbon scenarios. We believe this analysis is likely to reveal that a number of its commodity groups, such as aluminium, copper and uranium, are positively exposed to low-carbon scenarios whereas others, such as coal and potentially iron ore, could be threatened. It would enable the company to further position its business model towards a low-carbon economy, in line with the long-term ambitions of investors.

Changes at the company
At its UK AGM in April 2016, we congratulated the company for achieving a reduction in greenhouse gas emissions of 21% between 2008 and 2015, significantly exceeding the original target of 10%. We also noted that this target had been extended from 21% to 24% for the period ending 2020 and requested further details in its standard reporting on its greenhouse gas emissions performance, as well as its energy efficiency metrics and targets and the programme of activities and investments by which to achieve these. The chair acknowledged the opportunities available to the company arising from climate change, including from energy efficiency and the potential for an upward shift in demand for key product groups in low-carbon scenarios.

Following the Australian-based AGM in May 2016, the company announced that the climate change-related shareholder resolution passed with 99%. Since then, the company has set up a steering committee of senior executives to oversee the company’s response to the shareholder resolution on climate change. This should include more information about its energy efficiency initiatives, a more detailed description of how it assesses the asset portfolio resilience to low-carbon scenarios and a revised statement of its public policy on climate change, in line with the expectations of investors. We will continue to press for these outcomes in our engagement with the company.

[1] The Aiming for A coalition of investors take a supportive but stretching approach to corporate action on climate change and includes the Local Authority Pension Fund Forum and the largest members of the Church Investors Group, together with Hermes Investment Management on behalf of its stewardship services clients, Sarasin & Partners, Pensions Trust and Rathbone Greenbank Investments.

 

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    Bruce Duguid Bruce Duguid is a director at Hermes EOS and leads engagements with environmentally-exposed companies across the mining, oil and gas and utilities sectors, as well as corporate governance engagements in the UK. He is the lead author of the Institutional Investors Group on Climate Change’s 'Investor Expectations of Mining Companies – Drilling Deeper into Carbon Asset Risk’. Prior to joining Hermes EOS, he was head of sustainability at the UK Green Investment Bank, where he spent four years working on the project to establish the bank and then building its sustainability function. Before working in sustainability, Bruce worked in corporate strategy as a management consultant at the Boston Consulting Group and as head of strategy at Visa Europe. He is also a qualified lawyer in England and Wales and holds a degree in Natural Sciences from Cambridge University.
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    Engagement objectives:

    Environmental: Asset portfolio resilience to climate change – disclosure

    Environmental: Energy efficiency targets

    Environmental: Public policy on climate change

    Environmental: Stranded assets