Environment

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.

While energy efficiency has been clearly linked to growing margins, there is also a growing cost advantage in moving towards renewable energy and storage. Embedding energy efficiency and adopting renewable energy and storage

technologies are likely to have favourable payback periods, regardless of whether a carbon price is introduced. Under Sustainability and Follower, where a carbon price is introduced, these technologies provide major cost advantages.

While energy efficiency has been clearly linked to growing margins, there is also a growing cost advantage in moving towards renewable energy and storage. Embedding energy efficiency and adopting renewable energy and storage technologies are likely to have favourable payback periods, regardless of whether a carbon price is introduced. Under Sustainability and Follower, where a carbon price is introduced, these technologies provide major cost 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 monitors and tracks its progress towards these emissions reduction targets and reviews its emissions

reduction approach in line with IPCC’s updated scientific reports, while also considering other developments in low-emissions technology to ensure a practical and affordable transition towards this commitment.

Downer monitors and tracks its progress towards these emissions reduction targets and reviews its emissions reduction approach in line with IPCC’s updated scientific reports, while also considering other developments in low-emissions technology to ensure a practical and affordable transition towards this commitment.

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.