Strategic Report Johnson Matthey: the catalyst for a sustainable planet Have you ever wondered how our planet can sustain modern, healthy lifestyles for a growing population? Have you thought about how the way we travel, heat our homes and use natural resources will have to change to meet the ambitious net zero carbon emissions targets that so many governments and companies are making? Or how we might create a fairer society for all in a post-COVID-19 world – a world in which businesses use their skills and scale to ‘build back better’? We have. Johnson Matthey’s vision is for a world that’s cleaner and healthier, today and for future generations. And so we are making it our business to help address the four essential transitions the world needs for a sustainable future: transport, energy, decarbonising chemicals production and a circular economy. How? By drawing on our deep expertise in the transformative power of metals chemistry. Expertise that we’ve developed and used for more than 200 years to address some of society’s biggest challenges. And it’s more important now than ever, as we help our customers and our own business adapt processes and products to reach the sustainability goals that our planet and society are depending on. Johnson Matthey / Annual Report and Accounts 2021 1 Strategic Report The Strategic Report from page 1 to page 97 was approved by the board on 27th May 2021 and is signed on its behalf by: Robert MacLeod Chief Executive 2 Johnson Matthey / Annual Report and Accounts 2021 Contents 1 Johnson Matthey: the catalyst for Review of the year a sustainable planet 34 Chief Financial Officer’s introduction 14 Our global footprint 36 Financial review 15 2020/21 in numbers 40 Going concern and treasury policies About the business 42 Sector reviews 16 Chair’s statement 42 Clean Air 18 Chief Executive’s statement 46 Efficient Natural Resources 22 Our business model 50 Health 24 Our strategy 54 New Markets 26 Key performance indicators 58 Science and innovation 60 Sustainable business 86 Taskforce on Climate-related Financial Disclosures 88 Risks and uncertainties 97 Viability Case study Cleaning the air we breathe According to the World Health Organisation, 4.2 million people die every year as a result of exposure to outdoor air pollution, while 91% of the world’s population lives in places where air quality exceeds safe limits. We’ve been at the forefront of the fight against air pollution for decades, producing our first commercial autocatalyst in the 1970s. Controls on how much a new car can emit have been tightening ever since. And they continue to get tighter. Both in the EU and here in China, for example, are anticipating new emissions standard soon, bringing in the strictest regulations for vehicle emissions yet. Our R&D teams are already developing the next generation of catalysts that will help our customers meet these regulations. It’s exciting work. And it’s important since the internal combustion engine isn’t going to disappear overnight. This is particularly true for large, heavy duty vehicles like trucks, which are harder to decarbonise. And with the number of people living in cities expected to keep rising, catalysts to control the emissions from our vehicles are more vital than ever. It’s great to know that one in every three new cars on the road is fitted with a JM catalyst, working constantly to clean the air we breathe. Zhou Shang Scientist 3 Strategic Report Technologies to drive down transport emissions Our global transport system is going through its biggest transition in decades. Climate change and increasingly stringent air quality regulations are pushing the automotive industry to build cleaner engines and use new fuel sources, such as batteries and hydrogen fuel cells. That’s where we come in. Cleaner air for all Today, our emission control technologies are used in hundreds of millions of cars, buses and trucks around the world, helping to remove millions of tonnes of harmful pollutants, like nitrogen oxides and particulates, produced by gasoline and diesel engines. The end result is fewer harmful emissions from vehicles and cleaner air for everyone. Despite a growing number of government deadlines to phase out petrol and diesel vehicles, we’re not going to see the traditional combustion engine disappear any time soon. So, we’ll continue to innovate and improve these technologies to keep people moving in the cleanest way possible while the transition towards battery and fuel cell vehicles takes place. New technology to enable the transition Our technology is central to this transition. Because we understand the part metals play in complex reactions and electrochemistry inside batteries, we’re designing the next generation of battery cathode materials that will help drive the mass adoption of electric vehicles (EVs) in the next decade. These nickel-rich, advanced technologies – that we call eLNO® – can help increase the amount of energy a battery holds allowing a car to travel further on a single charge. And because every customer’s needs and challenges are unique to them, we can tailor our cathode material products to their precise technical requirements. Creating sustainable value chains But we also have a responsibility to use our planet’s resources wisely and lower the impact of our own operations. That’s why the new battery materials factories we’re building in Poland and Finland will be powered by electricity from renewable sources as soon as they start production, and we’ve committed to make the production of our eLNO products climate neutral by 2035. We’ve also signed up to the Global Battery Alliance’s ten guiding principles to help establish a sustainable battery value chain. Batteries are just one of the ways in which we can power a more sustainable transport network, though. For decades we’ve been using our knowledge of metals chemistry and electrochemistry to design and make the specialist catalyst coated membranes used inside fuel cells. Our very first fuel cell technologies even helped power the US space programme in the 1960s. Today, our focus is firmly back on Earth and our fuel cell technologies help vehicles that are less suited to batteries, such as long range trucks, and high use vehicles like buses, fork-lift trucks and some cars, run on the clean power of hydrogen. There are many scientific, financial and policy challenges to overcome in both battery and fuel cell technology. But we’re working with our customers today to tackle those challenges and help make the transport revolution a reality. 4 Johnson Matthey / Annual Report and Accounts 2021 Our impact Our market 1 in 3 ~1,800kT new cars carries one of our demand for automotive high emission control catalysts energy cathode materials expected by 2030¹ Strategic Report 2.5m tonnes pollutants prevented 5% from getting into the air of world’s trucks will be by our catalysts every year powered by fuel cells by 20302 211k tonnes 1 IHS and Johnson Matthey estimates. 2 LMC, KGP and Johnson Matthey CO2 equivalent avoided by our assumptions which equate to battery materials and fuel cell ~0.4 million trucks. technology in 2020/21 Case study Decarbonising heavy duty transport Heavy duty transport is essential for keeping goods and people moving. But it’s also a major source of carbon emissions. In the EU alone, lorries, buses and coaches represent around one quarter of all road transport emissions. Fuel cells have the potential to help decarbonise this part of our transport system. They’re ideal for heavy duty or high usage applications, such as trucks and buses, because of their longer range, low relative weight and fast refuelling times compared to battery alternatives. They use clean or low carbon fuels, such as hydrogen, to generate power without producing harmful emissions, since water is the only byproduct. This is a growing market, with 5% of trucks globally expected to be powered by fuel cells by 2030, rising to one third by 2040. We’re now scaling up our business to meet demand. For example, we’ve built a new facility in Shanghai, China, where the market for our catalyst coated membranes is expected to grow to more than £1 billion a year by 2030. Our broader expansion programme is now complete to double manufacturing capacity for products that will enable 2GW a year of power generation from fuel cells. We also announced a multi-million pound deal and joint development agreement with SFC Energy, a global leader in hydrogen and direct methanol fuel cells, to supply at least 400,000 membrane electrode assemblies. Johnson Matthey / Annual Report and Accounts 2021 5 Strategic Report Commercialising low carbon power to transform our energy systems If the transport transition is all about moving people and goods while lowering emissions, the energy transition is about finding sustainable ways to power our world. Hydrogen has a huge role to play – in fact, reaching net zero is not possible without it. As well as being used in fuel cells for vehicles and as a method to store and move power, hydrogen can replace natural gas as a fuel source for big industrial turbines. That’s why more and more industries are looking at hydrogen technologies to help them decarbonise. Hydrogen – the wonder element And no wonder. When burned as a fuel, hydrogen’s only byproduct is water. It’s the most abundant element in the universe, but it only exists in compounds, so, to be useful, it must be separated from other elements – think of the H in H2O (water) or CH4 (methane). So how that hydrogen is made – and the impact the process has on the planet – matters too.