Climate change and Downer’s TCFD response
The effects of climate change will be pervasive and felt in some way by every person, organisation and society as a whole. The effects will impact across environmental issues, economic performance, social behaviour, infrastructure and other aspects of human existence. Changes will generally develop gradually but could also be abrupt, as seen in recent times.
Downer accepts the Intergovernmental Panel on Climate Change’s (IPCC) assessment of the science related to climate change and supports the Paris Agreement in transitioning to net-zero emissions by 2050 to limit global temperature increase to 1.5°C by the end of this century. Climate change has been identified as one Downer’s material issues.
Downer recognises the uncertainties and risks posed by climate change on its long-term viability and to society. Downer’s current exposure to thermal coal represents a medium-term risk and informs Downer’s shift away from the Mining Services business. Other risks that Downer is exposed to need to be monitored and mitigated, or adapted to, dependent on the program of works affected.
Downer also recognises that there are significant opportunities to contribute to a lower carbon economy. Downer may leverage its already significant contribution to the renewable energy sector by providing further construction and maintenance services where these market opportunities arise. There are further opportunities within emerging technologies, such as Hydrogen and Carbon Capture and Underground Storage, where Downer has capability in each phase of its implementation. In addition to contributing to mitigation measures, adapting to climate change will be increasingly necessary over the coming years. To that end, Downer’s existing Asset Services business, along with maintenance services we provide across a range of industries, will be increasingly called upon, particularly in the face of extreme weather events. These represent significant opportunities for Downer.
Over the past three years, Downer has progressed its implementation of the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations. Downer remains committed to integrating the TCFD work into its overall strategy. This year’s disclosure builds on the work completed over the past few years.
The scenario analysis performed in 2019/20 continues to inform strategic planning processes by looking longer-term to critically assess the products and services provided by the business in these changing markets. The outcomes of the scenario analysis contributed to Downer’s Urban Services strategy, which focuses on capital light services and limits our exposure to the effects of climate change through fixed, long lived capital assets.
In February 2020, Downer announced it would shift investment in high capital intensive activities to lower intensive and lower carbon activities and advised the market that it would take steps to divest its Mining Services and Laundries businesses. This strategic shift will support Downer’s decarbonisation pathway and market position as the global economy accelerates its transition to a low-carbon future. Downer is also well positioned to provide products and services to our customers that will enable them to decarbonise, contributing to a lower carbon future.
Downer intends to undertake a program of work during FY22 to refresh its understanding of key climate-related risks and opportunities and the further embed climate-related considerations into the capital allocation process. The outcomes of the analysis will be disclosed in future disclosures.
The Downer Board, through its oversight functions, has ensured Downer appropriately considers Environmental, Social and Governance (ESG) risks, including those related to climate change. In fulfilling this function, the Downer Board also receives oversight from Downer’s Board Zero Harm Committee and Audit and Risk Committee, Tender Risk Evaluation Committee and Disclosure Committee. Climate-related risks and opportunities are incorporated into Downer’s broader corporate strategy, planning and risk management.
The Downer Board recognises that an integrated approach to managing climate-related risks and opportunities is essential. This has been reflected in the strengthening of Downer’s governance structure and increased focus on climate change in both Board and Executive forums. Examples include:
- Board strategy session, which occurs annually and includes climate change risks (physical and transitional) identified through the TCFD and scenario analysis. These issues, along with Downer’s decarbonisation strategy and management response, are presented by the Head of Sustainability.
- Investor meetings attended by CEO, CFO and Chairman of the Board. Discuss investor concerns associated with climate-related risk and opportunities, along with Downer’s strategy and management response.
- Monthly updates to the Board through functional Top Down Reports (TDR) provided and presented by the Functional and Operational Heads. For example, Health, Safety and Environment including climate change is provided by the Head of Sustainability. The monthly TDR provides updates on strategic initiatives as well as performance against targets and objectives including Downer’s GHG emissions intensity reported against its Science-Based Aligned Target.
- Reports provided to the Board Zero Harm Committee on quarterly basis. This committee is attended by the Head of Sustainability and the Group General Manager Environment, Sustainability and Reporting to discuss climate change related information, GHG emissions reporting and performance along with management response and strategy.
- Involvement through the Tender Review Evaluation Committee (TREC), established to assist the Board in approval of the submission of bids that exceed the delegated authority of the Group CEO or are referred to the committee by the Group CEO. This committee assesses the risks and opportunities in line with Downer’s risk appetite. Climate-related risks and opportunities is one of the considerations.
- Direct Board engagement in Downer’s sustainability materiality assessment process. As key internal stakeholders, Board members participate in the materiality survey and interviews, which are conducted by an independent expert. The Board, through the Zero Harm Committee, is involved in the validation of the materiality assessment results, which are disclosed in the annual Sustainability Report.
- Review and endorsement of the Annual Report and Sustainability Report, which disclose Downer’s material ESG issues. This includes: climate change, along with Downer’s TCFD disclosure; Downer’s science-based GHG emissions reduction targets; and progress towards decarbonisation.
- Inclusion of climate-related risks and opportunities questions in the annual Financial and Corporate Governance Self-Assessment.
- Monthly updates and papers to the Executive and Strategic Committee meetings. The management committees are attended by the Head of Sustainability, who presents strategic updates and performance-related information on ESG matters, including climate change and decarbonisation.
- Tracking Downer’s GHG emissions reductions in line with Downer’s Science-Based Target. These results are reported through various management and Board forums, with the KPIs linked to Downer’s Sustainability Liked Loan facility and Short Term Incentive performance, which is specifically reported to the Board Remuneration Committee each year.
The method for measuring the company’s performance is set out in our governance framework, and short-term remuneration incentives are offered to senior managers in relation to the company’s performance against environment and sustainability targets. These targets include the management of critical environmental risks, GHG emissions reduction and the development of improvement plans aligned to the top two UN Sustainable Development Goals that are material to that Business Unit.
Downer’s climate-related risks and opportunities, including their potential impact, likelihood and management response, are reviewed on an annual basis (at minimum) to ensure ongoing relevancy both at the Group and Business Unit levels.
Climate-related risks continue to be governed as part of Downer’s Group Risk and Opportunity Management framework and Project Risk Management framework. We identify, manage and disclose material climate-related risks as part of our standard business practices, which are aligned with our Group and Business Unit strategies. This framework applies to all employees, Directors and contractors.
Our Audit and Risk Committee and Tender Risk Evaluation Committee are responsible for providing oversight over Downer’s risk profile, policies and management, and external reporting.
Response to climate-related opportunities
Downer is leveraging its understanding of ESG mega-trends and key material sustainability issues to drive innovation, and to identify new sources of growth and revenue for the business. This includes the way Downer has pivoted its portfolio through its Urban Services businesses to position itself as the provider of choice to customers with services that are set to thrive in a low-carbon future.
Our existing Group and Business Unit strategy process considers key external drivers, as stated above. We have also enhanced our strategy process to incorporate more explicitly climate-related risks and opportunities on an ongoing basis. We have embedded this process in the annual Group strategy session and a similar process into the Business Unit strategy sessions.
This process confirmed that, at present, there were no material short-term climate-related risks for the Group. As indicated above, the majority of Downer’s climate-related risks have been deemed to impact the business in the medium-term to longer-term. However, there were signals to closely monitor Downer’s exposure to thermal coal as this risk could materialise earlier than anticipated. Downer’s opportunities identified relate primarily to leveraging Downer’s existing capabilities and business model as a service provider to service new and adjacent markets that will continue to emerge as a result of the transition to a low-carbon economy.
In FY19, Downer performed scenario analysis to test the resilience of its business strategy and the assumptions underpinning the strategic focus areas in relation to the relevant climate futures, both physical and transitional. While this analysis was completed a couple of years ago, it continues to inform Downer’s business strategy and focus on Urban Services.
In deciding on the three key issues (and their respective areas of the business) upon which to frame the scenario analysis, Downer undertook a process to identify the future risks and opportunities arising from the transition to a low-carbon economy and physical changes and overlay Downer’s strategic priorities, current risks and future changes.
These key areas informed the selection of four divergent, internally consistent and plausible scenarios, based upon the best available literature and modelling. Two of the four selected scenarios explore the minimum plausible global-warming trajectory (holding the world to approximately two degrees of global warming), and to explore the upper limit (approximately four degrees of global warming), with these pairs separated based on the degree to which adaptation is available and practicable in the given future.
The degrees warming is informed by the Representative Concentration Pathways (RCPs) (RCP 2.6 for under two degrees and RCP 8.5 for four degrees), while the transition pathways, including broader energy and socio-economic conditions, are informed by the Shared Socio-economic Pathways (SSPs).
(SSP 1 - RCP 2.6)
(SSP 4 - RCP 2.6)
(SSP 5 - RCP 8.5)
(SSP 3 - RCP 8.5)
Each of these scenarios provide numeric and qualitative outcomes under which to explore the risks and opportunities. The development of these future scenarios was tailored to Downer’s business strategy by identifying the key risks and opportunities that arose in each of the three selected priority areas. Once these were understood, a key driving climate or transition variable was mapped, enabling consistent exploration of the potential impact or outcome for Downer in each of the four futures.
Key findings include:
- Downer’s strategy was found to be resilient and well positioned in all scenarios used due to the diversification of services across multiple sectors, existing market presence and capabilities
- A <2°C world provides considerable opportunities which outweigh identified risks and will assist with lower cost of capital and increased margins
- Aligning to a <2°C world will require decarbonisation by the second half of the century, with a substantial decrease by 2035.
Downer will continue to focus on its decarbonisation strategy, which consists of:
- Divesting high capital, carbon intense businesses and focusing on lower carbon activities.
- Continuing to focus on energy efficiency and GHG emissions reductions
- Decarbonising our fixed assets with new technology and fuel switching
- Decarbonising Downer’s fleet through Electric Vehicles (EV) and Alternate Fuel Vehicles
- Increasing uptake of renewables, both on and off-grid
- Reducing Scope 3 emissions through the use of low-carbon materials, and working with suppliers to lower their emissions.
For more information, refer to the ‘Progress on decarbonisation pathway’ section of this report.
In all scenarios, weather conditions will become more extreme than today, with extreme rainfall, heatwaves and storms all resulting in potential unsafe work conditions and leading to delays or disruptions in project delivery or operations. More chronic conditions, such as gradual heat rise and longer time in drought, will create a higher risk of dust inhalation and the linked detrimental consequences to employee health.
In the immediate to short-term, these extremes will start to impact the way we perform our activities. Those on the frontline will be our outdoor workforce, who will be at higher risk of both injury and illness in a warming world.
Downer has the opportunity to adapt workplace policies and practices to reduce these risks before they result in consequences to our workforce. These changes will need to be strategically planned to manage the impact on margins. For example, shifting work hours away from daylight hours or implementing policies to stop work on days exceeding extreme temperatures may reduce the amount of time available to complete a project. These factors will therefore need to be a consideration when executing new contracts. For example, due to the impacts of COVID-19, Downer’s road maintenance customers brought forward programs of work and shifted the working hours to complete these works. As a result, our Road Services business achieved increased revenue in the later part of FY20.
Limiting global warming to under two degrees has relatively more positive outcomes for workforce health, safety and productivity due to a reduction in lost time, project delays or efficiencies gained, compared to higher warming scenarios.
The transition pathway will also provide opportunities to improve employee safety, with transition away from fossil fuels and internal combustion engines providing opportunities to improve air quality and productivity gains. In each case, financial implications will arise due to consequences of lost time, project delays or efficiencies gained.
In all scenarios, resilient infrastructure or adaptation to existing infrastructure will be needed. However, customers are willing to pay a premium for quality sustainable infrastructure, which may be contracted at higher margins. Points of difference arise across the scenarios in GDP, which will change the focus on critical infrastructure projects and achievable margins.
Downer designs and constructs infrastructure to withstand Australia and New Zealand’s climate. As the climate changes and, in particular, extremes heighten we will need to adjust the design factors and the way we construct infrastructure. Although Downer is already proactively responding to these changes, it will be important to remain aware of the changing future extremes in order to protect our reputation and standing, compared to competitors.
Adapting design and build methods may impact Downer’s margins, so these considerations will need to be carefully priced to assess the merits. For example, while there is still uncertainty around whether the world will limit global warming to less than two degrees, versus a four-degrees or higher warming, decisions need to be made as to the cost/benefits of incorporating worst-case versus best-case changes into planning. In any event, the climate will change, and the plausible minimum warming will be used as a baseline for decisions.
The sectors in which Downer’s Transport businesses operate will look to protect the resilience of cities as we move towards a warmer world. This provides Downer with opportunities to capitalise on new and emerging markets, particularly in sustainable infrastructure, sea walls, resilient roads and trains, and protection from urban heat islands. The direction of this demand, whether it be sustainable or purely cost-effective adaptation, is still uncertain. However, Downer has the ability to position itself to deliver on these emerging trends based on signposts.
In FY20, Downer announced its intentions to divest its Mining Services business. A key consideration for this decision was weighing up the incremental gain from servicing thermal coal with the opportunity costs for the remainder of the Group based on exposure to transitional risks. As reflected in the current increasing stigmatisation of the sector, we see in two scenarios stronger reputation risks, with declining social acceptability and increasing cost of capital, which applies to the broader Downer Group.
Downer Open Cut East business consists of coal contracts relating to the production of coking coal, with two contracts involving the production of thermal coal. These consists of Meandu and Commodore, which are the contracts by revenue. The majority of thermal coal produced from both mines is used to supply local power stations in South-East Queensland – Tarong and Tarong North Power Station (Meandu), and Millmerran (Commodore), with minor quantities sent to export markets.
In FY21, Downer progressed the sale of its Mining Services business and completed the sale of Open Cut West, Underground, Otraco, Downer Blasting Services (DBS) and Snowden. Open Cut East is the only remaining business to be sold. Downer continues to explore opportunities to divest Open Cut East. In the event Downer is unable to complete the sale, we will fulfill our contractual commitments. Once the terms of these contracts are complete, Downer will have no further participation in Mining services. Downer’s exit from the Mining Services business will substantially mitigate Downer’s exposure to thermal coal from a transition risk perspective. In addition, it will reduce the Group’s capital expenditure, which can be redirected to grow its Urban Services businesses, and significantly reduce its Scope 1 and 2 GHG emissions by approximately 27 per cent.
Globally, the energy transition is occurring at a rapid pace. The energy transition is complex and is being driven by multiple, inter-related factors. At a macro level, the costs of energy are changing dramatically driven by technology costs, fuel costs and a shift in consumer preference. Renewables are now viewed by many as the best solution to meet the demand for reliable, affordable and environmentally responsible energy. Energy end-users have increasing options to implement commercially and technologically viable solutions.
In response to the energy transition, Downer and the private sector are actively diversifying products and services, and making investment in new energies. This is driven by focusing on reducing operation costs, positioning for market share in new and emerging markets, and realising competitive advantages.
Opportunities to provide higher margin, premium products and services will arise in some scenarios. Improved margins through energy efficiencies and use of renewable technology with storage will deliver swifter payback periods, expedited where a carbon price is introduced.
A rapid transition or a delayed transition, which is out of step with market or consumer expectations, holds implications for Downer’s brand and reputation. Timing is crucial. Moving too slowly will result in increased costs of capital and reduced demand. However, moving too quickly will increase the risk of adopting technology unfit for purpose, impacting service delivery and ultimately brand. An effectively coordinated transition pathway, in line with public expectations, will be the optimum outcome.
To support the transition to a low-carbon economy in an equitable manner, Downer recognises the need to develop emissions reduction targets that align with the 2015 Paris Agreement goals to pursue efforts to limit the temperature increase to 1.5°C by the end of this century.
In 2019, Downer leveraged the Science-Based Target Initiative’s framework and guidance to set an ambitious long-term GHG emissions reduction target (aligned to a <2°C pathway). We committed to the decarbonisation of our absolute Scope 1 and 2 GHG emissions by 45-50 per cent by 2035 from a FY18 base year, and to being net zero in the second half of this century.
In FY21, Downer became a signatory to the Science-Based Target Initiative (SBTi) and tightened our commitment to being net zero by 2050 in line with the 1.5°C business ambition pathway. As previously mentioned, Downer’s long term GHG emissions reduction targets are also linked to our syndicated Sustainability Linked Loan, which further demonstrates Downer’s commitment to achieving these targets.
Downer’s pathway to significant decarbonisation is contingent on medium-term to long-term step changes. One of these is the divestment from carbon-intensive businesses, as noted in the TCFD disclosure section. The other key strategy for decarbonisation is the transitioning of fuels that Downer directly combusts to cleaner sources. These changes will have a significant impact on Downer’s carbon footprint. In the interim, Downer continues to make iterative improvements to operations to improve efficiencies where possible, which have a positive impact on emissions as well as costs.
In FY21, Downer completed a full assessment of its Scope 3 emissions portfolio in accordance with the Greenhouse Gas Protocol’s Corporate Value Chain (Scope 3) Standard. This is was major milestone for Downer and is particularly important for setting a Science-Based Scope 3 reduction target, which is a requirement for Downer to register and have its GHG emissions reduction targets validated by the SBTi.