The Effect Of Reduced Greenhouse Emissions On Financial Performance Of Mining Companies

Significance of Reducing Greenhouse Emissions in the Mining Sector

The advent of global warming, climate change and the depletion of the protective ozone layer have led to increased concerns over the environment, and especially the role of humans and specifically, organizations in contributing to greenhouse gases emissions and how these emissions can be reduced (Andersen & Sarma, 2012). With the business environment becoming increasingly competitive and with shareholders demanding more returns while executives have to generate more returns with fewer resources; firms are pressed on how they can achieve both objectives while also undertaking the corporate social responsibilities (CSR), including lowering greenhouse emissions. CSR has become such an important factor, that firms that actively engage in, and transparently report their CSR activities get positive perceptions from the public, and this has been shown to have a positive correlation with their financial performance (Galant & Cadez, 2017).

Mining and resource extraction is among the largest sectors and most important economic activities for the country and its economy; it is a significant primary industry which has over the years encouraged a rush of immigrants into the country. Australia boasts large mineral and other natural resource deposits, which include iron ore where Australia was the second largest global supplier at the end of 2015, coming only second to China with 824 million tons supplied; this constitutes 25% of the global output.  Nickel is another mineral found in large quantities with 9% of global output, Aluminum (29% of global output), Copper (5^th largest producer), Gold (2^nd largest global producer), Silver (6% of global output), Uranium (11% of global output), Diamond (3^rd largest global producer), Opal (95% of global production), Zinc (2^nd largest global producer), Coals (largest global exporter), Oil shale (6^th largest global reserves), petroleum, natural gas (3^rd largest global producer), and silica (‘Minerals UK’, 2018).  For Australia, the largest source of energy is coal with 73% of the total electricity generated in Australia coming from coal (Reichl, Schatz & Zsak, 2015).

This means that firms in Australia generate a lot of greenhouse gas emissions as a result of over reliance on coal as the primary source of energy (Kelly & Iverach, 2016; Slezak, 2017). Among the largest mining companies in Australia, which are also major global mining firms, include BHP and Rio Tinto. BHP is based in Melbourne, Australia, and had revenues of some $ 38.3 billion in 2017, while RioTinto, based in London UK, but with considerable operations in Australia, posted revenues of some $ 40 billion in the same period. BHP is among the top 20 of the largest greenhouse producing companies (Hamman, 2013); two thirds of all greenhouse emissions in the world are accounted for by some 90 companies with BHP and Rio Tinto being among the major producers, emitting 914 billion tons of carbon Dioxide. BHP is the largest mining company in the world is the 19^th largest producer, while Tinto rank at position 34 among the top emitters of greenhouse gases (Ker & Hannam, 2013; Goldenberg, 2013). While the effects of CSR disclosures have been shown to improve financial performance, it is important that the effect of reduced greenhouse emissions have on financial performance (Platonova, Asutay, Dixon & Mohammad, 2016). This paper seeks to determine, using a correlation analysis, the effect of reduced greenhouse emissions on the financial performance of mining companies, with BHP and Rio Tinto used. The paper defines the objectives and research questions after this brief introduction, followed by a statement of the problem. The significance of the research is the discussed followed by an extensive literature review; this is followed by a discussion of the research methodology, data collection and analysis. The results of the research are then discussed and conclusions and recommendations made, taking into account ethical issues and discussing the limitations of the research.

• To undertake an evaluation of the correlation between greenhouse gas emissions reduction and financial performance of companies in the mining sector
• To discuss the findings and make recommendations that other firms can use

Literature Review

Greenhouse gas emissions has become an urgent pressing matter, that can lead to adverse and possibly irreversible effects on the environment, life, and the world as we know it in general (Stover, 2015). The effects of greenhouse gases has been climate change, whose effects are seen everywhere form increased melting polar ice caps as well as rising temperatures in the Arctic regions. Other effects are heat waves across Europe and erratic weather in other regions (Emmott, 2013). While it is well understood that CSR disclosure and activities have a positive correlation with organization financial performance, the effect of reducing greenhouse emissions on financial performance needs to be well understood to act as motivation for firms to reduce their greenhouse emissions (Gabbatiss, 2018).

This research will provide firms with empirical evidence on how their financial performance will be impacted if they reduced their greenhouse gas emissions. The findings will also create a platform and provide information that can be used to encourage other firms to reduce their greenhouse emissions, and help- policy makers develop better proposals and solutions to reduce greenhouse gas emissions.

Among the UN sustainable development goals is the need to combat climate change and its effects; this is the 13^th goal of the Sustainable Development Goals (SDGs). According to the UN, climate change now affects each country in the world, disrupting national economies, costing lives, adversely affecting lives, and affecting economic livelihoods. Weather patterns equally are changing and sea levels rising with extreme weather events such as Typhoons and drastic temperature variations, very hot summers and extremely cold winters. These effects are happening when greenhouse gas emissions are at their highest in global history. As such, there is urgent need to reduce greenhouse emissions with the Paris Agreement at COP21 held in Paris where all countries agreed to work collectively and ensure global temperature rises do not go beyond two degrees. Garcia-Sanchez (2012) undertook a research to study the effect of greenhouse gas emissions on financial performance using dependence models. The outcomes demonstrate that ozone harming substance emanation controls have an inverse?linear impact on firm execution, freely of their level of advancement. This relationship is legitimized in that rather than past articles, the writers have proof of an invalid connection between specific corporate social obligation (CSR) practices and innovative work costs. Wang, Li and Gao (2013) investigated if greenhouse gas emissions affect financial performance through an empirical research. The outcomes demonstrate that ozone harming substance emanation controls have an inverse?linear impact on firm execution, freely of their level of advancement. This relationship is legitimized in that rather than past articles, the writers have proof of an invalid connection between specific CSR practices and innovative work costs.

Research Methodology

Liu, Zhou, Yang & Hoepner (2016) investigated whether, and how the performance of carbon emission relates to the corporate financial performance of an organization and how carbon emission performance disclosures in organization annual performance reports mediate the relationship. Using a 42 item disclosure index to undertake the investigation through quantification of 62 firms listed at the FTSE 100 from 2010 to 2012, the researchers established that carbon emissions has a negative correlation with financial performance. Further, the researchers noted that reporting on carbon emissions, however, has a significant positive correlation with financial performance. Broadstock, Collins, Hunt & Vergos, (2018) explored the empirical relationships existing between greenhouse gas (GHG) emissions and a variety of business performance measures; the study targeted UK FTSE 350 listed organizations over the first decade since such reporting commenced. Despite the publicized benefits of voluntary disclosures and the incentives to do so over a similar period, adoption of voluntary disclosures on emissions by the companies under study has been slow. A two step Heckman type model of selection was used analyses the performance of emissions nexus, based on the condition of the forms adopting voluntary disclosure. The results are a robust non lnear relationship and the decisions to report their emissions is not influenced directly by governance and social disclosure attitudes, suggesting that these companies dissociate social responsibility from environmental responsibility.

Delmas, Nairn-Birch & Lim, (2015) undertook an investigation into the relationship between environmental performance of companies and improved financial performance under the increasing likelihood of environmental regulation. The researchers leveraged longitudinal data for 1095 corporations based in the USA between 2004 and 2008 when there was increasing activity in climate change legislation to estimate the effect that GHG emissions had on short and long term financial performance of these firms as well as return on assets (ROA). Te study established that improving environmental performance of these firms resulted in a decline in financial performance in the short term and ROA. However, investor sentiment was that these firms had potential for improved financial performance in the long term as shown by an increase I Tobin;s q. the findings suggest that a limited uptake of strategies that are proactive may partly result in short term financial performance targets that end up guiding decision making by managers in such firms. Ngwakwe & Msweli, (2013) examined the relationship between reductions in carbon emissions at 3M Company and the company’s performance as shown by dividends per share (DPS).

Results and Analysis

The researchers made use of the least square multiple regression statistics and established that there a significant correlation between the reduction of carbon emissions at 3M company and its performance as shown by DPS in the years studied; this relationship was positive such that carbon reductions by 3M resulted in improved DPS performance, and this finding can be applicable to other firms engaged in reductions of carbon emissions. Choi and Luo (2017) undertook a study to determine whether information concerning carbon emissions was associated with the market value of firms. The researchers tested the whether high carbon emissions led to a decrease in firm value, using voluntary disclosures by such firms. The study established that carbon emissions levels ha d a negative correlation with the value of the firm. The negative value effect occasioned by carbon emissions was also reduced by Corporate governance. US firms that reduced their emissions of carbon by three percent per year through to the year 2020 could reap up to  190 billion due to reduced energy bills, increased innovation, and productivity. Reductions in carbon emissions result in positive financial returns for such firms with many firms listed in the S&P 500 having reported higher rates of returns on their investments in technologies that reduced carbon emissions on corporate capital investments (Cusick, 2013).

This research will use the deductive approach to undertake the research; which differs from the other approach which is inductive. The aim of deductive approach is to test a theory, which differs with the inductive approach which aims at testing new theories emerging from data. In this paper, the researcher hopes to test a theory, which posits that reducing greenhouse gas emissions results in improved financial performance (‘Research Methodology’, 2018). This is because while CSR activities and disclosure have been shown to improve financial performance, it remains to be understood and seen how reducing greenhouse emissions can affect financial performance. Further, inductive research is more suited to quantitative data, which is what will be used for this research.

Research Design and Type

The research will adopt a descriptive research design which is suited to the aims and objectives of this research; it is a scientific research method involving observation and description of subjects without influencing them in any way (‘DJS Research’, 2018). The research type suitable for this research is quantitative research, involving the use of secondary data; this is because such data (greenhouse gas emissions and financial performance data) are prepared rigorously by the companies or other entities and this is the most economical and logical way to obtain the data. Further, correlation studies require quantitative data and so this is the most suitable method for meeting the objectives and aims of this research (Wilson, 2010)

Discussion, Conclusions, and Recommendations

Data will be collected through the internet from reliable and verifiable sources, including the CSR statements of the companies involved and the audited financial statements of the two companies. Secondary data collection will be used for the purposes of this research.

The data will be analyzed using statistical methods where a correlation analysis will be undertaken. In undertaking the research, descriptive statistics will be used as well as the use of graphical analysis to show the correlation between greenhouse gas emission reductions and financial performance of companies in the mining sector, using the two major firms involved in mining; BHP and Tinto. The data will then be analyzed to show trends and correlation (‘Boston University’, 2013)

This research by no means escaped ethical issues that generally affect most research (Thakker & Read, 2010); one was on the temptation to use nonacademic sources of information, such as Wikipedia, which had a very nice discussion of the mining sector. To overcome this, the author used verifiable sources from the web. The other challenge was the risk of using information and material from other authors’ without acknowledgement; this was overcome by acknowledging used information through referencing. Unintended plagiarism was also an ethical issue; this was overcome through rephrasing and paraphrasing content, as well as checking for plagiarism using reliable checking applications

The coefficient of correlation between GHG and EPS (earnings per share) for the companies were calculated, with GHG regressed against the EPS. For BHP, the value of R was established to be 0.6067 with a coefficient of determination (R²) of 0.3681, at 95% confidence levels.  For Rio Tinto, the value of R was established to be -0.4507 with a coefficient of determination (R²) of 0.2031, at 95% confidence levels. For BHP, there is moderate positive correlation between GHG and productivity of the company as indicated by the EPS, while for Rio Tinto, there is a weak but negative correlation between GHG and EPS, meaning that a decrease in the GHG results in a small increase in EPS and vice versa.

Result Details BHP
Source	SS	df	MS
Between-treatments	2397.8614	1	2397.8614	F = 21.99399
Within-treatments	1090.2346	10	109.0235
Total	3488.096	11

For BHP, the f-ratio value is 21.99399. The p-value is .000855. The result is significant at p < .05.

Result Details for Rio Tinto
Source	SS	df	MS
Between-treatments	2588.0844	1	2588.0844	F = 379.67111
Within-treatments	68.1665	10	6.8166
Total	2656.2509	11

For Rio Tinto, the f-ratio value is 379.67111. The p-value is < .00001. The result is significant at p < .05.

The results of statistical analysis are significant

Graphical analysis for BHP shows that as GHG decreases, the productivity as measured by the EPS remains almost constant, or increases very slightly.

Ethical Issues and Limitations of the Research

Tinto, the graphical analysis shows that as GHG reduces, there is a slight increase in productivity in terms of EPS

Comparison in GHG Emissions between BHP and Rio Tinto

A comparison of GHG emissions between BHP and Rio Tinto shows that BHP was producing more GHG but has achieved the greatest reductions in emissions in the same six year period since 2013; while Rio |Tinto has achieved much gradual reduction in GHG emissions in the same period.

For the two firms, the findings are mixed; for BHP, when the GHG is regressed against the EPS, the result is moderate but positive correlation between the GHG emissions reduction and EPS which measures productivity. For Tinto, the statistical analysis shows that there is a weak but negative correlation between GHG emissions reduction and EPS, in that a reduction in the GHG emissions results in an increase in the EPS and vice versa. BHP is based in Australia where 70% of energy is generated from coal, which is a cheap source of energy and so a reduction in GHG through the use of less coal means that the firm has to use energy sources that are more expensive or has to make significant investments in new alternative energy sources. This is why there is a moderate positive correlation between GHG emissions reduction for BHP and its EPS. The findings for BHP are consistent with the findings by Delmas, Nairn-Birch & Lim, (2015) in which they established a short term decline in ROA with a reduction in GHG emissions. The data used for this research is in the short to medium term time series. For Rio Tinto, the results show an expected, albeit weak negative correlation between GHG emissions reductions and EPS as a measure productivity. Rio Tinto operates in a far different energy mix market where coal is not the main source of energy and so can use alternative cleaner sources of energy without much investments. The result is that as GHG emissions for Tinto reduce, then the EPS increases.

Conclusions

The increased concerns over global waring and climate change have gained greater importance, given that a positive correlation has been established between GHG emissions and the changes in climate and water patters as well as global warming. The mining sector is major consumer of energy and generator of GHG emissions. To this end, this paper sought to undertake a survey using regression analysis, to determine the impact that GHG emissions have on EPS. BHP was producing more GHG but has achieved the greatest reductions in emissions in the same six year period since 2013; while Rio Tinto has achieved much gradual reduction in GHG emissions in the same period. For BHP, the reduction in GHG has resulted in reduced performance of the company as measured by the EPS while for Rio Tinto, there has been a slight improvement in performance as a result of reductions in GHG emissions. Both firms have been involved in initiatives to reduce GHG emissions as shown in their annual sustainability reports, although BHP has been more aggressive in reducing its GHG emissions. The moderate positive correlation between GHG emissions for BHP and the weak negative correlation between GHG emissions and EPS for Rio Tinto show that aggressive reductions in GHG emissions result in greater costs that eat into productivity and hence result in reduced EPS, while a slower rate of GHG emissions reduction, as shown by Rio Tinto performance leads to a slight increase in EPS.

This study recommends that more studies be done over a longer period with several other productivity indices used to determine the relationship between GHG emissions reductions and EPS. This study also recommends further studies to determine if the rate of GHG emissions reductions has an impact on company productivity

These findings are limited to the inherent limitations and weaknesses in the research methods used, the period considered for review, and the inherent limitations I the methods used for statistical analyses.

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