Who’s afraid of the TCFD?

Why the TCFD should be embraced rather than feared by miners

Many mining executives are concerned about what growing investor pressure to implement the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) might mean for their businesses. However, aligning with the TCFD recommendations need not be a cumbersome or resource-intensive procedure. In this article, we discuss how the process can unearth commercial opportunities as well as reassure investors that firms are aware of their climate-related risks.

By Sipke Shaughnessy, PhD (Analyst), Henry Hall (Director), Marco Bartholdy (Senior Associate)

Many mining executives are concerned about what growing investor pressure to implement the recommendations of the TCFD might mean for their businesses. Our clients often initially fear the time and costs involved, including those related to potential shifts in business strategy, and are concerned about having to disclose sensitive information. In reality, the process can be undertaken in a staged manner, thus minimising resource requirements. Acting early gives more time to unearth opportunities and mitigate risks posed by climate change that may not currently be fully understood. Many mining companies will find that there are more opportunities than risks in preparing for a low-carbon future, in addition to strengthening the dialogue with investors and other stakeholders.

For those companies that do identify risks, they are in good company. The seismic shifts caused by the low carbon energy transition will create some level of risk for almost every company in the world, and these risks are rarely cause for radical investor action. The long timelines for emissions reduction (often 20 to 30 years) offer ample time to develop technical solutions or re-jig portfolios. Indeed, the key expectation of investors around TCFD is that management teams engage with and understand climate-related risks and incorporate that understanding into corporate strategy. On the other hand, avoiding disclosure may send the wrong message, that the company has something to hide or that management is not on top of the issue.

Crucially, TCFD-aligned reporting does not need to be a cumbersome or daunting process, particularly when starting from scratch. A light-touch first attempt can go a long way in reassuring investors and other stakeholders of a company’s awareness of climate issues, especially if accompanied by a well-structured action plan. As we outline below, meeting the four ‘pillars’ of the TCFD recommendations does not necessarily mean completing detailed and onerous disclosure immediately. Setting off along the path and outlining a clear roadmap to do more is an important first step.

TCFD is on the rise and here to stay

TCFD is here to stay

While TCFD compliance does not need to be onerous, making a start is becoming increasingly urgent. In the past year, investor focus on the TCFD recommendations has intensified and there is growing momentum in some countries behind making TCFD reporting compulsory. For instance, the UK announced in November 2020 that TCFD-aligned disclosure will be made mandatory for companies by 2025. Similarly, Switzerland is in the process of making TCFD recommendations legally binding for Swiss companies, while New Zealand and Hong Kong have also aligned their climate disclosure rules with TCFD recommendations. Meanwhile, Canada last year made TCFD-compliance a condition for accessing Covid-19 bailouts.

Major mining companies, such as Anglo American, BHP and Rio Tinto, were the first to publish TCFD-aligned reports, due in large part to greater pressures from investors and public attention regarding their exposure to fossil fuels. However, pressure to comply with TCFD recommendations is cascading swiftly down to mid-cap and junior miners, even those with less obvious exposure to climate change risk, for example in base and precious metals. As such, we expect to see a flow of new adherents reporting in line with TCFD in 2021, followed by a flood of mid-cap and junior miners in 2022. In order to avoid being left behind it is therefore important for all mining companies to consider their own roadmaps to TCFD compliance.

How does a mid-sized miner go about implementing the TCFD recommendations?

The TCFD recommendations emerged in response to fears that firms with fossil fuel exposures could be overvalued due to the risk of assets becoming ‘stranded’ as demand recedes during the transition to a lower carbon economy. Scrutiny of this issue cascaded down from the oil and gas and coal sectors into broader metals and minerals production. As a result companies for whom coal is a significant part of the value chain – for example in the bauxite and iron ore sectors – are expected to do more than others to demonstrate that they have developed well-thought through plans for decarbonising operations or diversifying into new commodities. The large diversified miners with strong exposure to these sectors have therefore been quick to move and have begun to disclose detailed emissions data and set ambitious targets for carbon reduction.

However the bar set by these major miners need not be met by smaller players with differing portfolios. The nature of the climate related risks and opportunities facing a mining company and the strategies needed to mitigate them vary greatly depending on a number of variables. These include: the metals and minerals produced; whether an operation is open pit or underground; how energy used at the mine is produced; what technologies are used for transport, processing and refining; the jurisdictions and regulations in the country of operation; the climatic conditions in the area in which the assets are located; and the way in which the commodity is processed and used by customers.

For most mining companies the key consideration is how demand for their product may be influenced by different climate transition pathways. For producers of minerals used in green technologies, such as copper and cobalt, the outlook is likely very positive. Battery mineral production is set to play a crucial role in the green energy transition and could be an essential driver for future growth in companies’ corporate strategies. Even here, however, there are risks worth considering. Copper production in Chile, for example, is likely to be impacted by increasing water scarcity resulting from climate change. The carbon-intensive nature of some forms of lithium production may also subject companies to investor and consumer pressure to adopt greener methods. Gold miners, meanwhile, face a different set of risks. Owing to the way gold is traded, climate dynamics are unlikely to be a significant driver of the gold price. However, climate change may have differential effects on the cost bases of rival gold producers – for example, through carbon taxes and other regulatory pressures.

The energy mix within different jurisdictions also matters, and companies may need to consider partnering with governments or investing in renewables in order to mitigate exposure to fossil fuel dependence in the power grid. For example, while copper miners are likely to benefit from the energy transition, copper produced in jurisdictions like Kazahkstan and Mongolia, where much of the energy needed for production is harnessed from coal, is nonetheless exposed to climate-related risk.

In essence, TCFD-aligned reporting involves developing a credible narrative for how companies will manage the risks and opportunities associated with climate change, based on a set of value drivers that are deemed most material. Finding such a narrative helps to send a clear message regarding the company’s acknowledgment of specific risks and their preparedness to mitigate those risks. The first step is to demonstrate to investors that any potential risks are understood, and then to demonstrate that there are plans in place to mitigate any material risks to value or reputation. Below, we outline a simple process to begin to address this issue.

The TCFD recommends action (and subsequently disclosure) on four key ‘pillars’: strategy, governance, risk management and metrics & targets. The precise amount of attention a miner will need to dedicate to each of these will depend on its portfolio, risk and opportunity context and existing practices and structures.

The TCFD alignment process

The first step towards TCFD compliance process is therefore to undertake a gap analysis against the firm’s peers and against investor expectations (see Table above). It is important to consider in this gap analysis that the baseline is rising fast and therefore selecting larger peer companies (though not necessarily the largest diversified miners) is likely a better gauge of what companies should aspire to.

The next step is to develop an action plan for plugging the gaps identified in this analysis, a process which can be staged over a 2-3 year period. Examples of relevant actions include assigning a board member to oversee climate strategy, incorporating climate change considerations into the due diligence process ahead of acquisitions, carrying out transition and physical risk scenario analyses and/or risk and opportunities analyses and preparing a TCFD report. While mining companies can start small and build detail over time, in our experience, being more ambitious from the outset can help companies stay ahead of the curve on regulatory developments and stakeholder expectations in the longer run.

Finally, companies will need to implement their action plan using the phased approach outlined in their timeline. There is little expectation that TCFD compliance will be achieved instantly, but developing a 2-3 year action plan (although aiming for a more ambitious timeframe if appropriate) allows companies to prioritise actions that are needed to understand risk and reassure investors while taking into account the organisation’s resources and capacities.