Norsk Hydro CFO on going carbon neutral

Norsk Hydro is not like other metal producers. By next year, it expects to become the first major carbon- metals and mining company in the world with a lifecycle carbon footprint at zero.

It will achieve this target because most if its power source is supplied by hydro-electricity in its home country of Norway, but also as a result of its push to a product mix focused on sustainability.

In an age when companies are likely to become forced to pay more for carbon impacts, in the post-COP21 environment, Norsk Hydro looks set to gain significant competitive advantage. “We use CO2-free power, giving us a significantly reduced environmental footprint, whereas our competitors generally have to do that with coal-based power,” says Hydro CFO Eivind Kallevik.

He says he is comfortable that Hydro will meet the target of becoming carbon neutral next year, a hugely important milestone for Norway’s sixth largest company which has set itself the challenge of becoming “better, bigger and greener”.

That’s no mean feat given that producing metal is a dirty, costly business. Much of the ore used to create it has to be excavated, usually by strip mining. The smelting process requires prodigious amounts of energy and the end-product is expensive to transport.

But in an age where companies are having to account for every impact they make on the planet and society, with the finance leader responsible for the data that explains this story, Kallevik is in the spotlight. But it’s a responsibility he relishes, he says.

Building competitive advantage

Hydro’s ambitions to become one of the biggest players in aluminium began more than a decade ago, when its fertiliser business was spun off as a listed company. An oil and gas unit was merged with energy giant Statoil before it too was spun off, leaving an aluminium business, with bauxite [aluminium ore] mines and a refinery in Brazil.

The Norwegian government owns a third of the business, although this has little bearing on how the company is managed, stresses Kallevik, who started his career as a corporate banker with Christiania Bank in Oslo and New York.

Kallevik is a 21- year veteran of Hydro, who spent two years working in the group’s Brazilian operation before being appointed to his current job in 2013. He says this experience has proved invaluable in being able to take a key role in shaping the future of one of Norway’s most prominent companies.

“That experience is clearly valuable from many perspectives, but I think the most valuable part is the competence that you build over time, having worked in many different parts of the value chain of Hydro. It means developing a good business understanding of the different parts of the business we operate in. When you can couple different sets of competencies, that’s when it becomes valuable.

He says these elements come to play when communicating with senior members of the board or stakeholders- for example the halving of production since February at the Alunorte alumina refinery in Brazil, due to environmental concerns.

The Alunorte refinery slowdown, along with increased raw material costs resulted in Hydro’s underlying earnings before financial items and tax decrease to NOK534m (£47m) in the fourth quarter, down from NOK3.55bn in the same quarter last year. Hydro’s underlying EBIT for 2018 was NOK9.07bn, down from NOK11.2bn in 2017

“One of the benefits is that gives you a certain degree of confidence to talk about the experience you have had, whether they are operational or functional. It gives you a certain understanding of what certain courses are. It gives you a different insight, when you have a broad-based background,” he says.

On the reduction of the group’s carbon footprint, two of Hydro’s main products are designed to meet customer expectations of being more environmentally friendly. The 4.0 range, aimed at carmakers, has a maximum of 4 kilos of C02 per kilo of aluminium, while the 75R product, focused on the building industry, has 75% post-consumer metal-recycling.

But are they delivering competitive advantage? Kallevik says there should be C02 pricing on all energy-intensive products, but concedes the process will take time because of the political challenges to addressing the issue on a global scale: “I think we’re starting to see more traction on this as a topic. I think you’re starting to see much more awareness on this, also from a political perspective, that you don’t shut down energy intensive businesses in one geography or political region, to only import other materials that have a much higher CO2 footprint.

Finance plays a key role in both monitoring the data on sustainability issues and developing KPIs for developing sustainability, regarding climate change but also environmental footprint, water usage and recycling of waste. “We have several targets that need to come together,” he says.

Those are reflected, both on the CEO KPI chart, and then its broken down in further detail in the various business areas. “It’s important because you need to take the overall strategic ambitions and break those down into activities that people understand, and activities and results that can be measured, so that you can achieve an overall strategic target,” he says.

“One of the things we worked quite a bit on was creating the understanding that business and sustainability goes hand in hand, that the business side doesn’t lose out on profitability and sustainability creates value,” adds Kallevik. “For example, through the recycling of post-consumer metal, we can reduce the cost base and improve the environmental footprint of the product that we use, and we gain access to markets we wouldn’t already have, so this is not one or the other but both in combination.”

Explaining the vision

Kallevik says its vitally important the group’s aims to deliver profitability in a sustainable way is communicated effectively across the group. “If sustainability, whether on climate, environmental or CSR, translates into additional business or increased profitability, that increases engagement in the organisation.

“For me it’s important that it’s not something that just stays at the top, but something that needs to be accepted and understood throughout the organisation. We also make measurable targets for the activities that all of our 35,000 people work with,” Kallevik explains.

New investment proposals must be set with health and safety, climate and environmental perspective, and are considered how they fit with overall strategy, from a profitability and sustainability perspective. For investors and wider stakeholders- that’s an increasingly important message.

“When I started this job about six years ago, we got sporadic questions around the ESG issues. It’s now a fairly regular topic in investor meetings with more interaction and feedback on this topic, in the investor communities, with more NGOs and other types of stakeholders compared to what we’d seen in the past,” he adds.

“It’s hard to say whether we get a disproportionate level of interest, but what we see is if investors are thinking of investing in the metals and mining industry, we believe we are in a very good position to attract that capital, when it comes to the C02 or sustainability strategy that we have,” he adds.

There is certainly plenty of demand for aluminium, as it is not only used in the early cycle of countries’ economic development but is also a late cycle commodity. But geopolitical uncertainty, be it in the shape of possible trade wars, Brexit, sanctions against Russia, is a concern. “It doesn’t necessarily translate into the day after, but has follow-on consequences in the years to come,” stresses Kallevik.

So far, the tariffs introduced by the US haven’t had negative consequences for Hydro, he says. “The paradox with that is immediately when the 10% tariff was introduced in the US, it also saw the premiums of our metals going up at exactly the same amount, so it’s the same as the period before the tariff increase, so this is actually just a cost that has been passed on to the consumer.

“But I’m more concerned about the follow-on consequences, because if that has a knock-on effect on consumers and GDP growth in the US, is that a negative consequence? Yes- but we haven’t seen that to date, says Kallevik.

Hydro is well placed to meet the challenges thrown up by the uncertain global environment, says Kallevik. “We are sometimes perceived as slow when it comes to decision-making. But we are a company that does things in a proper way with a long-term horizon, and that is fundamental to a company that has been around for 113 years, and plans to be here for another 100 years,” he adds.

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