Risk management accountability and oversight is an integral part of BHP’s governance. The Board, Sustainability Committee, Risk and Audit Committee and senior management are regularly provided with insights on trends and aggregate exposure for climate-related risks and performance against risk appetite.
Climate-related risks can be grouped in two categories: transition risk and physical risk. Transition risks arise from policy, regulatory, legal, technological, market and other societal responses to the challenges posed by climate change and the transition to a low carbon economy. We consider transition risks as part of strategy discussions, portfolio reviews and investment decisions.
Physical risks include acute risks resulting from increased severity of extreme weather events, and chronic risks resulting from longer-term changes in climate patterns. We include consideration of the potential vulnerabilities of our operated assets, investments, portfolio, communities, ecosystems and our suppliers and customers across the value chain in assessing physical risks.
Efforts to mitigate and adapt to climate change can also produce opportunities for BHP, for example through resource efficiency and cost savings, and building resilience along the supply chain to support business continuity.
A broader discussion of our climate-related risk factors and risk management approach is provided as part of our climate-related disclosures in our Annual Report and in the BHP Climate Change Report 2020, which is aligned with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).
We have previously published two climate-related portfolio analysis reports, which described how we have used scenario analysis to evaluate the resilience of our portfolio to both an orderly and a more rapid transition to a 2o world. In the BHP Climate Change Report 2020, we describe our latest portfolio analysis, including four scenarios: Central Energy View and Lower Carbon View which we use as inputs to our planning cases; a non-linear, higher temperature Climate Crisis scenario and a 1.5°C Paris-aligned scenario.
There are inherent limitations with scenario analysis and it is difficult to predict which, if any, of the scenarios might eventuate. Scenarios do not constitute definitive outcomes for us. Scenario analysis relies on assumptions that may or may not be, or prove to be, correct and may or may not eventuate, and scenarios may be impacted by additional factors to the assumptions disclosed.
The 1.5°C scenario is an attractive scenario for BHP, our shareholders and the global community. However, today’s signposts do not indicate that the appropriate measures are in place to drive decarbonisation at the pace nor scale required for the 1.5°C scenario. If we see the necessary changes in our signposts, we will adjust our planning cases accordingly. Given the long lead times for new investments, we will continue to stress test our decision-making with updated strategic themes and scenarios to understand emerging opportunities.
Our approach to climate change extends beyond consideration of climate-related risks and portfolio resilience. Reducing GHG emissions at our operated assets is a key component of our climate change strategy and we recognise the importance of taking action to support efforts to reduce emissions across our full value chain. We will also continue to advocate for actions in line with the Paris Agreement goals and seek partnerships to leverage our own investments in low emissions and negative emissions technologies and natural climate solutions, because we believe it is the right thing to do for our shareholders and our global community.
More information on each element of our strategy is available at bhp.com/climate.