The pressure is on for global businesses in every sector to increase their efforts to reduce carbon footprints as today’s shareholders, investors, regulators and consumers focus on the need to accelerate the journey to a net-zero global economy.
While concern for the planet’s health is not new, businesses are enduring a world of heightened scrutiny and expectations that are prompting them to recognize how climate risk is now a primary business issue that’s rapidly climbing to the top of boardroom agendas. Today’s reality goes beyond climate and ESG initiatives and what companies proclaim they are doing to reduce emissions.
The focus now is on how climate change and ensuing climate risks can seriously undermine financial and operational performance. Simply put, climate risk is now financial risk. At the same time, climate-related performance has also become closely linked to financial performance: not only do companies have an imperative to understand and manage climate risk, they are also expected to report more precisely on their climate impact. The goal, then, is to combine both an outside-in perspective on risk with an inside-out perspective on emissions-reduction results.
The traditional boundaries separating financial and environmental business agendas are thus blurring quickly. Forward-looking businesses are increasingly looking to understand and manage the inseparable link between environmental and financial performance via innovative carbon-management strategies that rely on blockchain, artificial intelligence and more. These front-runners are also wisely acknowledging that a heightened focus on accurately assessing their environmental impact will serve to protect their reputation, keep them ahead of emerging regulations, and help them respond to future opportunities and risks.
Forward-looking businesses are also working more closely than ever with their energy suppliers and other supply chain partners to implement and align new capabilities and drive the kind of progress that is increasingly being expected. The road to net-zero emissions includes the need for every business’s upstream and downstream suppliers to decarbonize as well. And this is no easy task for giant global organizations that are typically engaging with thousands of suppliers. Along the way, managing the cost of decarbonization will also be a key factor for everyone. Environmental initiatives can save money but other solutions such as buying carbon offsets cost money, reinforcing the need to keep developing solutions that are cost effective and sustainable for the long term.
The key to progress as we see it? There is no denying the critical need for today’s business leaders to calculate carbon footprint more accurately, document the impact of their carbon-management strategies, and generate informed, trusted, data-based decisions that meet the rising expectations of regulators, investors and stakeholders.
The focus now is on how climate change and ensuing climate risks can seriously undermine financial and operational performance. Simply put, climate risk is now financial risk.
No time to lose as climate risk and financial risk merge
KPMG's view is that there is no time to lose on this global transition journey. Worth noting is the fact that the World Economic Forum’s recently published 2021 Global Risks Report warns that climate change continues to be “a catastrophic risk” and “existential threat to humanity.” The report states that the top three global risks of the next decade are extreme weather, climate action failure and human-led environmental damage.
Meanwhile, according to the KPMG 2020 CEO Outlook COVID-19 Special Edition survey report, 71 percent of leaders said they want to lock-in climate change gains made as a result of the pandemic, with 65 percent also noting that managing climate-related risks will play a part in whether they keep their jobs over the next five years. Accurately measuring and communicating the impact of environmental improvements, as well as social and governance performance, will therefore be critical going forward.
There are two aspects to climate risk that we believe corporations need to think about today: physical risk and transition risk. While physical risk is generally understood as climate events and natural disasters, less understood is transition risk, which takes in the impact of a changing world of climate-related public expectations, regulatory requirements, investor concerns, consumer preferences, supply chain performance and more.
Certainly, investors are getting much better at understanding the potential impact that climate-related physical and transition risks pose to their investments and this is informing their decision-making on the value of new and existing investments. They are seeing that the link between climate risk and financial risk is not only very real today but even more immediate and significant than most had previously believed.
As businesses face new pressures to measure climate risk, report on its potential impact, and implement new solutions, one sector that we view as central to any discussion concerning climate risk and solutions is the financial services sector. While climate risk affects every sector today, the reality is that financial businesses such as banks, investment firms and asset managers hold or oversee a broad range of loans and equity investments involving every sector, and regulators are now insisting on enhanced climate stress-testing across portfolios. On the opportunity side, green financing is assuming critical importance and we're seeing leading financial institutions moving beyond niche initiatives to make green financing an integral component of all financing practices.
71 percent of leaders said they want to lock-in climate change gains made as a result of the pandemic, with 65 percent also noting that managing climate-related risks will play a part in whether they keep their jobs over the next five years.
Climate Accounting Infrastructure is the way forward
As businesses pursue progress toward net-zero emissions and other climate commitments to effectively meet stakeholder expectations and regulatory demands, the need for trusted, high-fidelity data has become critical. To support this journey, KPMG Climate Accounting Infrastructure has been designed to integrate asset-level data from existing business systems with disparate external data sources, and establish a precise and verifiable trail of carbon emissions against offsets and renewable energy consumption.
KPMG’s blockchain-based Climate Accounting Infrastructure seeks to offer a greater level of data fidelity and granularity, ultimately giving companies a capability to better meet today’s reporting and transparency challenges, identify areas for improvement, and capitalize on cost-saving opportunities they might otherwise miss.
While such capabilities were not possible a few years ago, businesses now possess the digital technologies needed to understand progress toward climate goals and the potential impact of climate risk across a portfolio of assets. Businesses can now, more accurately than ever: measure carbon footprints; track renewable energy consumption, renewable energy credits and carbon offsets; capture that information in a trusted way on a blockchain; use machine learning and other AI strategies to derive insights from the collected data; and report on climate impact in alignment with leading frameworks.
This article is featured in Frontiers in Finance – Resilient and relevant
Climate Accounting Infrastructure is making inroads among major organizations
The good news is that more forward-looking global businesses in every sector are making progress and setting the pace for change among businesses everywhere by becoming much more precise on climate risk and responses. Major energy producers, for example, are looking to leverage existing sensors on wells and pipelines along with geospatial and weather data to capture methane emissions more accurately – and prove that certain products were produced with lower carbon impact.
Real estate-focused businesses are also beginning to measure energy consumption at the bricks-and-mortar level using instrumentation and IoT sensors that accurately calculate emissions across a broad asset portfolio. KPMG professionals have also begun working with a major US financial institution to support its journey forward with KPMG Climate Accounting Infrastructure.
The disruptive impact of the global COVID-19 pandemic has clearly prompted more businesses to shift gears on climate risk management as their operating models transform and we look for the trend to continue, as it must. Businesses that build sustainable operating models and robust climate practices will unlock the critical insights needed to accelerate their transition to a low-carbon economy and become more resilient to environmental risks.
As businesses pursue progress toward net-zero emissions and other climate commitments to effectively meet stakeholder expectations and regulatory demands, the need for trusted, high-fidelity data has become critical.
Six core components of Climate Accounting Infrastructure
KPMG believes a robust climate accounting infrastructure consists of six core components for climate reporting that can help to win the confidence of internal and external stakeholders, auditors and regulators. These core components include:
- Device integration: The foundational requirement for a strong climate accounting infrastructure is the collection of data from a diverse portfolio of devices with industrial protocols and communications technologies, ideally delivered in a cloud-computing environment that promotes speed and flexibility.
- Digital Trust infrastructure: Using a blockchain ledger system, the company will be able to record and maintain the integrity of device data and digital assets with provenance, auditability and immutability.
- Data Storage: Using both data warehouses and data lakes, companies can process and store structured and unstructured data for ready access.
- Applications interface: APIs and microservices, configured to integrate information technology and operational technology applications, can help improve data fidelity and integrity. Operating technology in this instance refers to technology used to monitor and control the devices and processes that track things like energy use and carbon emissions.
- Cognitive intelligence marketplace: With reliable data collected and readily available, companies can use machine learning and other AI techniques to analyze data and generate insights that position them to take advantage of cost-saving or revenue-enhancing opportunities related to their use of energy and other natural resources.
- Reporting: Building on the five core components listed above, companies can create, with a high degree of confidence and transparency, a range of standardized climate accounting reports for a diverse array of stakeholder groups, each tailored to the individual group’s compliance requirements or expectations.