Climate transformation strategy – preserving company value through ESG
By Przemysław Oczyp, partner associate, and Łukasz Kolano, senior manager, Business Advisory, ESG, KPMG in Poland
KPMG on COP27
The 27th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP27), that took place in Sharm El Sheikh, ended on 20 November with UN Secretary-General António Guterres’ words: “We can and must win this battle for our lives.” As the conference brought progress on the climate change adaptation commitments, it also left no doubt as to the urgency of mitigation actions. The climate battle has reached the point of fighting for our lives. Not for the distant future of our planet, but for the immediate future of every single human being, as climate change already affects everyone, including those who have not been prioritising decarbonisation up until now.
Those lagging behind the global energy transition to renewables are beginning to deal with the economic consequences of their missed opportunities. The green transition poses chances and threats to KPMG’s clients from the public and private sectors and we help them identify, quantify and manage their climate risks and opportunities, aiming to become a leading global climate advisory organisation. To prove our commitment, 25 representatives of KPMG from different regions were actively involved on-site at the conference, endorsing KPMG’s initiatives and events. A key theme throughout the conference, echoed by KPMG’s speakers, was the critical need for greater convening between organisations, government, and financing to drive change.
- As a founder member with the United Nations Development Programme (UNDP) and World Wide Fund for Nature (WWF), KPMG launched the Alliance for Just Energy Transformation, a voluntary initiative to make the global path to energy transition socially just and equitable. The global energy transition will fundamentally transform the way energy is generated, distributed, stored, and accessed. KPMG forms partnerships to facilitate technological innovations addressing climate change, and advises clients to include the just transition agenda in their companies’ operations, communities and value chain.
- Companies reduce greenhouse-gas emissions from their business operations by measuring current emissions, defining ambitious targets, changing their business models, and developing and executing implementation plans. The pathway towards decarbonisation leads through additional levers such as Power Purchase Agreements (PPAs), and Carbon Markets. But the first step – measuring and reporting the climate impact – is a point of reference for all of the subsequent actions.
The global agreement on sustainability reporting is almost there. Since the International Sustainability Standards Board (ISSB) has been established at the previous COP, meaningful progress has been made on the way to develop a comprehensive global baseline of sustainability disclosures for the capital markets. ESG reporting is already shifting the business conversation, as the companies seek to highlight their actions on climate change mitigation, circular economy, greater biodiversity, and respect for human rights. They do so not just to satisfy their stakeholders. They also need to measure how effectively they are executing their ESG strategy, or integrated strategy, as ESG goals have become a part of the business strategy.
Preserving value through ESG during climate crisis
Only 18% of the 100 largest companies in Poland set specific decarbonisation goals, presenting at least assumptions for energy transformation. These actions (or lack thereof) significantly impact a company’s value and business model right now.*
There is no contradiction between implementing ESG programmes and seeking profits (reducing losses). Strategic action planning with ESG factors – such as transforming energy consumption and profiles, or resource management towards circularity – minimises operational risks as well as a whole range of external risks. For example, risks related to potential legal liabilities or compliance penalties are on the rise. Similarly, a significant impact on the valuation of companies in M&A transactions and pose a threat of blocking such for formal or legal reasons. It has a clear influence on company’s perceived and real financial attractiveness.
Large companies are required to report on their climate impacts for some time, but not many do so in a structured way that follows global recommendations and standards. Global standards, such as those created by the TCFD (the G20 Financial Stability Board’s Task Force for Climate Related Financial Disclosures) require specific information, such as that related to governance and accountability structures, risk management, performance indicators, KPIs and interdependence with company business strategy. Measuring emissions, especially in the full Scope 1-3 range, is a novelty. Because companies are reporting most often for the second time ever, it is rare to have a mature analysis of risks or targets, or setting a trajectory for reduction in the short term (closer than year 2040), setting metrics and reporting on their achievement.
Regardless of your position in the climate debate, the reason you should strategically address the topic of transformation focusing on ESG factors is as much an obligation as a financial necessity. Europe plans to spend €350 billion a year on investments in energy systems alone, just to meet its reduction targets by 2030. It also wants to allocate €130 billion a year to achieve other environmental goals.
In order for any financing to be available – or just to avoid the consequences of market restrictions, capital costs or penalties – one must consider a company’s vulnerability in this area. And create a map of opportunities and risks based on sober analysis. A realistic strategy can emerge, not only securing the company’s value for stakeholders – but also meeting the upcoming ESG disclosure obligations resulting from EU climate policy. Such an obligation will affect not only around 50,000 large companies in the EU. The obligation will spill over to other market participants – by requiring smaller partners in their supply chains to provide similar information to reporting large partners. There is not much time left for such preparation in planning and managing ESG information, even for smaller companies; the new obligations will appear as early as 2024.
For example, larger companies who lack convincing climate targets (including Polish entities) received a joint letter from representatives of 318 financial institutions and corporations, calling for emission reduction goals in line with the 1.5C target set by the Paris Agreement. It does not take long to figure out that this is a warning about a potentially difficult cooperation in the future.
Start with opportunities and risks
Why is analysing ESG risks so important and strategic for a company? Because companies are now operating in a time of radical business uncertainty. Doing business entails adapting to the rapid pace of change and meeting the challenges of the market. Business managers themselves admit that they have already entered ‘a permanent crisis management’ mode. The goal is no longer to hedge against all risks, but to have a deep understanding of the financially significant ones, to adapt and ensure the company’s resilience to those over which one has little influence. This can range from a pandemic, a war abroad, the collapse of supply chains in remote regions of the world, inflation, or unpredictable increases in energy prices. It is also interesting to note that Polish companies talk about ESG much more in terms of risks and external obligations, than market opportunities and performance improvements. This shows the approach to the topic of ESG, and general low awareness of the specific financial and operational opportunities provided by the new set of managerial tools (ESG indicators). Polish companies are yet to profit from systemic business thinking and long-term strategy planning.
Current state of knowledge
Most often, companies mention policies to reduce emissions as related to, for example, means of own transportation, purchasing emissions from renewable energy sources or reducing their own consumption (Scope 1). Such an approach and need are largely related to energy prices, and without specific aims and targets for energy policy, it is difficult to assess adequacy for the overall company strategy. At the same time, companies cite the implementation of less desirable energy/climate policies – such as instead of making Scope 3 emissions reductions, they buy so-called ‘carbon offsets’.
Let’s remember that the most climate-friendly action is to reduce every ton of greenhouse gases that can be reduced through energy or process effectiveness. Once a reduction strategy is in place, a company can take actions often referred to as positively impacting climate. This means activities related to, for example, offsets, carbon sequestration or based on other ecosystem services.
To sum up:
Integrating ESG into business strategy will give a competitive advantage.
Integrating ESG factors into the business strategy shows stakeholders and investors the maturity of the organisation and proper risk management. It also provides an opportunity to look at the bigger picture, including the company’s operations, processes, products and services, and take advantage of gaps that competitors have not yet recognised. It also makes it easier to tap into sustainability and innovation, or to gain an edge in the battle for talent in the labour market.
Without reliable data, there is no reliable management.
A company’s operations should first focus on assessing impact and monitoring data on key ESG factors, such as resource consumption, labour relations, data security or regulatory compliance.
Without assigning responsibility, there is no effective implementation.
Next, monitoring the implementation of ESG policies in the company’s key businesses by clearly defined ‘risk owners’ is essential. Even if ESG factors may encompass most key business processes – the responsibilities cannot be collective and equally distributed effort.
Without a long-term management vision connected to business strategy, there’s no value assurance.
As a result, the right management decisions should be derived straight from an aptly constructed ESG Strategy that meets stakeholder expectations and focuses on preserving the health and long-term value of the entire company.
*KPMG Sustainability Reporting Survey 2022.
This is one of the results of the Polish edition of KPMG’s global survey, Sustainability Reporting Survey 2022, informing company professionals about ESG disclosures, analysing 5,800 companies in 58 countries (the 100 companies with the highest annual revenue). This is the largest survey of its kind globally.