By Hans Kuipers
When it comes to climate change, we’ve clearly entered a new era. In the previous era, climate skeptics in business took a wait-and-see approach. Today, impacts from climate change are far more visible, including skyrocketing costs from weather-related damages. Tomorrow, the effects of global warming could escalate even further, leading to ever-more-drastic regulation, potential carbon taxation, changes in demand for commodities, and divestment pressures.
All this will call into question mining companies’ ability to continue operating successfully with their current business models and asset bases. Indeed, climate change and extreme weather events present serious risks for mining sites. An urgent shift is required as strategies currently being used were developed under what would now be considered outdated assumptions in terms of the devastating effects climate change has on mines and economies in general. Given these massive changes and uncertainties, it’s critical that mining companies take a holistic and systematic approach to managing climate risk.
The uncertainty advantage
Some mining companies are aware of the risks that climate change pose for their industry, and they’re taking action. But too many continue to underestimate the full extent of the disruption that climate-related crises could deliver in the near future. Companies who believe that they can postpone taking action now may end up paying a high price.
The typical response to climate change among mining companies has been to launch initiatives to enhance energy efficiency, secure water sources and in some cases restructure portfolios to exit commodities (namely, coal) perceived as unfriendly to the environment. But we believe that proactive companies that go beyond this response can build an “uncertainty advantage.” Instead of merely reacting to uncertainty, companies can use uncertainty to their advantage by tracking the new risks hitting their industry, crafting the right strategic responses, and strengthening their agility and resilience.
When it comes to building an uncertainty advantage around climate change risk, mining executives should focus on three key priorities: developing a climate-conscious, scenario-based business strategy; climate-proofing the operations; and engaging stakeholders with an inspiring narrative. Evidence suggests that the marketplace will reward those that do. According to BCG’s proprietary ‘Smart Multiple’ analysis, mining companies that have most proactively addressed climate change (i.e., those in the top quintile of emission performance) have, on average, valuations 20% greater than peers in the bottom quintile.
Hans Kuipers is Managing Director and Partner at Boston Consulting Group (BCG)