Question

Rio’s [Rio Tino Ltd] latest climate change report, released in February, says that it has modelled the likely performance of its assets at a range of carbon prices, including the global $US120-a-tonne equivalent that experts say are probably necessary to keep global warming to less than 1.5C.

Rio concedes such a price, combined with other carbon abatement measures, would cut margins at its dominant iron ore division, which delivered $US17bn in underlying earnings in 2019, and threaten the viability of its two Australian aluminium smelters powered by fossil fuels.

“The potential downsides to iron ore revenues from a greater use of scrap across the steel value chain are expected to be offset by upsides for aluminium and copper — which are both essential for the electrification of the global energy system, including electric vehicles, and the deployment of low-carbon power solutions such as solar and wind,” Rio said.

“Importantly, the competitive position of our assets, both on industry cash cost and carbon intensity curves, is expected to protect the margins of our assets, even for commodities such as iron ore where we may face a negative impact on demand and price. In the case of aluminium, the attractiveness of our hydro-based assets is expected to increase relative to coal-based smelters, which would face increased carbon costs that may result in higher aluminium prices.”

Rio has said a carbon price is an “indispensable” part of any strategy to combat climate change.

It says its greatest fear about the move to a carbon price as a means of combating climate change, however, was that the same price would not be applied by all global governments, putting some of its assets at a competitive disadvantage against producers in other jurisdictions.

While Rio has set a goal of reducing its own carbon emissions by 15 per cent by 2030, from 2018 levels, it has so far resisted pressure to follow the lead of rivals such as BHP and Vale and set goals for the reduction of so- called scope 3 emissions — those attributable to customers that buy it products, rather than its own operations.

On Thursday Rio’s resistance was met with a strong backlash from institutional investors, with almost 37 per cent of votes at its annual shareholder meeting on Thursday backing a resolution calling on the company to match the promises made by its major competitors.

Extract from Evans, N. Rio Tinto chairman Simon Thompson linked to carbon price pledge. The Australian. 8 May 2020.

Required:

a) From the content above, explain fully what theories from ACC30008 can be used to explain:
i. Rio’s response to the prospect of a price on carbon (maximum word limit 500 words) ( 8 marks)

ii. TheresponsefromRio’sinstitutionalinvestors?(Maximumwordlimit500words) (8marks) b) What is the meaning of the term ‘underlying earnings’ used by Rio Tinto Ltd in explaining the impact

on its iron ore division of putting a price on carbon? (maximum word limit 250 words)

Answer 1

Rio Tino ltd has come under increasing scrutiny given its massive exposure to the steel industry, one of the world's heaviest emitters, but has been resisting calls to follow rival miners BHP, Vale and Glencore and oil majors Shell and BP in pledging to set targets for customers' emissions. The company insists it has "limited control" over the emissions caused by customers and would be unable to accurately measure or report them.

Rio's Scope 3 emissions in 2018 were 536 million tonnes of carbon dioxide equivalent, compared to 28.6 million tonnes from its mining emissions, scopes 1 and 2, according to the company's reports.

Earlier this year, Rio Tino said it would invest $1.5 billion in the coming five years – the biggest decarbonisation investment in the mining sector to date – to lower its direct emissions by 15 per cent in 10 years and to become carbon-neutral by 2050.

Market Forces told investors that those targets fell well short of the cuts required to meet the Paris climate agreement's goals to keep global warming less than 2 degrees above pre-industrial levels.Rio Tinto plc instituional ownership structure shows current positions in the company by institutions and funds, as well as latest changes in position size. Major shareholders can include individual investors, mutual funds, hedge funds, or institutions. The Schedule 13D indicates that the investor holds (or held) more than 5% of the company and intends (or intended) to actively pursue a change in business strategy. Schedule 13G indicates a passive investment of over 5%.

But Rio Tinto has positioned itself in direct opposition to several large European institutional investors, including the Church of England, insisting its existing climate commitments are enough and encouraging shareholders to vote against the resolutions.

ShareAction senior campaigns officer Jeanne Martin said: “Rio Tinto is using the ‘Aiming for A’ resolution as a smokescreen to hide its failure to take further action on climate-related issues. But a closer look at what they are actually doing in response to the resolution reveals that smoke and mirrors is all there really is. Investors must ask Rio Tinto to come clean and cut ties with trade associations whose positions on climate and energy policy are seriously misaligned with theirs.”

ClientEarth climate lawyer Sophie Marjanac said: “Rio Tinto can’t dig its way out of this one. It may be pulling out of coal, but it can’t claim its hands are clean while funding lobbies that keep coal very much alive. This is outright climate hypocrisy and investors must demand action.Rio Tinto’s response to a shareholder revolt over its support for coal lobby groups has been condemned by green groups, which are calling on shareholders to fight back by voting against the company’s accounts

Ideally, the Rio summit will result in an international commitment to develop national regulations which mandate the integration of material ESG issues into annual reports and accounts and which provide effective mechanisms for investors to hold companies to account on the quality of their ESG disclosures, including, for instance, through an advisory vote at a company's annual general meeting.

Stock exchanges also have a unique role to play in facilitating improvements in corporate sustainability reporting and performance. The Sustainable Stock Exchanges initiative has been urging all stock market listing authorities to make it a listing requirement that companies consider how responsible and sustainable their business model is. It subsequently requests companies put a forward-looking sustainability strategy to the vote at their AGM.

So far, only a few a stock exchanges, such as those in South Africa, Singapore and Malaysia, have made progress. Elsewhere, there has yet to be a serious commitment to sustainability by, for example, integrating it into the guidance that they issue to companies or their listing rules.