Major investors telling Rio to ‘not go so hard’ on carbon but focus on returns, says chairman

Rio Tinto chairman Dominic Barton says he is seeing a shift in investor focus from decarbonisation to shareholder returns.

Rio Tinto faces a growing shareholder push to soften its focus on decarbonising its operations in favour of returns, according to its chairman, Dominic Barton.

Mr Barton became the Rio chairman in May, and told a KPMG podcast before Christmas he had already noticed a shift in focus from some of Rio’s institutional shareholders, with even previously strong supporters of the company’s push to cut its carbon emissions shifting their focus to cash returns to shareholders.

Rio accelerated its decarbonisation plans in October 2021, announcing it planned to spend $US7.5bn ($11bn) on renewable energy and other projects to try to halve its scope 1 and 2 emissions by the end of the decade, while maintaining its goal of reaching net zero emissions by 2050.

The company fleshed out those intentions at its annual investor day in November, laying out plans to spend up to an extra $US600m by 2026 to build solar, wind and battery generation to power its Pilbara iron ore operations, on top of a previous $US2.1bn decarbonisation spend in the division, and to buy renewable energy plans for those of its assets connected to the grid.

But Mr Barton told KPMG’s UK chair, Bina Mehta, that major investors were asking how Rio could maintain its shareholder returns in light of that spending, saying even some strong supporters of its decarbonisation plans were asking questions about Rio’s spending priorities.

“Rio Tinto wants to be net zero by 2050, and we’re going to cut our carbon emissions by 50 per cent in 2030. That takes a lot of capital,” he said. “So investors are saying we want you to do that. But we also want the returns.”

Rio Tinto chairman Dominic Barton. Picture: Aaron Francis

Geopolitical uncertainty has thrown a shadow over a broader post-pandemic recovery, and rising inflation has hit major economies across the world. With central banks lifting interest rates to combat inflation, investment returns are likely to be lower in the coming year after a long period of strong stock performances.

Amid the wreckage of technology stocks and poor returns elsewhere on the market, resource companies made up eight of the top 10 performing stocks on the ASX 200 in 2022, on a total return basis, led by coal miners Whitehaven Coal and New Hope Corporation. But with doubt hanging over China’s short-term economic recovery due to the spread of Covid-19, analysts are divided over whether strong commodity pricing will continue into 2023.

“One thing I’m finding interesting – even though I think I’ve been in this role for about five months now, at the beginning it was all ‘That’s great, focus on decarbonising’,” Mr Barton said.

“Now there’s a little more, ‘You know what, maybe you don’t need to go as hard on that one’, and the (shareholder) return side is picking up even from some investors who’ve been talking about being strong proponents of the other side.”

Rio Tinto chief executive Jakob Stausholm.

But Mr Barton was clear that he was not foreshadowing any change in Rio’s commitment to its decarbonisation plans, saying it was an investment for the long- term benefit of both the company and its shareholders.

“We’re a long-term company, we are thinking 20 to 30 years out. It’s the right thing for us to be investing significantly in carbon reduction. It makes economic sense,” he said. “Even if we may not have a parade on the street from investors that are happy to do it now, I know they’re going to be happy in 10 to 15 years, I am 100 per cent convinced of that.”

Mr Barton’s comments mirror those of Rio chief executive Jakob Stausholm and chief financial officer Peter Cunningham at the November investor seminar.

At the time Rio also outlined plans to spend up to $US3bn a year on investing in future growth, and analysts questioned how the company planned to pay for both its decarbonisation and growth spending while maintaining its record of returning about 60 per cent of underlying earnings to shareholders over the last six years.

At the time, Mr Stausholm said the company expected to be able to maintain its shareholder returns despite the spending.

“I hope you see this was the key thing … is that we are not wasting any shareholders’ money neither on growth investments nor on decarbonisation,” he told analysts and investors.

Mr Cunningham said Rio needed to invest now to de-risk its assets for the future. “We’re progressively moving through the projects curve, if you like, to really make sure we’re taking those opportunities that present attractive economics now,” he said.

Rio shares closed up $1.91, or 1.7 per cent, to $117.34.

Originally published as Major investors telling Rio to ‘not go so hard’ on carbon but focus on returns, says chairman