08 October 2019
BHP Social Value Briefing
8 October 2019
Chief External Affairs Officer, Geoff Healy
Slide 4: Social value briefing – from licence to value
If there is a phrase that gets to the heart of the evolution of our thinking it is: ‘from licence to value’.
We believe we must move from ‘social licence’ to ‘social value’; or from ‘tolerance and acceptance’ to ‘trust and partnership’.
We know this will be a challenging evolution.
Today, I am going to explain why this transition - from licence to value underpins our strategy.
And it is on this point that I want to be very clear.
For us, it is – plain and simple – good business.
We are part of a society that expects more of us.
We recognise that our success depends on our ability to earn their trust and confidence.
And we know that this means improving the way we do business at all levels, from local to global.
When we make business decisions, both financial value and social value considerations come into play: each depends on the other for the decision to be effective.
This point is key to this presentation. We know that the way we make business decisions has the potential to positively or negatively impact those around us, often materially.
We recognise that balancing financial value and social value sometimes calls for trade-offs. It is ultimately a matter of judgment as to how to draw the right balance.
We must be deliberate about this. It must be everyone’s responsibility at BHP.
Ensuring that these key judgments are made by the right people, with the right information, at the right time, across the entirety of BHP, is our objective.
If we can get this right, and by right I mean embedded to our core, we firmly believe we will win access to the best talent, resources and markets and set ourselves up to deliver a sustained competitive advantage.
Slide 5: We start with our purpose
This year, after more than a decade, we updated our Company purpose to capture the aspirations of all our stakeholders. It is:
To bring people and resources together to build a better world.
Our purpose reflects ‘why’ we exist.
It was developed for our people, by our people. They display it on their work boards all over BHP: drawing a direct link between our purpose, our strategy and their role.
It is part of our corporate charter, and part of our Board’s governance charter.
Our financial performance both enables our purpose, and depends upon it.
Slide 6: The materials we provide are essential for modern life
You can see our purpose in action – our commodities provide the infrastructure, energy, appliances and devices vital to today’s world.
Our products aren’t optional or nice to have.
They are not tailored to lifestyle choices that have readily available substitutes.
To put it simply - our products are essential to every day life.
Our iron ore and metallurgical coal provide the steel that underpins global economic development – from industrialisation to urbanisation, raising living standards for billions of people.
Our oil, gas and energy coal products power global mobility – and everyday modern life.
Our copper and nickel is essential in the transition to a lower-carbon future.
Electric cars require four times as much copper as a standard car; and nickel sulphate is needed for the lithium-ion batteries that power those cars. And, every part of a wind turbine relies on copper or steel.
And finally, our potash option could play a part in addressing food security issues as dietary patterns evolve and the world’s arable land diminishes.
As we bring those products from the ground to the market, they also generate wealth across our value chain. We have directly contributed in FY2019:
• US$4 billion in wages and salaries;
• US$2 billion in payments to local suppliers;
• US$9 billion in taxes and royalties;
• US$18 billion in dividends and interest; and
• US$94 million in direct community social investment.
While these numbers are large, and our commodities are essential, the sustainability of our business relies on the equitable distribution of value, and in delivering our products responsibly.
Slide 7: We take a long term view
Delivering our products responsibly means taking a long-term view. Andrew, our CEO, says it well: ‘The longevity of BHP’s assets means that we must think and plan in decades.’
The use of ‘decades’ is deliberate.
Our Escondida mine in Chile, for example, was nine years from discovery to first production, took 25 years to reach peak production; has now been in operation for almost thirty years.
We have been operating our Western Australian Iron Ore mines since the 1960s.
You can see our footprint on this slide. The map and figures show our global presence. Yet our footprint is distinctly grounded in ‘the local’.
That is the nature of our industry. We make a relatively small number of large, long-term capital investments that are structurally immobile. We can’t just close up the factory and relocate when the going gets tough.
When we invest in a region, we become an intrinsic part of the local community for decades. Sometimes, we create those communities.
Our portfolio is simple – yet the inherent risks are complex and wide-ranging.
• ~80 per cent of our EBITDA is concentrated in Western Australia, Queensland and the northern Atacama region of Chile.
• 55 per cent of our revenue is derived from China.
• Over 80 per cent of our products emit CO2 in our customers’ value chain.
An imbalance in our community relations in a few locations has the potential to fundamentally impact our business: from a reset of fiscal terms, to the refusal of necessary permits and approvals.
A disorderly transition to decarbonisation has the potential to threaten the viability of entire commodities in our product suite.
And a social and environmental disaster, such as another significant tailings dam failure, has the potential to be existential.
These risks are real and we manage them every day.
But on the flipside, we know that if we manage well our transition – from ‘licence to value’ – we will create a core competitive advantage that will be hard to replicate.
Retreating, or seeking a quick, short-term fix, will not work. Getting it right will be differentiating, and value creating.
Slide 8: We have a strong record of sustainable business practices
I talked earlier about changing societal and stakeholder expectations of business.
Let me be clear – responding to shifts in expectations is not new.
Operating responsibly has been a pillar of our risk-management framework; you’ve heard about our focus on social licence in presentations for many years.
Our commitment is evident in the investments we’ve made and in the initiatives we’ve undertaken. We have:
• Reduced the number of high potential injuries by more than 40 per cent in the last three years.
• Trebled the number of women hired since 2015.
• And invested over US$1.7 billion in social investments in the last decade.
The box in the lower-left corner shows our increased transparency around workplace fatalities. To give you a bit of context:
We used to keep our investigations and findings confidential.
For the last ~5 years we have released our full investigation report – in all its detail – to our workforce and to the industry.
We recognise that learning from events must prevail over all else.
Slide 9: We have a strong record of sustainable business practices continued
All of these commitments stand for nothing unless we hold ourselves to account and are transparent.
We have made public our emissions targets, our water stewardship efforts, and the taxes and royalties we pay.
Transparency is - rightly - only heading one way.
Slide 10: But the world is changing
While our foundations are strong, we know that change is accelerating, and - so must we - to stay competitive.
Along the top row, you can see some of the most fundamental changes impacting global corporations today.
• the rise of political populism and employee advocacy;
• the effects of income inequality on regional communities; and
• the influence of ESG among asset managers.
The bottom row shows the pressures particular to our sector:
• Governments nationalising resources – and setting decarbonisation targets.
• A challenge in attracting talent - with a 41per cent fall in mining-engineering-course enrolment in Australia in recent years; and
• And a lack of optimism – with nearly 7 in 10 people believing the best days of the mining industry are in the past.
The bar, as you can see, is higher for us as a resource company, than for those in other industries – this notwithstanding the essential nature of our products. And that is why we must move.
Slide 11: Social value: licence to operate is not enough
And here’s what acceleration looks like. I touched on it earlier, and you can see it on-screen.
A concrete example of this ‘licence-to-value’ transition can be seen in our approach to water management: We use ground, surface and sea water for everything, from processing ore to controlling dust.
Every single one of our assets depends upon water.
However, population growth, climate change, and societal and community expectations have increased pressure on the world’s water resources.
To achieve ‘social licence’, we must obtain relevant permits, meet legal requirements, and avoid water discharge breaches.
However, we recognise that ‘a licence’ to use water is not enough because water is a precious global commodity; the management of which is emerging as one of the world’s most pressing long-term issues.
We know we simply must use water in a socially equitable, environmentally sustainable, and economically beneficial way.
That is why we have embarked on a water stewardship program.
We have invested around US$4 billion in a water desalination plant in Escondida to secure a sustainable water-supply.
We have set group-wide water usage targets and integrated them into planning for every asset. And, we were the first in our industry to release a Water Report in 2018.
This is what it looks like for us to move from ‘licence’ to ‘value’ in the context of a critical business enabler.
Slide 12: Social value creation drives our competitive advantage
As I mentioned at the start, this transition is business-critical.
On the right, you can see the outcomes – the competitive advantages – that come from embedding social value at the heart of our strategy:
To obtain access to the best resources, we must be the partner-of-choice for governments.
To secure the best talent, we must be committed to making a positive societal impact.
And, to secure the best partners, we must be trusted by our community partners.
One word is key here: access. There are two sides to that access.
One, protecting and maintaining the access we currently have.
And two, securing access to new resources, new talent, and new partnerships to take full advantage of future opportunities.
Take Trion as an example - our oil development option in offshore Mexico. We were awarded the tender to develop this resource, making us the first international investor in Mexico to secure that right in 80 years.
We believe it was our commitment to social as well as financial value that allowed us to seize this opportunity.
Slide 13: We are embedding social value at every level of BHP
To capture these competitive advantages, we know we must ‘hardwire’ social value into decision-making at every level of BHP. And that is exactly what we are doing.
As this slide shows, social value is now part of:
• Our annual ‘5-year’ planning process – through which we deliver the strategy of BHP; and
• Our Company scorecard – by which we determine employee bonuses, from the front line to the CEO.
Slide 14: Ground-up: each asset has a social value plan
The embedding process begins at the asset: because that is where value generation begins for us.
What we’re doing at Western Australia Iron Ore exemplifies how we’re making this real on the ground:
WAIO management reviews its five-year-plans every year, and what key milestones it has to meet.
A number of those milestones – for example, the completion of our South Flank project, or any future plans to deploy more autonomous equipment – have the potential to be impacted by issues in our communities: from Perth, to Port Hedland to Newman.
To best understand these issues we must first engage with our key stakeholders.
The WAIO team polls its communities monthly and annually to identify what is material to them, and how we are managing those issues.
Land use conflict, transformational impacts on jobs and local procurement, and the stability of our fiscal terms – are all risks we encounter today.
This information is then fed into the annual prioritisation process through a ‘social value assessment’.
The senior leadership considers this assessment against the business milestones, and then decides on which actions to include in the five year plan.
The plan is then taken to the Executive Leadership Team and Board, and approved for execution or not.
That level of rigour, planning and evaluation is happening at each of our assets in a common way.
As a result, over time we will be able to more effectively see ahead to unearth risks and create opportunities: in and across all of our assets.
But beyond hardwiring social value into planning, it must be part of every leader’s mind-set and day job.
Execution is a collective responsibility.
Our site based General Managers and their teams make hundreds, if not thousands, of decisions each year that have a social value dimension. To name a few:
The ‘home base’ of their workforce: residential, fly in fly out, drive in drive out.
The structure of their workforce: permanent or casual.
The mix of procurement: local, regional, national, and global.
There is no process for this. It simply requires leaders with the capability and the authority to get on with it and make good judgements.
Slide 15: Top-down: a global focus on the issues that matter most
All of our individual asset plans are aggregated at the global level.
They give us a detailed portfolio view of the most critical social value issues.
Coupled with insights we hear from you, our investors, and societal trends more broadly, we identify the priority areas that we see as most important for our business over the short to long term.
If these areas are not already covered by our assets, the Group sets targets the assets must meet.
You can see the three areas we have identified on-screen, along with the global ambitions we have set for ourselves in each area.
Slide 16: Our Climate Investment Program
Here is an example of the action we are taking to create social value at a global and local level.
We operate in regions that may impose, over time, increased carbon costs. This represents risk to our portfolio.
And as I mentioned earlier, over 80 per cent of our EBITDA comes from products that emit carbon dioxide in processing or use.
We recognise that we must work with our suppliers, customers and others to reduce these emissions across the value chain to protect demand for our products.
To manage these fundamental risk exposures, we have made a US$400 million commitment over five years to develop technologies to reduce emissions, from both our own operations, as well as those generated in our value chain.
We’ve set public targets for our operational emissions (scope 1 & 2) and we have committed to work with others to address scope 3 emissions.
On Scope 3, we know we can’t require our customers to reduce emissions. Unlike the control that we can exercise in our operational environments, working in our supply-chain requires influence and collaboration.
Recognising this, we will work with others to drive actionable projects that reduce greenhouse gas emissions both up and down our supply chain.
By making sure our own ‘house is in order’ and by protecting demand for our products, we will preserve and create value for BHP.
Our climate investment fund is global in focus and is being managed, on a portfolio-basis, by a dedicated team; the fund has an embedded governance process, and the team will consider opportunities from inside and outside the company.
We are committed to doing this with the same rigor and discipline we apply to any capital management.
Slide 17: Our Samarco response
At BHP we also know too well the implications of failure.
The tragedy at Samarco is a part of our Company and our history, and the impact of that event will never be forgotten.
Our response has been led by an underlying commitment to do the right thing.
This commitment, to the people and the environment harmed by the disaster, remains as resolute as it was on day one.
This work is being carried out through the Renova Foundation.
We have also done everything we reasonably can to ensure a tragedy like this never happens again.
We have reviewed the structural integrity of our significant dams; established a Taskforce to drive safer tailings management and enhanced our global tailings standards.
We are also determined to play our part in ensuring tailings management standards are lifted across all of industry.
Slide 18: People
Social value is as I said being created at all assets across our business.
At Saraji in Queensland, a fleet of trucks operates continuously to remove the overburden that sits above the metallurgical coal.
That requires a team of relief truck drivers to ‘hot-seat’, or take over while drivers have scheduled meal breaks – also called ‘crib relief’.
Previously we brought in relief drivers from outside the region. This was costly and didn’t benefit the local community.
Following discussions with the Dysart Women in Mining Group, we realised we could tap into the local workforce if we adjusted the relief shifts so they aligned with school hours.
So, we changed the schedule.
This has unlocked a new talent pool; secured a more stable and flexible workforce; and injected AUD$4m of wages into the local community.
I have a few more examples but I’d like to pause and highlight a point from earlier in the presentation – social value comes from hundreds of business decisions – large and small - across BHP every year.
Ultimately we want social value to be as organic and as embedded in our decision-making as safety is today.
Let me give you two more examples.
Slide 19: Environment
At the other end of the scale, we are transforming the way we are managing water and power at Escondida.
Escondida is located in the desert in Chile, and is the world’s largest copper mine.
Copper grades are declining at Escondida – so to maintain production we must increase throughput – which essentially means move and process more rock.
To do this – we need more water in a water-scarce area.
But moving this water to site needs a lot more power. So, we need more power, but we need it at lower cost, with fewer emissions.
So, we invested some years ago - as I mentioned earlier – more than US$4 billion in a desalination plant to reduce our draw on the local aquifers, and to secure a sustainable water supply.
And we’re now in the late stages of securing a long term contract for renewable power supply that could deliver significant cost savings relative to our current gas-fired supply.
That means Escondida is in the process of transitioning to 100 per cent renewable power, and 100 per cent desalinated water over the medium-term.
Taken together, our actions with the government and others, have:
• forged a path to ‘environmental resilience’;
• delivered a sustainable way forward for the world’s largest copper mine to deliver an essential product to market with attractive returns on capital; and
• set the national standard in Chile.
Slide 20: Communities
One final example is from our community priorities: the Tjiwarl Land Use Agreement.
Indigenous people commonly have title in the lands on which we explore and operate.
Our core business has been tied to indigenous communities for over a hundred years. We invest deeply in developing relationships of trust with our traditional owners.
Almost all of our operations at Nickel West lie on or adjacent to the lands of First Nations peoples.
Over a number of years, BHP engaged with the Tjiwarl people with a view to entering a long term land-use agreement. This agreement was reached in early 2019.
For the Tjiwarl, it delivers opportunities for employment and procurement; it provides cultural security for special places; and it creates financial sustainability for their community.
For us, it provides confidence that we can operate our mines and expand them consistent with our long term nickel strategy.
This may sound straightforward, it is not. The Tjiwarl people have litigated against almost every land user, bar BHP.
Slide 21: Social value looks outward, not inward
I want to finish on the role of brand, and communication, and their connection with social value.
Almost four years ago, we decided to tell our story around value creation: starting with who we are, and building to what we do.
Research told us nearly 100 per cent of Australians recognised BHP, but had little knowledge of what we did, or our broader economic contribution.
Our research also confirmed that when communities feel connected to us, and see us as contributing fairly, the pressure for populist rent-seeking policies significantly reduces.
Since 2017, we have undertaken targeted campaigns at both national and regional levels; and we’re seeing a measurable difference in public perception.
We know this broad based support in cities and regions is essential to creating value and returns for all stakeholders, and in particular for shareholders.
The chart on the right reflects Australian favourability – we are not perfect – but we are definitely heading in the right direction.
Slide 22: Social value briefing: from licence to value
And that’s the direction we must keep moving in.
While our products are essential to modern life, our sector faces unprecedented challenges to its future.
The winners will be those who can see past the risks to the opportunities and who can grasp them and turn them into a competitive advantage.
This is the spirit that underpins our transition from licence to value.
We know that when we consider social impacts in our decision-making; and when we build respectful and mutually beneficial relationships, we create sustainable value for all of our stakeholders; and in particular for our investors.
We are determined to assess and communicate our progress regularly and transparently.
And we expect to be judged on the results we produce and the value we create, for you as investors, as well as our broader stakeholders.
We are committed to that path.