The BHP Group Ltd (ASX: BHP) share price has performed strongly over the past four years, up 114%. Plus all the dividends.
But these days any business that is producing and exporting coal seems to be coming under a lot of public attention.
Coal is not BHP's biggest division by a long shot, it's iron ore that generates the king's share of earnings for BHP. But coal generated US$3.4 billion of underlying earnings before interest and tax (EBIT) in FY19, which was more than copper and petroleum, although copper may reclaim its second place position in FY20.
The reason why coal could be so influential for BHP's 2020s share price is due to climate change concerns.
Global demand for coal could fall from customers, and investors – which decide the share price – may exclude buying BHP shares because of coal for ESG reasons. Imagine if BHP divested its coal division, there could be a large increase of aggregate demand for BHP shares from investors which would boost the share price.
But if I were BHP management I wouldn't sell the coal division today, I'd want to get a good price for the coal business. Demand from Asia for coal from countries like India is expected to rise considerably over the next 10 years as energy demand rises, which should at least support the coal price.
But compared to most other coal companies, BHP is taking more environmental action.
The company has said that it accepts its responsibility to take action on global warming and reduce its greenhouse gas emissions. One of the things it's doing is to do new climate portfolio analysis in 2020 to outline plans to mitigate and adapt to global warming.
It has launched a five-year, US$400 million climate investment program to assist delivery of its public targets for its own operational emissions (scope 1 and 2) and to work with others across its supply chain to address scope 3 emissions that come from the transport, processing and use of its products.
The scope 3 goals will be presented in 2020 and will be designed to measure BHP's impact and align with the goals of the Paris Agreement. BHP can't force customers to reduce emissions, but it can work with them to reduce emissions, such as developing carbon capture utilisation and storage in industrial applications such as steel.
Foolish takeaway
BHP is currently trading at 15x FY21's estimated earnings. Iron ore is currently at a strong point in the cycle, so I wouldn't want to buy shares right now – cycles normally change.
