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JOHNSON MATTHEY PLC

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Johnson Matthey : TCFD

06/15/2022 | 06:13am EDT

Taskforce for Climate-related Financial Disclosures

In this section

Introduction

60

Governance

60

Strategy

61

Risk management

68

Metrics and targets

69

Introduction

Climate change is one of the most pressing threats facing our planet today. It is affecting our environment and poses a growing risk for people and businesses alike. We recognise that what we do at JM has impacts - both positive and negative. Our products and services remove harmful air emissions and recycle scarce metals, and we are designing new technologies so that we can help accelerate the transition to a low-carbon future. But the manufacturing and chemical processes we use have their own environmental impact, creating greenhouse gas emissions, using water, and producing waste.

Our strategy is shaped, therefore, around the opportunities and the risks that our changing climate presents. And we have set ourselves the ambition of achieving net zero by 2040 with a series of challenging intermediate targets for 2030, to ensure we keep driving up the benefits of our products while reducing their environmental impact (see page 35 for a full table of targets).

The requirement to report using the framework of the Task Force on Climate-related Financial Disclosures (TCFD) is a useful tool in this process. It helps us think holistically about the future impact that climate change and the transition to a low-carbon world could have on us and, during the year, we continued to work with global sustainability consultancy Environmental Resources Management (ERM) to develop our approach. We have organised our report under the headings of the four pillars of TCFD framework because we believe that it's most useful for our stakeholders to include our response to TCFD as a standalone section within our annual report. In doing so, we have reported consistent with the framework, although we are still working on quantifying the climate-related impact of some of our risks.

Governance

Given the nature of our business, and how closely aligned our strategy is to a warming world, climate-related risks and opportunities have been on the board's agenda for many years.

In May 2021, we announced the creation of a new board committee, the Societal Value Committee (SVC), to help the board focus more closely on the governance of sustainability matters including response to climate change. Nonetheless, the SVC is only part of the wider governance arrangements that support the board in discharging these responsibilities, as summarised in the diagram on page 61.

Role of the board and its committees

The board is responsible for setting and overseeing the implementation of the group's strategy, including the annual budget and detailed business plans. In doing so, it considers climate-related issues, including when approving requests for capital expenditure or new initiatives.

The SVC meets at least three times a year. It supports the board by overseeing the delivery of our sustainability strategy, and monitoring and overseeing progress against our sustainability goals and targets, with regular updates from the Chief EHS and Operations Officer. Jane Griffiths, the SVC Chair, reports to the board after each meeting, including bringing forward any recommendations from the committee. Given how fast society's response to climate change is developing, the SVC receives papers on emerging issues at each meeting, such as legislation and stakeholders' expectations. It also invites external experts to get an 'outside-in' view on our sustainability plans, and other emerging topics, which this year included diversity and inclusion, and human rights for more on the SVC's work, see page 98.

During the year, the wider board received an update on climate-related legislation and a training session on the implementation of TCFD recommendations.

Together with the Nomination Committee, the board ensures that, among the directors, it has the necessary sustainability and climate-related expertise. For more details of our non-executive directors' skills and experience, see pages 86-87.

As an initial step, the Audit Committee has this year reviewed the internal assurance in respect of TCFD. It will continue to assess the level of assurance over TCFD and climate-related issues as we continue to develop our reporting in this area. The Audit Committee is also responsible for reviewing the effectiveness of internal control and risk management, which includes climate-related risk.

This year, the Remuneration Committee reviewed the role of sustainability and climate-related targets within the group's remuneration approach. Measures will be included within the Performance Share Plan, reflecting our intent to contribute to an acceleration of the transition to a net zero world. For more details, see page 69.

As a result of our internal board effectiveness review, the responsibilities of the board and its committees in relation to climate-related issues and the broader sustainability agenda have been refined and clarified.

Role of management

The board delegates responsibility for running the business to the Chief Executive; this includes overall responsibility for climate-related issues, which resides with the Chief Executive, assisted by the Group Leadership Team (GLT). The Chief Executive is supported by the Chief EHS and Operations Officer who is responsible for day-to-dayclimate-related matters and provides updates to the GLT on the steps taken to develop or implement our sustainability strategy, including key metrics, risks and opportunities. The Chief EHS and Operations Officer is in turn supported by the Sustainability Council. The Sustainability Council is made up of managers from across our sectors and functions who, together, develop our sustainability vision, goals and targets. To prioritise driving our sustainability agenda and threading all elements into our business, we appointed a new Chief Sustainability Officer with effect from 16th May 2022. The Chief Sustainability Officer will report to the Chief Executive and be a member of the GLT.

60

Johnson Matthey | Annual Report and Accounts 2022

Taskforce for Climate-related Financial Disclosures continued

Governance structure for climate-related issues

Board

Chief Executive

Societal Value Committee

Audit Committee

Remuneration Committee

Responsible overall for

Assists the board in overseeing

Reviews the assurance

Reviews climate-related targets for

climate-related issues

the sustainability strategy

process for TCFD

incorporation in incentive plans

Members:

Members:

Members:

Chief EHS and Operations Officer

full board

all independent

all independent

Responsible for day-to-day

Chair:

non-executive directors

non-executive directors

Jane Griffiths

Chair:

Chair:

climate-related issues (from 16th May

Meets at least three times a year

Doug Webb

Chris Mottershead

2022, our new Chief Sustainability

Meets five times a year

Meets five times a year

Officer will assume this responsibility)

Sustainability Council

Develops our sustainability vision,

goals and targets

Members: representatives of all

sectors and functions

REPORT STRATEGIC

Strategy

Our business strategy is based on addressing the world's need to transition to a low-carbon future through enabling the necessary transitions in transport, energy, industry and the circular economy. Climate change offers us many opportunities, while also requiring us to adapt our operations to ensure we are resilient. So that we properly understand and can plan for its potential impacts, this year we developed climate-change scenarios to frame the ambiguities of an increasingly volatile and complex environment. These scenarios, which project the impact of climate change on our operational and commercial performance, are essential in informing our strategic choices, such as how we invest in R&D, or which new products to develop. We also use climate scenarios to consider the resilience to changing weather patterns of our own operations, those of our strategic suppliers and our core supply routes.

Climate scenarios for evaluating transition risks and opportunities

Our climate scenarios are central to our plan to achieve net zero by 2040, and our nearer-termten-year strategic planning. They are used by all our businesses as a common basis for planning, forecasting and stress testing their strategy and assumptions on growth.

To test the resilience of our strategy and portfolio, and our assumptions about growth, we have developed three transition scenarios that represent a wide range of outcomes.

  • Rapid transition scenario (aligned to 1.5⁰C) - net zero achieved globally by 2050, in line with the goal of the Paris Agreement to limit the world's temperature rise to well below
    2⁰C by 2100, and preferably no more than 1.5⁰C. This reflects swift and decisive action with regard to policy interventions and decarbonisation commitments.
  • Pragmatic evolution scenario (aligned to 2⁰C) - net zero achieved globally by 2080, which reflects a step-up in policy interventions and decarbonisation commitments compared with today, but not as decisive as under the rapid transition scenario.
  • Slow transition scenario (aligned to 3⁰C) - net zero not achieved by 2100, reflecting a global lack of urgency on climate change with limited policy or legislative interventions.

Johnson Matthey | Annual Report and Accounts 2022

61

Taskforce for Climate-related Financial Disclosures continued

We developed our climate scenarios internally with support from an external expert, reflecting the latest available research from internationally recognised sources such as the International Energy Agency (IEA). The IEA research we used included three scenarios: the Net Zero Emissions Scenario, the Sustainable Development Scenario, and the Stated Policies Scenario. Our methodology breaks down the different energy sources (electricity, hydrogen, gas, coal, oil, renewables, biomass and others) and considers forecasts for each source by demand type: transport, buildings, industry, power and heat, and feedstocks for materials. We developed in-house forecasts for specific source / demand combinations close to our areas of expertise in automotive, chemicals, hydrogen and other industries, while ensuring that, at a macro level, we remained within IEA's forecasts. This methodology allowed us to develop an economy-wide view, while also including enough detail about our key markets to inform our specific strategies for different parts of the business.

We update the scenarios at least annually to reflect any changes in external drivers. In these updates, we incorporate the latest from internationally recognised sources alongside our own forecasts, which take into account policy developments, technology evolution and the rate of public and private investment in new plants and infrastructure.

We model scenarios up to 2100 (see chart below), but look at shorter-term horizons, specifically 2030 and 2040, to inform our strategic and operational decisions. The table below details the main qualitative and quantitative assumptions we used for our 2040 scenarios, given that this is our target date to achieve net zero. We use the pragmatic evolution scenario as our base case for our strategic planning.

Market Sector

Metric (2040)

Unit

Rapid transition

Pragmatic evolution

Slow transition

Global

Total primary energy demand

EJ

500-550

550-600

690-740

Renewables supply

% of total energy supply

c.55%

c. 40%

c. 25%

Automotive

Global sales of zero-emissions vehicles

% of total automotive sales

c. 90%

c. 70%

c. 40%

Global sales of fuel cell electric vehicles

% of total automotive sales

c. 20%

c. 15%

c. 10%

Hydrogen

Global hydrogen production

Mt p.a

350-400

200-250

150-200

IEA's NZE and SDS scenarios are used to inform our rapid and pragmatic transition scenarios, respectively. Both rely on policy interventions beyond current pledges to reduce fossil fuel-related emissions. The NZE assumes a wider range of interventions and stronger implementation rates, including in terms of near-term support to early deployment of key innovative technologies and supporting infrastructure. The NZE also assumes substantial energy efficiency gains through stronger standards for appliances and fuel economy, among other levers.

Total anthropogenic emissions (GtCO2/yr)

50

40

30

20

10

0

-10

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100

Slow transition

Pragmatic evolution

Rapid transition

62

Johnson Matthey | Annual Report and Accounts 2022

Taskforce for Climate-related Financial Disclosures continued

Our transition risks and opportunities

Through our scenario work, we identified four distinct potential climate-related impacts, which represent both risks and opportunities for our business. We have added the first climate impact risk to our principal risks because it is of strategic importance to our business (see page 74).

Climate impact

Description of the transition risk and opportunity

REPORT STRATEGIC

  1. Changing customer and consumer demand for our products
  2. Increasing demand for low-carbon manufacturing and recycling of key materials
  3. Increasing carbon taxation
  4. Increasing stakeholder expectations of corporate climate policy and performance

Increasing awareness of the impacts of a warming climate is changing consumer habits, leading to lower demand for some of our existing products and higher demand for new products. We need to carefully match supply as demand changes, and to identify new markets for our solutions catalysing the net zero transition for our customers to avoid negative financial impacts and realise opportunities for our revenue, cash flow and profitability.

Customers and policy makers are increasingly interested in the carbon footprint of our products, demanding a lower carbon footprint and specifying recycled content for key raw materials.

We need to make the right capital investment decisions to transition our operations to net-zero emissions in line with market demand, and use low-carbon raw materials to increase our competitive advantage and avoid the potential issue of stranded assets.

An increasing number of governments are introducing or considering introducing a carbon tax or trading schemes. This could raise the costs of energy, water and waste both for us and our suppliers, and also the cost of transport and logistics, which may be affected by international border carbon tax mechanisms. If this results in higher prices for our products, our customers may be less willing to buy them.

Market expectations are rising and corporate policy / performance regarding climate-related targets are under increasing scrutiny. If we do not meet our stated net-zero commitments and strategy, or our commitments do not keep pace with societal / market expectations of net zero, we could suffer from a loss of stakeholder and / or shareholder confidence, loss of reputation, shareholder action and climate-related litigation. Conversely, if we outperform our competitors in how we adapt to climate change, we could attract new shareholders and customers.

We have used our climate scenarios to evaluate these risks and opportunities in the short (0-3 years), medium (3-10 years) and long term (10+ years), in line with our usual business planning timescales. We believe the pragmatic evolution climate scenario is most likely to occur, so have used it as the base case for assessing our transition impacts, and the other two scenarios to stress test the sensitivity and resilience of our business plans.

Climate

Primary driver

Opportunities

Risks

Management of impacts

Financial impacts

KPIs to monitor impacts

transition impact

of impact

(with time horizons)

(with time horizons)

(after management)

1. Changing

Regulation

customer

Emissions standards for

and consumer

vehicles

Emissions standards for

demand

energy production

for products

Requirements for use

of bio-based feedstocks

Markets

  • Shifts in consumer preferences
  • Uncertainty over which technologies will prevail.

Sustained sales of existing products for internal combustion engine vehicles in the short and medium term, as tighter emissions standards demand state-of-the-art technology for exhaust pipe catalysts.

Opportunities for new products in the medium and long term:

  • Lower carbon energy sources (blue and green hydrogen).
  • Hydrogen-poweredvehicles (fuel cells) and sustainable aviation fuels.
  • Low-carbonsolutions for the chemicals industry.

Without adaptation of our portfolio, there is a long-term risk that we may not have a financially viable future business model and / or capability as society transitions away from fossil fuels.

  • Reduced demand for existing autocatalyst products for light duty vehicles
    (long term).
  • Uncertainty in the rate of market evolution from existing to new technology options which could affect profitability (medium / long term).
  • Ability to scale up rapidly to manufacture new products for new markets
    (short / medium term).

We focus on managing our existing

Growth

Progress towards our 2030

businesses effectively, while pivoting

Accelerating profit growth, with low

sustainability targets for products

away from fossil fuels-based industries to

double-digit growth rate towards

and services:

ones based on sustainable chemicals,

end of decade1 and

Sales, R&D and revenues

fuels and clean energy as markets develop.

c. 40% of profit coming from

aligned with SDG7 and SDG13.

We are closely monitoring the

businesses related to the net zero

Tonnes of GHGs avoided by

changing market environment,

transition by 2031/32. Clean Air

customers using our products.

updating our climate scenarios at

remain a cash generative business of

Economic activity aligned with EU

least once a year to inform our

scale, with sales2 c. £2bn in base case

strategic decisions.

by end of decade.

taxonomy regulation - climate

delegate act.

We keep investing in innovation to

Costs

make sure we have products that

Market evolution forecasts

c. £300m of cumulative capital

differentiate us in all our markets.

Automotive emissions

expenditures dedicated to businesses

For our maturing businesses, we

related to the net zero transition over

regulation changes

have a plan to reduce our cost base

Market forecasts for vehicle

2022/23-2024/25.£100m-£200m

to improve efficiency and cash flow

fixed cost savings from Clean Air

sales by type and region

For some of our growth businesses,

by 2030/31.

Governments' investments in

we plan to invest in production assets

1. At constant 2021/22 average PGM

hydrogen infrastructure

and to make sure our capital projects

prices and FX rates

Evolution of the use of

are implemented effectively through

2. Sales excluding precious metals

sustainable aviation fuels

our capital expenditure control

programme.

Johnson Matthey | Annual Report and Accounts 2022

63

Taskforce for Climate-related Financial Disclosures continued

Climate

Primary driver of impact

Opportunities

Risks

Management of impacts

Financial impacts

KPIs to monitor impacts

transition impact

(with time horizons)

(with time horizons)

(after management)

2. Increased demand for low-carbon manufacturing and recycling

Markets

  • Shift in consumer preferences towards products with a low-carbon footprint

Regulation

  • Emerging rules on recycled content of consumer goods and the need for companies to declare the carbon footprint of their products

As the world's largest recycler of secondary PGMs, we could benefit from the increased demand for goods with low-carbon and / or recycled critical raw material content (short / medium term).

Opportunity to expand our knowledge of metal recycling into new markets, particularly lithium, nickel and cobalt, which are required by the electric vehicle industry to meet the EU's directive on battery recycling

(medium / long term).

Commercial advantage if we adapt our manufacturing plants to low carbon operation faster than our competitors.

Medium-term risk that we cannot transition our operations for net zero at the correct pace to meet customer demand of low carbon products.

  • Loss of customers and failure to attract new customers (medium / long term).
  • Greater capital required to transition our assets to low-carbon manufacturing (medium / long term).
  • Inability to access the alternative renewable energy sources needed to decarbonise our operations (medium / long term).
  • We have set challenging recycling, and net zero targets to decarbonise our manufacturing operations
  • We have established a cross-functional Sustainability Council to drive progress towards these targets
  • In 2022, we will introduce an internal carbon price for our capital investment decisions to help us make the right choices for decarbonising our operations for net zero in the long term
  • We are developing
    a roadmap to net zero by 2040, which we plan to publish in 2023

Work is under way to quantify the financial impact of our commitment to net zero manufacturing by 2040.

Progress towards our 2030 sustainability targets for products and services:

  • % recycled PGM content in our products.
  • % reduction in Scope 1, 2 and 3 GHG emissions % products with a cradle-to-gate LCA available to our customers
  • Number of customer requests for low-carbon and recycled content in products.

3. Increasing

Regulation

carbon taxation

Carbon pricing

mechanisms

Increasing regulations and the introduction of carbon taxes will accelerate growth in our new target markets - sustainable chemicals, sustainable fuels and clean energy

(medium term).

Many jurisdictions are implementing carbon pricing mechanisms with rates increasing over time.

  • Increased costs to us and our suppliers of goods and logistics due to carbon taxation on raw materials and fossil-fuel derived energy (medium term).
  • Loss of competitive advantage due to the increasing
    price of our products (medium / long term).
  • Reputational damage if we do not transition fast enough to cleaner energy solutions in our operations (medium / long term).

We are tracking carbon price risks through:

  • An annual exercise with the help of outside experts to forecast the effect of long-term carbon prices on our portfolio.
  • Working to embed carbon prices within our three- and ten-year planning cycles going forwards.
  • In 2022, we will introduce an internal carbon price for our capital investment decisions to help us make the right choices for decarbonising our operations.

Work under way to quantify financial impacts to our portfolio.

Potential exposure to carbon taxation in 2030 by Scope 1, 2 and 3

64

Johnson Matthey | Annual Report and Accounts 2022

This is an excerpt of the original content. To continue reading it, access the original document here.

Disclaimer

Johnson Matthey plc published this content on 15 June 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 15 June 2022 10:12:08 UTC.


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