KPMG ENRich 2021 Report highlighted the urgency of actions against climate change by the corporates and the need energy transition
In an attempt to curb climate change, there is an urgent need for a global approach towards tackling this crisis. Whilst efforts at policy level are done by many governments, a report by KPMG, India finds that the global corporations too need to make a joint effort to combat climate change. It strongly backs the idea that corporations need to step out of token climate-consciousness and take substantial measures to bring change.
Global temperature prognosis suggests 2.3 degrees increase in global temperature by the end of this century if there is a lack of global effort to avoid it. The 1.5 degrees goal for containment of global heating was committed in COP26. To achieve this there is a demand for energy transition especially in reaching Net Zero.
The report titled ‘Decarbonization and the evolving role of corporate boards’ was presented on the sidelines of the 12th edition of its annual energy and natural resources event ‘ENRich 2021’. The report highlights how corporate boards should up their game to meet the challenges of the carbon constrained world and meet their net-zero targets.
It further discusses the imperatives of decarbonization highlighting the requirement of a system perspective that incorporates energy demand management, improves energy efficiency, new reporting standards and increases the share of clean energy in the overall energy mix.
Key highlights of the report are stated below:
- Climate responses towards actionable goals have been slow. Although governments, financing institutions, and industry participants are forming alliances to focus on stronger actions. However, the pace of energy transition has been sluggish. Globally, the investment dynamics in the energy sector are changing, and companies should balance their investments across technology portfolios. The pathway to achieving 1.5 degrees requires urgent action to halve the current emissions by 2030.
- With respect to risk for business and energy CEOs, corporate leadership recognizes climate change as a major risk. According to the report, 81 per cent of the organizations are actively disrupting the sector in which they operate rather than waiting to be disrupted by competitors. Whereas, 85 per cent see technological disruption as more of an opportunity than threat. Globally, investors are increasingly committing to integrate environmental, social and governance (ESG) aspects into their investment strategy as evidenced by growth in signatories for ‘Principles for Responsible Investment’ (PRI). In addition, the majority of institutional investors consider climate change to be a key factor influencing their investment decision.
- Corporate boards have initiated measures for driving board level governance for climate change. The adoption of such measures, however, remains low for Energy and Natural Resources (ENR) companies compared to other sectors.
- New reporting standards set by World Economic Forum in association with key leading professional services firms, have reformed stringent metrics which will support in evaluating SDG’s performance and associated NDCs.
- Impact of climate change on businesses:
Corporates are likely to be the principal delivery agents of decarbonization. In that aspect, strategic investment decisions should be backed by data driven analysis with a whole system view. To suit regional priorities in the short-term and long-term, corporations should tailor the implementation of energy transition.
Setting clear goals backed by the right Key Performance Indicators (KPIs) that meet business and regulatory needs is crucial for credibility. Technology and other ESG related KPIs will be a key enabler in the decarbonization journey.
Approaching the challenge:
Boards have to ensure that sustainability and climate aspects are brought into day-to-day operations by integrating sustainability and non-financial targets into the existing incentive structure.
Organizations need to do more than what the regulation demands and move beyond compliance.
Boards have to set very clear directions to guide thought and action at every level. To ensure that the guidance is indeed being followed, boards need to find ways to maintain regular dialogue with peers and key stakeholders.
Boards leadership will involve many dimensions:
· Organisational culture and performance metrics
· Maintaining and enhancing climate competence within the board as well as within the organization
· Translating commitments into material changes move beyond tokenism
· Risk and opportunity assessment
· Disclosures and compliance
· Investment planning and technology selection
For corporations in pursuit of energy transition, the focus has to move to ‘climate proofing’ of businesses, and hardening of systems has to increase substantially, given the limitations of current climate mitigation actions. Investments should also take into account long-term carbon costs and aspects like Carbon Taxes/Carbon Border Adjustment Mechanism (CBAM).
Despite challenges and uncertainties there is a very significant opportunity in funding the energy transition.