Understanding the relationship between ESG, Climate Risk and Decarbonisation
  • Bridget Beals, Partner |
3 min read
esg-venn-2

CSR strategy driving financial performance and resilience

Companies can no longer ignore the focus of consumers, shareholders, and investors on the quality of their CSR (Corporate Social Responsibility) related behaviours. From reporting to embedding CSR-led values and behaviours in their culture, companies that refuse or are slow to invest in positive CSR action risk reputational damage, loss of brand loyalty, talent leakage, and reduced financing sources. The sum of these effects is a real impact to their bottom line and resilience.

Recent conversations with our clients often see climate risk and decarbonisation considered solely as part of wider CSR preparations. Our Venn diagram illustrates our belief that CSR, climate risk and decarbonisation should be considered within an over-arching strategy but managed as separate issues with distinct strategic outcomes; this approach also acknowledges the importance of their inter-relationship. 

Managing climate risk is a Board level responsibility that can challenge strategic thinking

The assumption is often made that management of climate risk should be sustainability led and focused on a business’s impact on the environment, which dovetails well with an CSR brief. However, we support the increasingly popular view that climate risk is best viewed from an ‘outwards in’ perspective. Companies should aim to identify and quantify the impact of climate-related physical and transition risks and opportunities, taking into account macroeconomic inputs, on their business model, assets, and supply chain. This phase should include drilling down to second and third order effects; for example, considering the impact of extreme weather events leading to broader regional divestment and implications on ongoing insurability of assets, which could be a risk in the short term. It is this depth of analysis which will challenge assumptions, inform solid strategic decision making with minimum 10 year planning horizons and allow businesses to pivot their geographical footprint, market focus and product offering. It is also the cross functional but, ultimately, financial and strategic implications of these risks that point the responsibility for their management at Board level.

Decarbonisation activity supports your CSR narrative and drives real business benefit

Decarbonisation fits the CSR brief more conveniently, but we believe should still be managed separately from CSR as a strategic opportunity. When executed through a strategic lens, decarbonisation initiatives can deliver tangible benefits to a business’ bottom line in several ways. Cost reduction can be accelerated through Corporate PPA (Power Purchase Agreements) which secure lower renewable energy costs, process innovation leading to efficiency improvements, and building energy management and avoided carbon costs. Securing growth is realised through the development of first mover zero-carbon products and services, encouraging brand loyalty through environmental credentials, releasing capital by divesting unsustainable assets. Furthermore, decarbonisation offers the opportunity to build resilience into a business by engaging the supply chain on sustainability to reduce exposure to shocks, pre-empt future regulatory demands and, importantly, improve talent acquisition and retention through reputational benefits. Strong decarbonisation targets are increasingly expected by internal and external stakeholders and taking decisive action on decarbonisation supports the broader narrative on climate risk management.

CSR, climate risk and decarbonisation offers immediate and long term opportunity

CSR, climate risk and decarbonisation offer distinct strategic opportunities when considered on their separate merits. As well as future proofing businesses against climate related shocks, strands of these benefits coalesce to form a broader narrative that can be leveraged to improve reputation, increase market share, and retain talent. KPMG’s CSR practice respects that many of our clients will want to tackle these three topics as a whole, but also encourages them to consider the clear benefits of dedicating specialist climate risk and decarbonisation teams to unlock the potential of each one.

Please get in touch with us if you want to explore how your business can take advantage of the opportunities offered by effective climate risk management and a clear decarbonisation strategy.