Rio Tinto: what does it take for engagement to succeed?

Altering corporate behaviour is no easy feat. Yet, when investors engage with companies over decarbonisation that is the objective. Partly, the challenge rests in translating investor demands into incentives for change. Often, investor demands for climate action at the world’s largest emitters tend to get lost in translation.

So when engagement succeeds in altering corporate behaviour, it is unsurprisingly noteworthy. Recent developments at Rio Tinto, an Australian mining company and J-Power, one of Japan’s largest energy companies demonstrate the power of successful engagement.

Rio Tinto has committed to enhanced disclosures on how the company plans on reducing scope 3 emissions from iron ore processing. These emissions account for 69% of the company’s scope 3 emissions. The company says it will also disclose how much it spends on steel decarbonisation and how much it plans to spend over a three-year period.

At J-Power, the company’s medium-term management plan now includes a commitment to close five coal power plants by 2030. By some estimates, these closures would mean avoiding 16.2Mt of carbon dioxide emissions annually

Sustained pressure

The first common denominator in both cases is the presence of sustained investor pressure.

At J-Power’s 2022 AGM 26% of shareholders supported a proposal seeking “credible emissions reduction targets”. The proposal was filed by asset managers Man Group, Amundi and HSBC Asset Management along with shareholder advocacy group Australasian Centre for Corporate Responsibility (ACCR).

In 2023, the filers of the 2022 proposal followed up. This time, they asked for short-term reduction plans and received 21% shareholder support. On May 10, 2024 - when J-Power finally announced that it would shut down five coal power units, the company’s President Hitoshi Kanno said:

“We deemed it necessary to demonstrate to shareholders our strategy for coal power plants on a site-by-site or unit-by-unit basis”.

At Rio Tinto, institutional investors from Australia and Europe had raised the scope 3 emissions issue on multiple occasions in 2023 and 2024. This included letters, meetings with Rio’s climate team and a shareholder proposal.

“The transition towards a greener mining sector is a long haul, but Rio Tinto's new announcement shows that constructive dialogue and active ownership produce results”, said Rasmus Bessing, co-CIO and head of ESG investments at PFA - a Danish pension fund.

These engagements also came with threats of escalation, making it challenging for Rio Tinto to avoid investor concerns. Naomi Hogan, company strategy lead at ACCR says that the Rio Tinto outcome “highlights the importance of escalation as a necessary and logical component of effective stewardship.”

Granular pragmatism

Reflecting on why engagement succeeded at Rio Tinto, Daniela Jaramillo, head of sustainable investing (Australia) at Fidelity International said:

“On reflection, the key elements that we believe were key to this success are: first, as investors, recognising the need to pivot our approach, be pragmatic and sometimes adjust our engagement objective to the second-best outcome”.

Fidelity International and the Australian Council of Superannuation Investors were the engagement leads for the Climate Action 100+ investor coalition.

Instead of pushing for broad-based target setting on scope 3 emissions, investors at Rio Tinto shifted their focus to abatement plans and expenditures on iron ore processing.

CA 100+ in a statement, referred to this new engagement plan as, “a pragmatic approach that focused on enhanced disclosure on scope 3 abatement plans and expenditure rather than solely advocating for targets.”

Within Rio Tinto, the pragmatic prospect of technical feasibility played a role in catalysing change. Back in November 2022, the company had successfully experimented with a low-emission technology for iron and steel production using biomass. In December 2023, the company said it was looking to scale up the project.

Collective bargaining

When Rio Tinto announced the changes to scope 3 disclosures, the company’s chief commercial officer Alf Barrios acknowledged the role of investor coalitions and the CA100+ in particular:

“CA100+ provides a useful focal point for our engagement with investors on climate change and we have aligned our Climate Action Plan with the CA100+ Net Zero Company Benchmark”.

Given that JP Morgan Asset Management and State Street Global Advisors exited the coalition not too long ago, Barrios’ words carry weight.

Fidelity International’s Daniela Jaramillo agreed. “Alignment between stakeholders like the CA100+ leads in Australia and Europe as well as ACCR”, said Ms. Jaramillo was one of the reasons engagement succeeded in this case.

At J-Power resolutions were co-filed and backed by several asset managers and asset owners. Outcomes of engagement at these two companies are perhaps also evidence in favour of collective bargaining.

Companies such as Rio Tinto and J-Power are under consistent and escalating investor pressure. This pressure also means that investors are willing to give these companies an opportunity to earn their confidence for the long haul.

For such companies, developments at Rio Tinto and J-Power might change the way investor pressure is perceived. They might choose to believe what Billie Jean King, a luminary of women’s tennis, famously said – “pressure is a privilege”.