Climate change is having a profound impact on habitats, livelihoods and the global economy – and its effects are only intensifying, particularly as emissions continue rising. A "new normal" is emerging, and we will have to cope with it.
What does this "new normal" look like? A big part of the picture is more frequent and extreme weather: prolonged droughts and heatwaves leading to more serious fires (like the recent Australian bushfires), but also intense periods of heavy precipitation causing severe flooding, rising tides and high winds – all of which also recently affected parts of Australia.
Such extreme weather events a new reality that we humans must learn to adapt to, but they are also climate risks that affect the economy and the way we do business.
With its long and intricate globe-spanning supply and value chains, the resources sector is uniquely exposed to climate risks – but it is also well-positioned to respond and prepare for this emerging "new normal".
Climate risks 101: What are climate-related risks?
The Task Force for Climate-Related Financial Disclosure (TCFD) is a market-driven initiative established by the G20's Financial Stability Board (FSB). Its role is to recommend voluntary climate-related financial risk disclosures for companies to refer to when reporting to shareholders.
In line with TCFD recommendations, climate risks fall into three categories:
- Physical risks are risks arising from the physical effects of climate change on financial institutions' and/or businesses' operations, workforce, markets, infrastructure, raw materials and assets;
- Transition risks are "financial risks which could result from the process of transitioning towards a lower-carbon economy", like carbon pricing (more on that later);
- Litigation risks are "a range of different proceedings connected to climate change matters" that emerge as judges increasingly consider climate science-related arguments that did not previously appear in courts.
Climate-related risks in the mining and resources sector
In all sectors, companies are facing new challenges from exposure to climate risks as the "new normal" materialises. The resources sector is particularly vulnerable.
In 2013, the UTS Institute for Sustainable Futures warned that the Australian mining industry was particularly ill-prepared for growing threats from extreme weather after the Yallourn Mine in Victoria flooded, leading to losses of around 109 million Australian Dollars. More recently, Bloomberg reported "one of the biggest warnings yet of the financial risks of climate change", as drought and heat pushed American utility PG&E Corp towards bankruptcy.
But climate-related risks are not just affecting conventional resource extraction: they are also threatening global decarbonisation by affecting the ability of the sector to provide key materials needed for the low-carbon transition.
Copper and lithium, for example, are essential components for batteries required to electrify the transport sector, and most technologies used to extract these resources require large amounts of water. Yet areas where these resources are mined – like Australia or Latin America's " Lithium Triangle" for lithium, or Chile and Peru for copper – are exposed to growing physical climate risks, such as water scarcity. In fact, globally 73% of lithium mine capacity operates in regions under high water stress.
Deposits of copper and lithium appear in various forms including brine, hard rock and clay, which can be extracted using different technologies. One thing these technologies have in common is the large amounts of water they require – a problem in water-stressed regions. This is particularly the case in Chile, whose water authority is more than doubling water prohibition areas, while Indigenous groups are contesting mining corporates claim to water in other parts of the country.
Some companies are exploring more water-efficient methods of lithium extraction, and while investments in research and development can help Australian and global mining companies respond to such challenges, the complexity of local operations exacerbated by the impacts of climate change is difficult to manage – particularly across continents and from a distance.
A thorough analysis of climate-related risks is the best way for corporates to understand the business impacts of mining operations in climate change affected regions.
In 2018, the Australian Securities and Investments Commission (ASIC) reported that mining companies are legally obliged to include a discussion of climate risk in their annual reports. ASIC also noted that many of Australia's largest mining and infrastructure businesses may be in breach of their legal duties by refusing to consider the financial risks posed by climate change.
By considering and disclosing physical and transition climate risks, companies in the resources industry can also minimise such
Carbon pricing: Another emerging "new normal"
As growing swathes of the electorate led by the youth movement put increasing pressure on political decision makers to tackle climate change, climate policy and carbon pricing is emerging as another "new normal" around the world – and it's an important
transition risk for companies operating in the resources sector to consider.
According to the World Bank, as of 2020 around 20% of global emissions are already covered by carbon pricing mechanisms. These include the EU ETS, Canada's federal carbon backstop, California's cap-and-trade program, Colombia's carbon tax and the Chinese ETS, among others. Carbon pricing is also considered in the Paris Agreement, under Article 6.
Understanding the implications of current and potential carbon-related regulation in different countries and between jurisdictions can help companies – particularly those in the resources sector with cross-continental supply chains – better prepare for the business impacts of legislation.
Minimising risks and seizing opportunities
Companies in the mining and resources sector with supply chains spanning Australia, Asia and Latin America face a unique series of risks related not only to their business operations – but ultimately their social licence to operate. The good news is that companies that work to understand these risks now can mitigate them, future-proof their business – and even seize opportunities.
Businesses in all sectors that embrace climate-related risk disclosure now have an edge over their competitors, with investors increasingly considering ESG and see climate risk-reporting companies as attractive options. At the same time for companies in the resources sector, understanding climate science and related technological innovations as well as the shifting status quo can be useful in mapping future areas of sustained growth, helping these companies transition away from areas of reduced demand.
Work with the experts to prepare your mining or resources company for the "new normal"
Are you ready to prepare your company for the "new normal"? With local Australian offices in Sydney and Melbourne, as well as representations in Mexico City, Medellín and Bogota in Latin America, our experts are connected to a global network of climate policy and carbon market specialists with decades of experience. Our team can help identify your company's climate-related risks, minimise them and seize opportunities, all the while future-proofing your business in the face of the emerging "new normal".