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EXECUTIVE PERSPECTIVE: Corporate reporting on GHG emissions evolving, KPMG

KPMG recently published a survey on the quality of greenhouse gas (GHG) emission data available from the private sector to policymakers, investors and the general public.  The survey raises some significant questions around the level of information actually available for informed decision-making, especially coming out of COP21.  Below we hear from Katherine Blue, National Sustainability Network leader at KPMG, on the findings.

29 January 2016

Sustainability: Your recent survey concludes that corporate reporting on GHG emissions lacks consistency and comprehensiveness. Why don’t companies report out on emissions like they do financial results and risks?

Ms. Blue: In the United States, carbon emission reporting for the most part is regulated by U.S. Environmental Protection Agency for large emitters and currently there is no formal federal cap and trade program, only regional or state cap and trade programs – thus much of the disclosures at this stage are voluntary through investor or other initiatives or for environmental regulatory purposes. Moreover, some companies may not view disclosure as valuable or their emissions may not be financially material without a current price on carbon. However, many large U.S. companies are leading the way globally in carbon emissions reporting and transparency, necessitated by their global impact and operations.

We see clients gradually moving toward increased disclosure of carbon data and other non-financial data that tells a story of performance, beyond pure financial results. This signifies an evolutionary reporting trend where companies will increasingly report on other non-financial metrics, other sustainability data. Given global moves toward carbon pricing, which may be accelerated by COP21, and more transparent reporting of climate risk, carbon pricing will increasingly become a financial and compliance issue versus purely non-financial. And with the evolution of that reporting, accuracy should increase and the scope of reporting should expand. Furthermore, companies will likely converge over time with increasing consistency on what they are reporting.

Sustainability: Do you think COP21 does anything to change that in terms of how countries will implement it?

Ms. Blue: The Paris Agreement from COP21 is a clear signal to businesses and for countries – it signified that there was a global political intention to move to a low carbon or zero carbon economy. Increasingly ambitious commitments by countries to reduce national carbon emissions are a likely outcome of COP21 as well. Government policy will need to deliver these commitments and there is a likely filter down to the private sector. Notably, the agreement was constructed in a way to give countries flexibility in terms of how they accomplish the goals and measure performance.

(The agreement itself starts in 2020 and purely states to limit warming to well below 2 degrees C above pre-industrial levels and to pursue best efforts to limit it to only 1.5 degrees C. There was also a global carbon neutrality agreement to peak GHG emissions as soon as possible and achieve global carbon neutrality (zero net emissions) between 2050 and 2100. The targets themselves are not legally binding but it requires countries to report their progress transparently and thus will provide impetus to countries to deliver on their commitments, take stock of how they report and strengthen their goals leading up to 2020).

Sustainability: Can COP21’s goals be achieved without change in private sector emissions reporting?

Ms. Blue: Both are integral – the private sector and public sector. Private sector businesses were actively engaged at COP21 and many large companies made additional commitments on carbon emissions reductions and enhanced reporting. There are trends toward science-based targets as well and an increase in the number of large companies aligning their reduction targets to the 1.5/2 degree goal and to carbon positivity versus carbon neutrality.

As with any goal to reduce emissions, the key for both governments and private sector businesses is having clear and concise data to be able to model whether the goal will be achieved – in order to manage, one must measure. We also anticipate clients will be needing internal capacity and support in the following areas:

  • Compliance – understanding how to comply with increased carbon reduction and carbon reporting legislation worldwide and managing the pace and complexity of that legislation.
  • Reporting and assurance – implementing effective processes and IT solutions to gather, analyze, and report on carbon data and providing third party assurance of that data.
  • Strategy, risk and control – helping clients understand and profit from disruptive change in a low carbon economy; identifying, managing and reducing climate-related risk including supply chain risk, and helping clients understand carbon taxes or pricing systems worldwide.
  • Financing and investment – helping clients to understand and raise capital via green bonds for investment and innovations to reduce carbon emissions and/or increase energy efficiency, providing third party assurance for green bonds, and helping clients to identify and access tax incentives for carbon reduction or energy efficiency projects.

Sustainability: The adoption of GHG emissions reporting has been described as “a natural evolution” alongside emerging regulatory and other risk drivers. To date, what drivers catalyze adoption most effectively, and why?

Ms. Blue: Drivers that catalyze adoption are often either regulations or business drivers in terms of stakeholder pressures, financial institution requirements, or cost savings. To the degree we have a global COP21 agreement, many of the largest companies in the U.S. have and will be orienting their carbon reporting and reduction programs toward the COP21 goal. As previously mentioned, a trend toward science-based targets is noteworthy.

Sustainability: Can carbon pricing in some form be an effective driver? What form?

Ms. Blue: It is one form of a driver. Some of our clients use internal carbon pricing as a model to make better internal business decisions across the countries and business divisions that comprise their operations given that they’re subject to varying regulations for reporting and reductions.

Sustainability: How do investors factor in the list of drivers? Are they important now, and is that changing?

Ms. Blue: Investors currently factor in the financial risk of environmental regulations and will continue to assess that as a risk to projects, expansions or investments. COP21 may provide additional impetus to develop different financial mechanisms to drive low carbon investments such as green bonds and to that end, the financial sector will be integrally involved in assessing the financial value and risks of projects given carbon risk or the positive benefits of carbon neutrality aspects of projects. Climate is increasingly being recognized as a risk by the financial community; for example the Financial Stability Board (FSB) Task Force on Climate Risk is working toward making recommendations for consistent company disclosures that will help financial market participants understand their climate-related risks.

Sustainability: How important is supply chain reporting (scope 3) in constructing an accurate picture of global emissions from the private sector?

Ms. Blue: Scope 3 reporting is important as it shows the broader impact that companies have in terms of value chain emissions. This in turn helps companies better understand the economy wide impact of carbon emissions.

It also provides companies one more way to interact with their suppliers and partner on ways to lessen the impact of these emissions and improve efficiency. Above all, Scope 3 (upstream and downstream) reporting is a crucial means to identify the full impact of carbon emissions through the full supply chain which would not be possible if left to individual players in the supply chain.

Sustainability: Do we have accurate and current emissions numbers from countries, as opposed to companies?

Ms. Blue: From prior reporting mechanisms for the Kyoto Protocol and individual country policies and regulations, many countries have already been estimating these emissions for years, at minimum at a macroeconomic level with basic energy flows and transportation emissions. Each year, countries generally try to improve and refine these estimates, much like private sector companies do.

Sustainability: What do you expect the conclusions of the survey to look like 10 years from now, assuming our rate of global warming continues over the same time period?

Ms. Blue: That’s a great question. Ten years from now, we may see more discussion on how leading companies and countries are approaching and succeeding as they move toward carbon neutrality (or even positivity) and how they’re linking their performance with the broader 2 degrees / 1.5 degrees C goal from the Paris Agreement. Scope 3 reporting should become more common, especially Scope 3 downstream reporting, which is rare at present. And companies will be better at explaining exactly why they set the target reductions that they have, and how carbon reduction benefits their business and shareholders. Inclusion of carbon data in annual financial reports or integrated reports could also be more standard.

 

Topics

Climate and Energy, Corporate Governance

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