In the previous era, climate sceptics in business took a wait-and-see approach. Today, impacts from climate change are far more visible, including skyrocketing costs from weather-related damages and intensifying political and social unrest. Tomorrow, the effects of global warming could escalate even further, leading to ever-more-drastic regulation, divestment pressures and potential carbon taxation.

Many mining companies are aware of risks that climate change poses for their industry, and they're taking action. But other mining companies continue to underestimate the full extent of the disruption that climate-related crises could deliver in the near future. Companies that believe they can postpone taking action now may end up paying a high price.

The case for change is overwhelming. Drawing on insights from BCG's proprietary Smart Multiple analysis, we've seen that mining companies that have already made progress in managing their sustainability footprint have, on average, valuations that are more than 20% higher than those of their peers in the bottom quintile (figure 1, below).

To date, mining majors' traditional reaction to climate change has centred on launching initiatives aimed at enhancing energy efficiency, securing water sources and (in some cases) striving to exit commodities (namely, coal) perceived as unfriendly to the environment. But we maintain that proactive companies that go beyond traditional responses—by capitalising on a much wider range of tools and strategies—will get rewarded. They will build what we call an Uncertainty Advantage—moving from merely reacting to uncertainty to extracting advantages from it, as we explained in our article in the July issue of Mining Journal.

To achieve all this, miners must excel at all three components of the Uncertainty Advantage framework: understanding and tracking sources of uncertainty to build a Signal Advantage, crafting strategic responses to achieve a Decisive-Move Advantage and enhancing their agility to attain a Resilience Advantage.

Signal Advantage

Signal Advantage is all about using the best models to build climate change into risk assessments. Most mining companies consider climate in their risk assessments for particular projects or general risks. Cases in point include Rio Tinto's climate-change sensitivity framework, Anglo American's water-efficiency tool and Gold Fields' requirement that each of its sites identify climate-related risks and opportunities.

Miners can—and must—gather even better signals to understand and track sources of uncertainty related to climate change. Setting up dedicated centres of expertise and data can help. Take Barrick Gold. Since mid-2017, the company has integrated digital weather forecasts into water-usage models at its South American sites to more accurately predict weather-related water risks (such as reservoir depletion or floods) in real time. As a result, Barrick Gold expects to be able to continue operations even in the case of adverse weather events.

Companies can further sharpen their competitive edge by also demonstrating leadership on this front. Examples include BHP's commitment to set public goals in 2020 on reducing greenhouse gas (GHG) emissions from its products even after sale (scope 3 emissions), and its plans to tie executive pay more closely to performance on environmental-responsibility targets.

Decisive-Move Advantage

Most mining companies have launched programmes aimed at reducing GHG emissions and fossil-fuel burning; for example, optimising energy-intensive processes like haulage or milling and switching to less contaminating fuel such as natural gas. But a number of miners have taken additional steps to achieve a Decisive-Move Advantage.

Some of these leaders have focussed their efforts on process innovation. Lithium Australia, for instance, has developed a way to extract lithium with less energy-intensive and contaminating processes. And Barrick Gold optimised underground ventilation at its Hemlo site to reduce heating in winter and cooling in summer. The mine uses naturally occurring geothermal properties as well as stopes in old mining areas to create an air supply. These moves delivered a 24% reduction in GHG emissions and a 10% decrease in energy consumption, as measured by ventilation per tonne of ore, according to the company's 2018 sustainability report. Meanwhile, Northam Platinum has implemented a closed water circuit to ensure that 90% of the water used in its operations is recycled, as a means of protection against water shortages.

Portfolio innovation

Some leaders are restructuring their portfolio ahead of signals, and have benefited as a result. To illustrate, early movers that exited the thermal coal business before the trend had fully manifested had a broader set of interested buyers. That gave them a value advantage that may not be available to companies that make such moves behind the trend, if the pool of eligible buyers shrinks or if tougher global carbon regimes crush coal's profitability in the future.

On the other hand, demand for coal will likely remain significant in the foreseeable future. And given that capacity expansions in coal are limited, operators that remain in the coal business may cash in. The upshot? In grappling with portfolio decisions, miners must fully understand the specific context they're operating in, including externalities affecting their business. These can differ depending on context. Thus, exiting coal might be the right choice for some companies (such as those facing pressure from public investors), while entering or enhancing exposure to coal can be value accretive for companies owned by specialised PE investors.

Shifting towards new green-energy metals is another example of portfolio innovation. Rio Tinto and Alcoa, for instance, have developed a new method to produce carbon-free aluminium (expected to be sold by 2024), with support from the governments of Canada and Quebec and technology giant Apple.

Umicore, meanwhile, transformed itself from a mining player to a materials-tech leader. Initially, its assets focussed on copper and zinc smelters. It sold off most of its assets and acquired capabilities and technologies centred on primary metals recycling, and began producing new products such as automotive catalysts. As early as 2013, it was operating at the frontiers of the clean-tech economy, generating €2.4 billion in revenues and significantly reducing the impact of metal-related emissions on air and water. That year, it ranked No.1 on the Global 100 index of the world's most sustainable companies.

Other effects from climate change may offer new opportunities for miners positioned to seize them. As the Arctic ice melts, for example, it's estimated that Greenland's Ilimausaq complex could start meeting as much as a quarter of the global demand for rare-earth elements.

Resilience Advantage

Miners that achieve a Resilience Advantage work to improve their operations so they can readily recover from climate-related disasters. For example, Ensham's decision to build levee banks around its central Queensland mine enabled the mine to avoid being flooded during the wet season in 2010-2011. Two years earlier, it had suffered $300 million in damages when several coal pits were badly flooded.

Other leading miners are building more resilient and renewable energy infrastructure, in such forms as off-grid energy projects. The business case is that the cost of installation is offset by decreased energy costs. South32's installation of a solar farm for its Cannington mine is one example; another is Rio Tinto's development of a wind farm for its Diavik diamond mine.

Next steps for mining companies

Miners that want to stay ahead of the environmental and social tsunamis catalysed by climate change must act now to boost their performance on the three Uncertainty Advantage components. We recommend asking questions such as the following:

•             What climate-related risks are facing each of our projects? Our operations?

•             How much leadership do we want to demonstrate on this topic? How can we do so?

•             What strategic moves—such as divestments and investments—would help us take effective action ahead of the most important trends?

•             How might we develop less carbon intensive processes and operations?

•             What new opportunities could climate change open up for us, and how could we capitalise on them?

•             How could we best use our existing expertise to prevent or to recover more readily from adverse climate events?

•             How could we acquire expertise needed to strengthen our resilience?

Of course, arriving at answers to such questions—and implementing new moves—is no easy feat. But companies that wrestle with this now will be glad they did. BCG analysis shows that the valuation multiple premium of climate leaders versus that of their lagging peers has increased over time (figure 2, above). We expect this development to continue and even accelerate in the future.

In an age when mining companies are competing for funds from an overall sceptical investor pool, that's reason enough for miners to start building an Uncertainty Advantage now.

*Hans Kuipers (Kuipers.Hans@bcg.com) is a managing director and partner at Boston Consulting Group; Tycho Moncks (Moencks.Tycho@bcg.com)  is a partner at BCG; Alison Sander (Sander.Alison@bcg.com) is the director of BCG's Center for Sensing & Mining the Future.