Appraisal Report on BHP Company Risk Governance and Corporate Social Responsibility (CSR)
1.Introduction
The management of corporate risk and the corporate social responsibility (CSR) remain two significant dimensions of current corporate governance in the international resource business of the Australian BHP Company Ltd the company famous for mining, metals, and petroleum industries (Argus & Samson 2021). Thus, as the crucial components of organizational safety and good performance, risk management and sustainable practices are vital to BHP. Thus, this introduction creates a context for discovering more about BHPs current risk management system, the function of board committees in risk management, and CSR activity. As a result, this report discussion employs the theories of corporate governance and the related frameworks to provide an assessment and recommendations for BHP that reflect on principles of ethical corporate practice in order to foster increased organisational resilience and sustainability.
2.Risk Governance
Risk Governance Structure
BHP Group has a risk management framework that is approved by the companys board of directors and supervised by the risk and audit committee (RAC). The RAC assesses that risk management is sound by scrutinising risk management frameworks, internal controls, key risks, risk mitigations, and emerging risks; BHPs commitment to exercising effective risk management in mining is reflected by this (Massey 2022). According to the BHP Annual Report,2023, the Capital Allocation Framework (CAF) disciplines reinvestment with the return to shareholders in BHP. It focuses on conditions such as maintenance capital, a strong balance sheet, and a minimum of 50% payout to the shareholders, providing dependability in the context of industry fluctuation and encouraging social and environmental development (BHP 2023).
Operational Risk Management
According to BHP (2023a), BHP has been using the BHP Operating System (BOS), which is fully implemented in the operation by the financial year 2024 in dealing with operational risk management.The BOS trains improvement into a system and organisational culture and minimises operation risks of all the entities in BHPs operating business streams. Cost control consistency in the management of rising inflationary cost is evident in BHP and acts as a plus in improving operational flexibility and performance (Keenan, Kemp & Owen 2019).
Technology and Innovation in Risk Management
With reference to the technical category of risk management detailed in the 2023 Annual Report, BHP applies technology and innovation in its management of risks. For instance, an association of cloud-based technology in Western Australia Iron Ore operations to maintain consistent shipping grade and the use of Artificial Intelligence innovations in Escondida to optimize overt operations such as flotation and increase odds on positive productivity, safety, and sustainability profiles in operations (BHP, 2023a).
Financial Risk Management
BHP's financial risk management strategy, detailed in the 2023 Annual Report, prioritizes maintaining a strong balance sheet across commodity price cycles, diversifying funding sources, and holding predominantly US dollar-denominated borrowings and cash reserves. The company's ability to consistently generate substantial net operating cash flow, reaching US$18.7 billion in FY2023, highlights the resilience and effectiveness of its financial risk management practices over the long term (BHP 2023a).
Climate and Sustainability Risk Management
In BHPs 2023 Annual Report, climate, and sustainability are depicted as being managed under the companys consideration with goals and initiatives towards net zero operational emissions by 2050 and sustaining land and water assets (BHP 2023).
SWOT Analysis for BHP Risk Identification
Strengths:
This is operational capital strength where BHP has set records in production at Western Australia Iron Ore, Olympic Dam, and Spence, among other achievements, and has recorded net operating cash flow of over US$15 billion for 13 out of the last 14 years (BHP 2023, Argus & Samson 2021).
Weaknesses:
Their portfolio exposure to iron ore, copper, and coal puts BHP at direct risk of market risks in these commodities (Lorenc et al. 2023). Operational risks surrounding water management in water scarce regions such as Escondida are another operational concern which can affect the relations with the local population and license to operate (Whittle 2022).
Opportunities:
The transition to the low-carbon economy also offers the following opportunities for BHP like cutting down on emissions and expanding the usage of renewable energy sources (Ajay Gambhir & Pearson 2018).
Threats:
External threats to BHP are critical and risky and have implications for the companys operation and its strategic goals. Fluctuations in the prices of commodities such as iron ore and copper affect financial also affect the revenues and hence the funding for capital projects (Mckay 2021). Therefore, geopolitical risks and operating country regulation pose some challenges, by altering market access and raising the cost Climate change issue is a physical and transition risk, which influences the production and demand for the commodity. (Buckton 2022).
From this SWOT analysis with reference to the Annual report (2023) of BHP, the eight identified significant risks for BHP are below.
1.Operational Performance Risk (Strategic): The BHP company production lever does have high expectations, so the company needs to be critical as there are chances of failure in operations. This results in a decline in brand image, and investors may lose confidence.
2.Financial Complacency Risk (Management-level): As BHP's financial condition is strong so and investors may get overconfident, but markets are dynamic and risky, so financial risk can be affected at any time.
3.Portfolio Concentration Risk (Strategic): The Company's main focus on commodities like iron ore, copper, and coal can lead to economic downturns. If any market fluctuations drastically decline, the company becomes vulnerable.
4.Water Management Risk (Operational): There are water management challenges at mining sites like Escondida which is a water stressed area. If not futuristic, this could lead to production disruptions, regulatory penalties, and community conflicts.
5.Energy Transition Risk (Strategic): The company has a risk of exposure to the reduction of demand for its products or assets if it fails to sustain the global shift towards a low-carbon economy.
6.Technology Implementation Risk (Management-level): BHP is known for its adoption of technological innovation that offers opportunities. When there is an advantage, there are challenges like cybersecurity threats and workforce upskilling.
7.Commodity Price Volatility Risk (Operational): The commodity price fluctuation prices, especially for iron ore and copper could present significant financial risks to BHP's revenue and profitability.
8.Geopolitical Risk (Management-level): The current incline of global trade tension and changes in regulations in the countries in which it operates could impact the operations cost and market access.
Risk Matrix:
This presents the risks analysed in a tabular form assisting in ranking the risks by means of their probability and effect on the overall process. Hence, the risks that are in the top-right quadrant (5, 7, 3) should be managed more than any other attention in the BHP risk management process. Specifically, one high-priority risk is the Energy Transition Risk (5), which entails the transition risk to a low-carbon economy. The identified risk factors include Commodity Price Volatility Risk (7), which describes the revenue and profitability effects of high and low-price sensitivity and Portfolio Concentration Risk (3), which shows the controls focus on a limited number of commodities (Heyes & Cooper 2019).
Risk Management Policies
Energy Transition Risk Management Policy
Specifically, BHP should create an Energy Transition Task Force comprising people with sustainability, operational, and finance backgrounds to build a solid decarbonisation plan (Tonge 2019). This involves using emission reductions targets that are based on scientific advice and investing in new technologies and essential minerals while being also honest and open to the wider community.
Commodity Price Volatility Risk Management Policy
Commodity price risks that are relevant to BHP include fluctuations in metal prices, which should be addressed either through risk protection or opportunity capture. This involves having proper policies for the use of Futures contracts and Options, in addition to making the product offering portfolio more diverse. The company should further use advanced analytics in strategic pricing and innovative financial model stress testing to increase the firms versatility and strategic resourcefulness (stensson 2020).
Portfolio Concentration Risk Management Policy
The effective risk management strategy that BHP should benefit from is the strategic diversification policy that minimizes portfolio concentration. This would entail a process of gradual diversification into new products and regions, possibly with the help of mergers and acquisitions. Thus, the policy should set targets on aiming to diversify away from the most critical commodities, carrying out systematic portfolio reviews, and analysing potential vertical integration activities with the usage of innovations and technologies to strengthen competitiveness and sustainable value creation (Choy et al. 2023).
Water Management Risk Management Policy
So, BHP should have a clear Water Stewardship Policy as a guide on how it manages water critically in regions with a shortage of water supply. This policy should establish company-wide water efficiency standards and the use of advanced methods in water recycling as well as treating water and require organizations to conduct risk assessments of water use in projects (Rudebeck 2019). Local stakeholders engagement and partnership, pilot-based investments in other water sources such as the desalination plants and timely and factual reporting of the water risks. Frequent enhancement through the comparison to the best practices and the research of new technologies of fresh water preservation should also be an action on the agenda to maintain effective water usage correspondingly to the global norms, such as CEO Water Mandate (Hamilton 2019).
3.Corporate social responsibility and sustainability
Based on BHP (2023), Corporate Social Responsibility and sustainability are managed at BHP through the Sustainability Committee which oversees the Corporations CSR and sustainability policies. This committee is comprised of non-executive directors who are independent that have different specialization in addressing the environmental, social, and governance (ESG) matters. The annual report 2023 and BHP (2021) reveal that the Sustainability Committee may be composed of several members belonging to the Board of Directors of the company. Currently the board members include Ken MacKenzie (Chair), Mike Henry (Chief Executive Officer), and other non-executive directors are Xiaoqun Clever-Steg, Gary Goldberg, Michelle Hinchliffe, Don Lindsay, Ross McEwan, Christine O Reilly, Catherine Tanna and Dion Weisler.
Mandate, Responsibilities and Conformance Functions
The Sustainability Committee was established further to the companys Board Charter by helping the company to monitor its sustainability performance and management for these aspects. It provides advice on policies, activity standards, and targets concerning health, safety, environment, climate change, and community and supervises performance, investigates incidents, and considers sustainability reporting (Argus & Samson 2021). The committee works on a reporting basis to the Board through presenting recommendations or exercising the Boards agency. Together with the Risk and Audit Committee, it guarantees compliance with the CSR and sustainability standards based on the assessment of the risk profile, risk management, and internal controls (Mayes 2019). The Sustainability Committee helps BHP become sustainable in its operations; for instance, through the fight against modern slavery, it produces statements on measures to fight modern slavery and promote human rights (BHP 2023b).
Performance Functions
Strategic Goal Setting
The Sustainability Committee is one of the most essential subcommittees of BHPs CSR and sustainability structure that deals with effective policies, targets, and goals, especially related to climate change. This way, through the adoption of the 2030 social value scorecard, it aligns BHP with global and stakeholders expectations, thereby providing for long-term sustainability goals and objectives across the various fields and providing for recurrent monitoring and review of the implementation and progress of the objectives.
Integration of CSR into Core Business Strategy
Figure 1 BHP- Sustainable approach
(BHP 2023)
The role of the Sustainability Committee includes ensuring that CSR and sustainability is entrenched in the organisational strategy, through the process of evaluating climate risk management frameworks and proposing key performance indicators which link sustainability to executive remuneration to ensure that sustainability considerations are infused into the organisational culture (Lesnikov, Kunz & Harris 2023).
Measuring and Reporting Impact
The Sustainability Committee probably has governance responsibility for tracking and reporting on BHP's sustainability performance against parameters such as Greenhouse Gas Emissions, Water, Safety, and Communities. In measuring these indicators for the CEO and the Executive Leadership Team, it shows the organizations focus on both short-term goals and sustainable development goals (Abdullah 2022). Supervising the Climate Transition Action Plan highlights the companys long-term GHG emission reduction goals, which require balanced and adequate management to maintain and improve both operational and financial performance and sustainable development values (Foerster & Spencer 2023).
Transparency and Stakeholder Communication
The role of the Sustainability Committee seems to be quite critical in crafting and implementing policies that would help in the timely disclosure and reporting of BHPs sustainability performance to the various stakeholders. Through its role in supervising these reporting processes, the committee assists in guaranteeing that BHP groups sustainability performance is correctly and exhaustively reported to investors, regulators, and more interested and relevant parties, all of which goes a long way towards strengthening the organizations reputation and authenticity (Norrish et al. 2019).
Stakeholder Theory in BHP's Sustainability Governance
Figure 2 Stake holder theory
(Colle 2005)
The principles of stakeholder theory are very evident in the approach taken by the Sustainability Committee. This theory says that a firm should create value for other stakeholders apart from the owners of the company. With regard to the implementation of sustainable development, this is evident at BHP, where the commitment is depicted by the committees monitoring of several sustainability functions of different organizational stakeholders. For example, the committee's responsibilities in the management of Indigenous partnerships, community engagement, and environmental stewardship suit the recognition of diverse stakeholders society. Thus, the committee plays a vital role in ensuring that BHP has due regard to its employees and the society as a whole thus safeguarding the companys social license. This stakeholder-orientation approach is most relevant to the mining company since this industry usually has profound effects on communities and the environment (Colle 2005).
Corporate Social Performance Model in Action
Figure 3 Corporate Social Performance (CSP) model
(Siltaoja 2013)
There is a clear indication of the Corporate Social Performance (CSP) model in the Sustainability Committee. This model says that the business entities have an obligation to respond to the society and should provide something to the community as compared to just making profits. Such an approach is evident from the handling of BHPs social value framework and 2030 goals, the responsibility of the committee BHP (2023a). Thus, through the establishment and enforcement of high goals for decarbonization, the protection of the ecosystem, and the enhancement of communities, the Committee for Sustainable Development at BHP is putting pressure upon the company to do more than comply and actively contribute to the resolution of the existing global problems (Ha, Ngoc & Velencei 2019).
Integration of Theories in Committee Functions
The BHPs Sustainability Committee utilizes the stakeholder theory and the CSP model in the governance framework. In this way, it addresses short-term operational requirements with long-term strategic visions by establishing procedures for determining sustainability targets for executive compensation and linking managers/management interests with stakeholder issues (Stubbs & Higgins 2015). Also, the committee is responsible for sustainability matters such as the conservation of biodiversitys and the struggle for sustainable water management, which goes beyond legal obligations (Bazilian et al. 2023).. By integrating sustainability into BHP, this has a way of ensuring that sustainability is a significant part of its strategic plan and not an afterthought; this approach has established proper governance that leads to the improvement of both corporate and social performance (Sarokin 2022).
Three CSR and sustainability practices
Environmental Practice: Operational Decarbonization
As stated in the BHPs annual report 2023, BHP has shown its intention of bringing the operational GHG emission intensity to at least 30% of the fiscal year 2030 along with the net zero by 2050 goal corresponds to the global drive for addressing climate change. This practice involves short term expenses including the cost of renewable energy and efficiency enhancement, which might affect the reported short-term performance.
Social Practice: Indigenous Partnerships
The BHP Modern slavery statement report 2023 states that BHP recognising the importance of partnering with Indigenous people is a significant social imperative as highlighted in the targets set for Indigenous employment and procurement. The following commitment is, therefore, in line with this companys social responsibility and commitment to the growth of other nations. Short-term, there could be a need for other resources, while the long-term gains are, for instance, better community relations, better social license, and unlocking of diverse human capital (BHP 2023b).
Governance Practice: Sustainability Committee Oversight
As part of the sustainable development, it is necessary to focus on the creation of a committee for the promotion of sustainable development at the board level at BHP. This one is a governance committee that supervises the companys sustainability management, the achievement of objectives, and the alignment of strategic key decisions with sustainability concepts. In the short run, it may result in stiff decision making and slower project approval, however in the long run, it helps executive better risk handling, keeping the shareholders and consumers confidence, and more sound business strategies which in the end establishes sustainable value and competitive advantage (Stubbs & Higgins 2015).
4.Recommendations to the Board
From the assessment of Risk Governance, CSR, and sustainability report of the firm, the following recommendations should be implemented by the BHPs Board of Directors. These are to increase sustainability key performance indicators disclosure that link executive remuneration to sustainability to align managers incentives towards sustainable goals, improve portfolio concentration risk management by investing substantially in clean energy transition minerals, perform better Integrated climate change risk assessments, scale up circularity strategies, and improve more disclosure of sustainability disclosures (Siegrist et al. 2019). The Board should also consider forming an Energy Transition Task Force to create a better plan for the companys decarbonization journey, enhancing the status of hedging to handle fluctuating commodity prices, and creating an elaborate Water Stewardship Policy (Egan & Agyemang 2022). It is also important to enhance the quality of engaging with stakeholders, especially in the concepts like the impact on biological diversity or human rights mapping. It is for this reason that the integrated report could go a long way in improving the way the relationship between financial as well as other reports. These recommendations will help BHP to establish its leadership in the sustainable mining, build up the organisational resistance to forthcoming adverse conditions and generate the sustainable worth for all the parties involved by responding to decisive environmental, social, and administrative risks and opportunities as well as increasing its operations productivity and managing risks effectively. As BHP undergoes its journey in the global resources sector, more acutely, this companys ability to meet short-term objectives while striving for longer-term objectives will be determinant. Thus, by focusing on these areas, BHP can even better strengthen its status as the industrys leader in terms of sustainability and generate sustainable value for all relevant stakeholders.
5.Conclusion
In conclusion, the report under analysis shows that BHP is following the best practices of risk governance, being responsible for its actions and impact on the society and environment, and pursuing sustainable development policies and activities as evidenced by the companys frameworks and solutions. The Board policy, supported by specific Board committees, does incorporate stakeholder theory and the CPS model into the companys functioning. It should also be noted that the BHPs strategy of striving for operational decarbonization, Indigenous engagement, as well as sustainability management fits into global sustainability trends. Still, it is crucial to point out the key opportunities for development, such as addressing the concentration risk in the portfolio, improving climate models, and increasing the focus on non-financial indicators in the management of executives incentives. In the water management and circular economy aspects, the company also has areas of growth.
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