On Wednesday this week, global political, financial and technology leaders will participate at the Dublin Climate Dialogues conference to develop a set of climate-specific declarations which will be delivered by the Government to the UK Government in its role as joint hosts of the COP26 conference to be held in Glasgow this coming November. One of the key issues that will be considered at this gathering is the potential impact of climate risk on the global financial system. Michael Hayes, KPMG Global Head of Renewables, explains.
Irish business has reacted admirably to the Brexit and COVID crises – however a much bigger crisis, the climate crisis, is now upon us and once again it will need to respond. Over the past 18 months, and particularly following the pandemic, climate risk and decarbonisation have become an increasingly important boardroom agenda item.
Climate risk is the combination of two different types of risks. Physical risk is the risk of more frequent or extreme weather events such as sea level rises and flooding which, depending on geography, will impact companies in different ways. Seconding is transition risk, which is much less understood. Transition risk relates to the financial risks which could result from transitioning towards a low-carbon economy. In practice, transition risk will manifest itself in myriad different ways:
- Increasing regulation on companies to help accelerate their low carbon trajectory eg carbon taxes;
- Changes to customer and supply chain sentiment requiring greater green products and services;
- Increasing demands from employees (and other stakeholders) demanding companies pursue a more carbon friendly and greener future.
As a result of these transition related risks, certain sectors of the economy could experience material declines in asset values as well as higher costs of doing business. Climate risk is not just a matter for the financial services industry or for high carbon industries such as oil and gas – it permeates throughout the corporate sector, and therefore it is now time for companies to recognise this, and to respond accordingly.
What does all of this mean for Irish corporates?
In the first instance, there will be increasing requirements to measure and report on climate risk. Recent EU Directives will mandate much more enhanced disclosures on ESG, and climate related risks, in particular. The scope and impact of this legislation is profound, requiring all large private and public companies across the EU to greatly enhance their non-financial disclosures in their annual reports and have the disclosures subject to independent assurance.
Irish corporates will increasingly make net-zero commitments in the same way many other major global corporations have done so over the past 18 months. However, making the commitment is just the first step, the real test will be how companies deliver against these commitments between now and 2030. This will require Irish corporates to integrate key decarbonisation solutions including renewable energy procurement, circular economy, supply chain and also solutions specific to their own business.
Companies will need to consider whether a wholesale transformation of their business and operating model is necessary. To achieve a net-zero ambition and to eliminate climate risk, companies will need to reassess their corporate strategy ; adapt their operating model; invest in innovation; and invest in training as well as upskilling employees and executives to be able to adapt to the changing landscape on carbon.
Irish corporates cannot ignore the direction of travel in the investment community. Banks and Insurance companies are coming under increasing pressure to disclose the extent of their green investment compared to their non-green investment. Also, equity investors increasingly understand the reality of climate risk and are concerned about the impact on asset and corporate valuations in the future and the risk of stranded assets arising.
However, notwithstanding these challenges, the transition to a carbon-neutral economy is akin to a new industrial revolution, and with such change also comes great opportunity for Irish business. Many, if not most, businesses will go through some degree of transformation – and for some, it will be radical.
Ireland at the forefront
There will be winners; particularly those companies who embrace new low-carbon emerging technologies and opportunities to sell greener goods and services – which are more aligned to a carbon-neutral world.
Ireland has numerous opportunities to be at the forefront of these new opportunities, including specifically:
- For a number of years, there has been a strong focus to turn Ireland into a global green financial centre. This is now part of Government policy.
- Ireland has vast resources which can be used to deploy renewable energy throughout the EU creating a whole new export market. Also it is now accepted that, particularly through our vast offshore wind potential in the West of Ireland, Ireland can become a leader in the emerging hydrogen economy; one of the key areas of focus in the new EU Green Deal.
- Ireland has a proud history of innovation and it is no different when it comes to climate innovation. Already we are seeing multiple Irish companies undertake ground-breaking innovation projects which will benefit the entire world.
Climate risk & opportunity
We are long past the tipping point – the question now is how quickly we can accelerate to a net-zero economy. It is critical that substantial progress will need to have been achieved by 2030 if the ultimate 2050 targets are to be met. Irish businesses need to act now and be ambitious on decarbonisation.
Resilience and adaptation by Irish businesses will once again be key to achieving success, this time in the fight against climate change. With these actions, climate risk will no longer present the threat that it does today and the climate opportunity will be embraced.
This article first appeared in The Irish Times and is reproduced here with their kind permission.
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