Towards net zero

This demonstrates that the company is attempting to measure, manage, and disclose its climate-related risks and opportunities. It may give investors and other stakeholders confidence that the company is actively working to increase its resilience to the impacts of climate change.

Physical risks result from the changing climate, e.g. more frequent and severe storms, wildfires and rising sea levels. Transitional risks arise from the global shift to a net zero economy, e.g. new regulation and changing market dynamics. Corporate reporting therefore needs to cover both types of climate-related risk in order to be complete and robust.

Scenario analysis is an effective way to understand how climate-related risks might impact the business and to plan appropriate responses. It helps companies surmise how risks might evolve under different climate, economic and regulatory conditions. It also provides investors and other stakeholders with a forward-looking view on the organization’s potential vulnerability or resilience to climate-related risks and is recommended by the TCFD.

Despite the best efforts of climate scientists, no one knows exactly how much the world will warm by and how quickly or how rapidly the world will transition to net zero. It is therefore important for companies to report on potential climate risks under a range of possible global warming scenarios. KPMG professionals typically advise clients to conduct scenario analysis under a minimum of two warming scenarios such as 1.5˚C and 2˚C (which are considered low warming scenarios and are the targets of the Paris Climate Agreement), 3˚C (considered a moderate warming scenario) and 4˚C (considered a high warming scenario). Additionally, investors, lenders and insurers need to understand the climate risk profile of companies in the short, medium and long terms. It is therefore important that corporate reporting clearly defines the timelines used for climate risk scenario analyses and explains why those timelines were selected.

Financial stakeholders need to know that the scenarios used by companies for climate-related risk assessment are robust and reliable. KPMG professionals therefore recommend that companies use recognized and respected scenarios developed by credible sources such as the Intergovernmental Panel on Climate Change (IPCC), the International Energy Agency (IEA) or the International Renewable Energy Association (IRENA). Using a combination of different scenarios from reputable sources adds depth to analysis.

Setting carbon reduction targets aligned with global decarbonization goals shows investors that the company is in step with the global shift to a net zero economy. For example, a company may choose a deadline of 2050 or sooner to achieve net zero emissions. This is in line with what the IPCC says is necessary to limit global warming to a relatively safe level (1.5˚C). Alternatively, companies might set a “science-based” carbon reduction target in line with what is needed to achieve the goals of the Paris Agreement on Climate Change. Over 1,000 companies have adopted science-based targets to date.

A company’s reporting needs to explain how it will achieve its carbon reduction targets by describing the company’s decarbonization strategy. A clear strategy on carbon reduction also helps the company by enabling all divisions and functions within the business to understand and deliver their own contributions to the group target.

A company can maintain or increase investor confidence if its reporting either confirms it is on track to achieve its carbon reduction targets or is open about any dilemmas and challenges that have hindered progress. A lack of transparency can have the opposite effect by diminishing investor confidence.

Investors may view the use of an internal carbon price as a sign that a company is well prepared to manage climate-related risks and to navigate net zero transition. An internal carbon price can also signal that management understands the organization’s exposure to potential increases in external carbon prices applied by governments and is factoring it into future investment decisions. The use of an internal carbon price is especially important in high carbon sectors such as oil and gas; metals, minerals and mining; and electric utilities which are particularly exposed to carbon reduction policies and external carbon pricing.