Integrated Report 2022PDF List

Integrated Report 2022

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Index

Climate Change

Materiality Forming the Basis of EX Strategy

Materiality; Contributing to Decarbonized
  1. MC’s Policies on
    Climate Change
  2. Initiatives to Achieve
    Net Zero by 2050
  3. Disclosures in line
    with the TCFD Recommendations
  4. Decarbonization Projects

MC’s Policies on Climate Change

Our planet and its ecosystems, human beings and corporate activities are highly vulnerable to climate change. At MC, our belief is that while climate change does pose significant threats, it also presents the MC Group with new business opportunities. Accordingly, MC has identified “Contributing to Decarbonized Societies,” which is part of its Materiality, as one of the key issues for management to address and respond to as MC strives to achieve sustainable growth. MC aims to fulfill its mandate to meet the demand for energy, while at the same time helping to achieve international objectives, such as the UN Sustainable Development Goals (SDGs) and the Paris Agreement. To realize that aim, MC works in collaboration with a wide range of stakeholders, including governments, other businesses and industry associations.

Initiatives to Achieve Net Zero by 2050

GHG Emissions Reduction Targets

In its Roadmap to a Carbon Neutral Society released in October 2021, MC has formulated medium- and long-term greenhouse gas (GHG) emissions reduction targets aligned with the Paris Agreement: to halve emissions by the fiscal year ending March 31, 2031 (fiscal year ended March 31, 2021 baseline) and to achieve net-zero emissions by 2050. To reach the target of halving emissions by the fiscal year ending March 31, 2031, we will utilize every means available, including replacing assets and switching operations to renewable energy and alternative fuels. Looking toward 2050, we will leverage our collective capabilities to drive industrial transformation as well as embrace new technologies and innovations to aim to achieve the goals of the Paris Agreement and net zero emissions.

In order to ensure the achievement of the reduction targets for the fiscal year ending March 31, 2031, which are shown below, we believe it will be crucial to develop and improve our GHG emissions management processes, monitor progress in emissions reduction and disclose such efforts. Based on this approach, in the Midterm Corporate Strategy 2024, as described below, we established and announced new specific and effective processes for confirming short- and medium-term GHG reduction plans when formulating investment plans (“Investment Planning in Accordance with GHG Reduction Plans”). Furthermore, we will continue to appropriately disclose annual GHG emissions each year, as before, to inform stakeholders of our progress in reducing emissions toward the target for the fiscal year ending March 31, 2031. Our progress as of the end of the fiscal year ended March 31, 2022 is as follows.

  • *1 The figures on the left represent the Scope 1 and Scope 2 emissions of MC and its consolidated companies, including affiliates, based on the GHG Protocol’s equity share approach. Furthermore, base year figures include emissions from thermal power generation and natural gas projects, which comprises (i) assumed peak emissions from pre-operational committed projects and (ii) projected fullcapacity emissions for partially-operational projects.
  • *2 The figure, 7.7 million tons CO2e, represents the Scope 1 and Scope 2 emissions of MC and its consolidated subsidiaries under the GHG Protocol’s equity share approach. It would be equivalent to 8.3 million tons CO2e under the GHG Protocol’s financial control approach. For details, please refer to here.
  • *3 Any residual emissions, after reduction efforts have been made, will be neutralized using internationally-accepted offsetting methods including carbon removal. The specific reduction plan and measures for the GHG emissions reduction targets will be adjusted as required in line with progress of technological developments, economic viability and policy/ institutional support.
GHG Emissions (Scope 3)

MC’s reduction targets and GHG emissions above include a portion of the Scope 1 and Scope 2 emissions of its affiliates on an equity share basis, corresponding to Scope 3 Category 15 (Investments) emissions. In addition, we recognize the importance of appropriately disclosing emission of Category 11 (Use of Sold Products), which account for the majority of MC’s Scope 3 emissions. Looking towards such disclosure, we believe emissions should be calculated in manner that accurately reflects the actual circumstances of our business, and we will continue to diligently consider ways to disclose them.

Midterm Corporate Strategy 2024 / Adopt Mechanism for Initiatives to Achieve the GHG Reduction Targets

In order to achieve our GHG reduction targets in the Roadmap, in the Midterm Corporate Strategy 2024, we have adopted mechanisms for simultaneously decarbonizing and reinforcing our portfolio by classifying each business based on climate-related transition risks and opportunities. In addition to scenario analysis, which we have conducted for some time, we are introducing measures such as Transform Discussion, Investment Planning in Accordance with GHG Reduction Plans, and Evaluation of New Investment Using Assumptions Under Decarbonization Scenario, and will promote various measures to fulfill our mandate to meet the demand for energy and achieve the international targets set forth in the Paris Agreement.

Sustainability Initiatives
in the Midterm Corporate
Strategy 2024.

Disclosures in line with the TCFD Recommendations

Governance

As an important management issue, the Executive Committee determines the basic policies and other important matters regarding climate change*, and reports these to the Board of Directors. In addition to seeking advice and recommendations from the external experts of the Sustainability Advisory Committee, the Sustainability & CSR Committee discusses matters thoroughly before they are brought to the Executive Committee.

We have appointed a number of directors and Audit & Supervisory Board members who are expected to contribute based on their experience, knowledge, and expertise in climate change-related matters.

* Discussions focus on basic policies regarding climate change, such as climate-related initiatives through business and policies for addressing the TCFD. Other important matters such as methods to evaluate climate risks and opportunities (including scenario analysis) and GHG reduction targets (including status of reductions) are also discussed.

Skills Matrix
Overview of Corporate Governance
Initiatives to Date
Climate-Related Governance Framework
MC’s Sustainability
Promotion Framework.
Risk Management

Using the mechanisms introduced in the new Midterm Corporate Strategy for simultaneously decarbonizing and reinforcing our portfolio, as shown in the workflow below, we will conduct functional risk management, from identifying businesses with high climate change risks to assessing the impacts on profitability of individual projects.

Additionally, based on our current sustainability-related governance system, we will build a system that ensures that the Board of Directors is appropriately involved.

Strategies
Transition Risks and Opportunities
Process for Determining Projects to be Monitored

In addition to 2°C scenarios, we conducted an analysis of climate-related transition risks and opportunities using the 1.5°C scenario assuming further decarbonization and incorporated these results into our business strategy.

Policies and Initiatives Based on Scenario Analysis

The results* of the scenario analyses for the major businesses selected for monitoring (risk perspective) through the process detailed above are as follows.

* Scenarios are based on past data and are not forecasts. Instead, they are virtual models based on possible outcomes with high levels of uncertainty. The scenarios and business environment written here represent MC’s understanding of the main scenarios disclosed by International organizations such as the IEA, and do not represent MC’s medium-to long-term outlook.

Power Generation
(Fossil Fuels)
General awareness of the business environment under the 1.5°C scenario
  • The power sector will be the first to achieve net zero, and the share of electricity generated from fossil fuels is expected to decrease significantly.
  • Significant changes in the power generation cost structure due to the tightening of regulations such as carbon taxes and an increase in capital investment as a measure to reduce GHG emissions are expected, and the competitiveness of power derived from fossil fuels is expected to decrease.
Policies and initiatives based on the awareness of the business environment
  • We recognize the risk of stranded assets, the increasing difficulty of withdrawal, and the increasing risk of reputational damage associated with retained assets.
  • We will not enter into any new coal-fired power generation businesses and will promote strategic divestment from existing thermal assets while paying close attention to factors that affect the difficulty of sale (M&A market trends, relationships with relevant countries, contractual restrictions, environmental regulations, etc.). Concurrently, we are considering switching to zero-emission thermal power for retained assets in the effort to achieve a 100% non-fossil power generation portfolio by 2050.
Metallurgical Coal
General awareness of the business environment under the 1.5°C scenario
  • Steel demand will increase by 12% in 2050 compared to 2020. Advances will be made in electric furnace method and hydrogen reduction method, and it is expected that CCUS for blast furnaces will spread rapidly and the blast furnace method will continue in some regions.
  • Although overall demand for metallurgical coal is expected to decrease toward 2050, it is anticipated that the reduction in demand for high-quality metallurgical coal, which contributes to a low carbonization, will be relatively low as a result of plans to decarbonize blast furnaces by further improving their efficiency and outfitting them with CCUS.
Policies and initiatives based on the awareness of the business environment
  • Even under the 1.5°C scenario, needs for high-grade metallurgical coal, which contributes to low-carbonization of existing blast furnaces, is expected to exhibit a relative increase, and superiority of metallurgical coal business. It is anticipated that our metallurgical coal business, with its mainstay high-quality metallurgical coal products, will maintain its advantage to a certain extent.
  • We will strive to strengthen the competitiveness of our metallurgical coal assets by assessing the progress of decarbonization in the steel industry and the external environment affecting the supply of metallurgical coal.
  • We are working to reduce GHG emissions in the production process in our metallurgical coal business, and in collaboration with our partner BHP, supporting research that contribute to reducing emissions throughout the entire metallurgical coal value chain.
Natural Gas
General awareness of the business environment under the 1.5°C scenario
  • Global natural gas demand is expected to decline by 6% by 2030 compared to 2018, while LNG trade volume is expected to increase by 16%. Thereafter, by 2040, natural gas demand and LNG trade volume are expected to decline by 46% and 33%, respectively, compared to 2018.
  • The demand for hydrogen, a next-generation energy source that is expected to support decarbonized society, will increase, and the significance of natural gas as a raw material for blue hydrogen is expected to increase further in the future.
  • Approximately half of the total demand for natural gas in 2050 will be directed to hydrogen production, and 40% of hydrogen demand will be sourced by natural gas.
Policies and initiatives based on the awareness of the business environment
  • MC will fulfill its responsibility to provide a stable supply of LNG, an important energy source in the transition to a carbon neutral society, as well as aim to increase its profits from the LNG business by strengthening the foundations of existing businesses, steadily launching projects under construction, reinforcing our marketing functions, and participating in competitive new projects.
  • We will pay attention to policies of various countries, such as the introduction of carbon taxes, and trends in technology development, such as CCUS, which may affect the competitiveness and profitability of our natural gas and LNG business. We will also strive to make our LNG value chain carbon neutral and conduct studies to develop business around production and supply of next-generation energy sources such as synthetic methane and blue hydrogen.

Please refer to our Sustainability Website for more information about the scenario analyses, including the results of the analyses for the other businesses to be monitored.

Incorporation into Business Strategy

For the eight businesses selected for monitoring (for both transition risks and opportunities) mentioned above, the results of the transition risk/ opportunity analysis for each business, assuming the 1.5°C scenario as a decarbonization scenario, are incorporated into strategy when each Business Group formulates its own business strategy, for the purpose of optimizing our portfolio.

Physical Risks

Physical climate risks (e.g. floods, droughts and temperature increases) could affect the operations of some of the MC Group’s businesses. In order to comprehensively understand the potential physical risks that climate change poses to the MC Group’s business, MC has conducted a physical risk analysis according to the process below.

Comprehensive Analysis Process
Assessment Results

The current measures and future adaptation strategies for the two businesses with assets that are likely to be affected by the physical risks identified via the above process are as follows.

Assets subject to assessment
Metallurgical coal business

Mines and coal terminal owned by BHP Mitsubishi Alliance (BMA)*

Copper business

Copper mines owned by Anglo American Sur, S.A.

Location
Metallurgical coal business

Australia

Copper business

Chile

Type of hazard
Metallurgical coal business

Stormwater flooding

Copper business

Drought

Current measures
Metallurgical coal business

Given that flooding due to heavy rain at mines has the potential to disrupt operations, the following measures have been implemented to improve resilience of the sites to flooding since the last flood events in 2011:

  • Implementation of water storage inventory procedure based on climate forecasts;
  • Utilization of the pits under care and maintenance for its water storage management;
  • Installation of floods levees to prevent flood water entering pits, pumping and water pipeline systems to move surplus water around and between mine sites and water storage locations, and additional excess water discharge infrastructure.
Copper business

While most of the water required for the operations is reused within the mine, a certain amount is lost due to evaporation and other factors, and this water must be replenished from external sources. Since in the drought condition, there is a possibility that sufficient water intake may not be possible which could affect operations, resilience measures are considered through increased procurement of industrial wastewater and treated sewage from third parties.

Future adaptation strategies
Metallurgical coal business

MC together with BMA will continue to enhance physical risk mitigation in response to climate change forecasts.

Copper business

In addition to the current measures, further diversification of external water procurement is under consideration. Moreover, new technologies to further improve water reuse efficiency at the operations are also being considered.

* To address the risk of the storm surges, the latest port berth infrastructure installed has been designed to withstand a 1 in 1000 year wave event factoring in rises in sea levels and cyclone impacts due to climate change. An additional project is currently underway to upgrade an older berth to the same design standard.

Metrics and Targets

MC has set the following climate-related targets to capitalize on opportunities and mitigate risks on a consolidated basis. In addition, we manage progress toward achieving our GHG emissions reduction targets through annual disclosure of GHG emissions results.

Target 1
GHG Emissions Reduction Targets
  • Net zero GHG emissions by 2050, and a new FY2030 target with a detailed reduction plan.
  • Emissions halved by FY2030 through portfolio replacement driven predominantly by divestment of thermal power assets.
Target 2
Non-Fossil %
  • Aim to reduce existing thermal power capacity and switch to zero-emission thermal power, targeting 100% non-fossil by 2050.
Target 3
Renewable Energy
  • Doubling MC’s renewable energy power generation capacity compared to the fiscal year ended March 31, 2020 levelsby the fiscal year ending March 31, 2031.

Decarbonization Projects

MC considers transitioning to a low-carbon society to be one of the key issues for management to address and respond to. Through its businesses, MC is working to reduce and eliminate carbon in a variety of fields. In particular, under the name of Energy Transformation (EX), we are taking on the challenge of reforming the energy field with a view of a decarbonized society, and evolving our energy-related business portfolio in the process. By addressing the common issue of decarbonization across all industries in this way, we aim to both meet environmental challenges and fulfill our social mission of providing a stable supply of energy, which will lead to the sustainable growth for MC over the medium- to long-term.

Special Feature:Creating a New Future
(Fostering New Industries/Regional Revitalization)