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. The complex and pervasive nature of climate change means that it can act as an amplifier of other risks across BHP’s risk profile. For example, greater risk of extreme weather increases both the likelihood and potential impact of risks that could threaten the integrity of BHP’s assets. Climate-related risk events also have the potential to manifest across environmental, economic or other systems. 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. 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.
We recognise the importance of integrating physical climate change risks and adaptation assessment and planning into decision-making processes: for example, we require proposed new investments to assess and manage risks associated with potential physical impacts of climate change. 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.
BHP operates in zones prone to extreme weather events and is exposed to potential disruptions such as failures of mining or processing equipment, loss of containment, mining infrastructure failures (e.g. power, water, rail and port), support infrastructure failures (e.g. technology services and office buildings), disruption to critical supplies (e.g. explosives stock) and adverse impacts to health and safety, including loss of life.
We assess our risk of exposure to potential climate change impacts to be material, including the potential for more frequent and intense weather events, and increasing sea water levels that may result in disruptions (e.g. to port operations). Left unmanaged, physical climate change risks may threaten our sustainable long-term shareholder return objectives.
Our approach to climate change adaptation was established in 2014. To strengthen our approach, BHP undertook a series of assessments and engagements in FY2020 and this work has informed the updating of our Adaptation Strategy, which will be finalised in FY2021.
Climate change is a global challenge that requires collaboration, and industry has a key role to play in supporting policy development. We engage with governments and other stakeholders to contribute to the development of an effective, long-term policy framework that can deliver a low carbon economy. We prioritise working with others to enhance the global policy and market response and support the development of market mechanisms that reduce global GHG emissions through projects that generate carbon credits.
BHP is a member of industry associations around the world. We believe associations can perform a number of functions that can lead to better outcomes on policy, practice and standards. Over the past five years, there has been increasing stakeholder interest in the role played by industry associations in public policy debates, particularly in the context of climate change policy. We published our first industry association review in 2017, which sought to identify ‘material differences’ between BHP and our member associations on climate and energy policy.
We repeated this exercise in 2018 and 2019. For the latter, we broadened our methodology to capture additional organisations and to provide an assessment of the extent of overall alignment between BHP and our association memberships on climate change policy. Outcomes from our 2019 review are set out in our 2019 Industry Association Review Report.
Following our 2019 review, we commenced a process to understand how we could further enhance our overall approach to industry associations to ensure we maximise the value of our memberships. We have also taken further steps to address investor expectations around climate change advocacy by industry associations by engaging with a broad range of stakeholders from around the world, including investors, civil society groups, community groups and industry associations. As a result of that feedback, we developed and published our Global Climate Policy Standards, which are intended to provide greater clarity on how our policy positions on climate change should be reflected in our own advocacy and that of associations to which we belong, and announced key changes to our approach to industry associations.