More than half the world’s largest 250 companies now acknowledge climate change as a financial risk to their business in their corporate reporting, according to a new KPMG International survey, Towards net zero.
Companies here in Ireland are also coming under increasing pressure to disclose their exposure to climate-related risks and explain their strategies to ensure resilience and competitive advantage in a net zero world.
KPMG’s new study aims to help by proposing a set of quality criteria for climate-related disclosures and analysing how the world’s 250 largest companies measure up against these criteria.
Readers of this study will learn:
The results of this research enable any company to assess its own reporting against the performance of this global leadership group.
KPMG has developed 12 quality criteria for good corporate reporting on climate risk and net zero transition.
The criteria are based on the insights of climate disclosure experts at KPMG firms, combined with key elements of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, other reporting frameworks and evolving best practice.
KPMG professionals used these criteria to analyse and compare the maturity of climate risk and net zero reporting by the world's 250 largest companies.
Click on the wheel to discover how the world's largest companies perform for each of the 12 quality criteria.
Reporting should confirm the company has assigned board responsibility for overseeing the company’s response to climate change
This demonstrates to investors and other stakeholders that the company is serious about understanding and addressing climate risk. Companies may choose to make the board as a whole responsible for the company’s climate response, supported by a sub-committee, or may name a specific board member with responsibility.
The Chair or CEO’s message in the annual financial or integrated report should mention climate change and/or climate-related risks
This signals to the company’s investors that the organisation’s leadership acknowledges climate change as a material risk for the business. It also implies that the company’s action on climate change is being driven from the top.
Financial (or integrated) reporting should clearly acknowledge climate change as a potential financial risk to the company
It is now widely acknowledged that climate change poses a potential financial risk to companies in all industry sectors. All companies should therefore clearly acknowledge in their financial reporting that climate change is potentially a financial risk to the business. They should also disclose the materiality of that risk
A clear section on climate risk should be included in the company’s annual financial or integrated report and/or the company should publish a stand-alone climate risk/TCFD report
This demonstrates that the company is attempting to measure, manage, and disclose its climate-related risks and opportunities. It may give investors and other stakeholders confidence that the company is actively working to increase its resilience to the impacts of climate change.
Reporting should cover both the physical and transitional risks the company faces from climate change and net zero transition
Physical risks result from the changing climate, e.g. more frequent and severe storms, wildfires and rising sea levels. Transitional risks arise from the global shift to a net zero economy, e.g. new regulation and changing market dynamics. Corporate reporting therefore needs to cover both types of climate-related risk in order to be complete and robust.
Reporting should include scenario analysis of climate-related risks
Scenario analysis is an effective way to understand how climate-related risks might impact the business and to plan appropriate responses. It helps companies surmise how risks might evolve under different climate, economic and regulatory conditions. It also provides investors and other stakeholders with a forward-looking view on the organisation’s potential vulnerability or resilience to climate-related risks and is recommended by the TCFD.
Reporting should include risk analysis in line with different global warming scenarios (ideally two or more) and a clear timeline
Despite the best efforts of climate scientists, no one knows exactly how much the world will warm by and how quickly or how rapidly the world will transition to net zero. It is therefore important for companies to report on potential climate risks under a range of possible global warming scenarios. KPMG professionals typically advise clients to conduct scenario analysis under a minimum of two warming scenarios such as 1.5˚C and 2˚C (which are considered low warming scenarios and are the targets of the Paris Climate Agreement), 3˚C (considered a moderate warming scenario) and 4˚C (considered a high warming scenario). Additionally, investors, lenders and insurers need to understand the climate risk profile of companies in the short, medium and long terms. It is therefore important that corporate reporting clearly defines the timelines used for climate risk scenario analyses and explains why those timelines were selected.
Scenario analysis should be aligned with recognised climate scenarios developed by reputable sources
Financial stakeholders need to know that the scenarios used by companies for climate-related risk assessment are robust and reliable. KPMG professionals therefore recommend that companies use recognised and respected scenarios developed by credible sources such as the Intergovernmental Panel on Climate Change (IPCC), the International Energy Agency (IEA) or the International Renewable Energy Association (IRENA). Using a combination of different scenarios from reputable sources adds depth to analysis.
Reporting should state the company’s ambition to achieve net zero carbon emissions at or before the IPCC deadline of 2050 OR should clearly explain another target such as science-based targets
Setting carbon reduction targets aligned with global decarbonisation goals shows investors that the company is in step with the global shift to a net zero economy. For example, a company may choose a deadline of 2050 or sooner to achieve net zero emissions. This is in line with what the IPCC says is necessary to limit global warming to a relatively safe level (1.5˚C). Alternatively, companies might set a “science-based” carbon reduction target in line with what is needed to achieve the goals of the Paris Agreement on Climate Change. Over 1,000 companies have adopted science-based targets to date.
Reporting should describe the company’s strategy to achieve its decarbonisation targets
A company’s reporting needs to explain how it will achieve its carbon reduction targets by describing the company’s decarbonization strategy. A clear strategy on carbon reduction also helps the company by enabling all divisions and functions within the business to understand and deliver their own contributions to the group target.
Reporting should clearly communicate whether the company is on track to meet its decarbonisation targets
A company can maintain or increase investor confidence if its reporting either confirms it is on track to achieve its carbon reduction targets or is open about any dilemmas and challenges that have hindered progress. A lack of transparency can have the opposite effect by diminishing investor confidence.
Reporting should communicate that the company uses an internal carbon price or ‘shadow price’
Investors may view the use of an internal carbon price as a sign that a company is well prepared to manage climate-related risks and to navigate net zero transition. An internal carbon price can also signal that management understands the organisation’s exposure to potential increases in external carbon prices applied by governments and is factoring it into future investment decisions. The use of an internal carbon price is especially important in high carbon sectors such as oil and gas; metals, minerals and mining; and electric utilities which are particularly exposed to carbon reduction policies and external carbon pricing.