At first glance, the world’s 250 largest companies are not doing very well in recognizing and measuring financial risks related to climate change, according to a new report by KPMG.
The report, “Towards Net Zero,” noted just over half (56 percent) of the largest companies acknowledge climate change is a financial risk. Only about 1 in 5 are reporting the impacts of climate-related risks using scenario analysis (22 percent) or reporting risk analysis in line with global warming scenarios or a clear timeline (12 percent and 17 percent, respectively).
The world’s top companies are moving rather deliberately to manage and measure their climate change-related risks, yet the authors of the report see the glass as half full, not half empty.
“Overall, the data paints a picture in which most large companies in most countries have the basics of climate risk reporting in place,” the report’s executive summary said. “They have acknowledged climate change as a financial risk and are reporting, to some extent, on both the physical and transitional climate risks their businesses face.”
Physical risks of climate change can have an impact on infrastructure, human health, and agricultural productivity, as well as on economic activity, asset valuations, and firms. Transition risks, on the other hand, “are associated with the uncertain financial impacts that could result from a transition to a net-zero emissions economy,” according to a policy report issued by a subcommittee of the Commodity Futures Trading Commission earlier this year. Examples of transition risks include suddenly stranded assets in the fossil fuel industry or shifts in climate policy, technology, or consumer preferences.
It’s only been five years since the Task Force on Climate-related Financial Disclosures (TCFD) established key metrics by which a company can measure its climate change-related risks.
“There has been pretty remarkable progress in a short time,” said Katherine Blue, a KPMG principal, ESG and climate services leader.
The purpose of the KPMG report is to highlight “what good looks like” in the corporate governance of climate-related risks in the manner companies identify those risks, measure the impacts of those risks, and report on net-zero transition. (The Intergovernmental Panel on Climate Change recommended in 2018 that companies set 2050 as a goal for achieving net-zero emissions to limit the damage being caused by climate change).
The KPMG report found some bright spots among countries and sectors.
“Japanese companies perform particularly well in demonstrating good governance of climate risk in their reporting and delivering high quality scenario analysis, but they do not do so well at clearly reporting their decarbonization strategies,” the report said. “German companies lead the world in setting net zero decarbonization targets, but lag behind when it comes to transparent reporting of their progress toward meeting such targets.”
Sectors like technology, media, and telecommunications are ahead of their peers in acknowledging the financial risk of climate change in their reporting, the report said, but few of those companies are using scenario analysis to model and disclose those risks.
Getting started on recognizing climate change-related risks
Some companies may not have even started to identify, measure, and manage their climate change-related risks. Where to begin?
The first step is convincing company leaders climate change does indeed pose financial risks to the company’s future success and profitability. Knowing and planning for these risks is no longer a luxury. And if such an examination of risks begins in reaction to an investor request, use that opportunity to prove the value of the endeavor.
Understanding climate change-related risks, implementing a plan to deal with them, and then acting on that plan can set a company apart from its competition, said Blue.
Blue says evaluating climate change-related risk can create value for a company by:
- Understanding and addressing emerging tail risks that threaten profitability, and in some cases, the entire business model;
- Attracting a new investor base while meeting the increasingly stringent requirements of institutional investors and asset managers;
- Gaining access to new sources of capital, as well as reducing the cost of capital;
- Competing for and retaining top talent; and
- Building loyalty and adding new customers with new approaches, services, or products.
Once a company has recognized climate change does pose financial risks, it should evaluate its current position, as well as evaluate its stakeholders’ climate-related expectations. Assess where the gaps lay between where you are and where you want to be, Blue said. Determine a timeline to address gaps and meet objectives. That should help the company develop a roadmap, with clear goals, that will move from its current state on climate change-related risks to its target state.
“Reporting (of climate change-related risks) should be aligned and should keep pace with the development of the company and should be embedded in the core business activity of that company,” she said.