Making climate and ESG reporting matter
Learn how one organization is getting ahead of the reporting curve by measuring the impact of its climate and ESG investments.
Climate change’s impact gets clearer by the day: Rising temperatures, catastrophic weather events, spiking energy costs, and fundamental threats to basic human essentials like clean air and water.
None of which, of course, is good for business. But what remains less clear by the day is exactly how companies need to report out all of that bottom-line impact—on a consistent basis, and as part of clearly defined accounting procedures.
The Securities and Exchange Commission (SEC) released its much-anticipated initial proposal on climate reporting and assurance rules back in March, with a goal of having at least some new guidelines on the books for 2023. But, many months later, the final rules and an exact rollout timeline remain unclear amid ongoing discussions elongated by economic headwinds, political debate, and even some technology glitches on the SEC’s feedback tool.
It’s no wonder that just 17 percent of the companies in a recent KPMG survey said they felt prepared for the inevitable new SEC reporting requirements—even though 78 percent said they expect the new rules will mean more effort from their teams.
The SEC’s action underscores the imperative for businesses to understand likely reporting requirements and connect them to their strategy and operations. The details will be pored over, but management teams and Boards must take note – the ESG moment is accelerating in the United States.
Scott Flynn
KPMG US Audit Vice Chair
Clearly, a “watch-and-wait” approach is just not an option for most companies when it comes to responding to climate change and the broader emerging arena of environmental, social, and governance (ESG) issues. And that’s why KPMG has been actively working with clients to establish thorough ESG strategies that put them in the driver’s seat, and sooner.
Here’s how one of our leading-practice clients is doing it today.
Getting ahead of the curve
The promise of renewable energy is not new for EIG, a Washington, D.C.-based private equity firm that has been investing in the space since 1990 as part of its overall portfolio.
For the past decade, the company had had a dedicated ESG team focused on sustainable investing, working with both portfolio companies and their own investors. A core strategy is investing in the transition away from fossil fuels to a more sustainable energy mix, in alignment with net-zero carbon emissions by 2050, broadly outlined in the 2015 Paris Agreement on climate change.
But quantifying and assessing the effectiveness of these climate-influenced investment initiatives is still relatively new territory, so EIG partnered with KPMG to help it establish metrics, model potential outcomes, and then gather and report the appropriate data to assess progress for its investors.
EIG and KPMG teams collaborated on some key steps, including:
1
ESG is just part of EIG’s overall focus, so while the company was fully committed to a transformative energy strategy, it looked to KPMG for help with the latest details—everything from the specifics of the Paris Agreement, for example, to the implications of the looming SEC proposal. That helped EIG understand specific guidelines and guardrails and adjust its overall strategy accordingly.
2
With that overall context in place, KPMG then assisted EIG with creating a broad array of metrics that can be used to assess the effectiveness of current investments in meeting the firm’s ESG goals, as well as contemplating future investment criteria and scenarios.
3
A separate team with extensive experience in private equity operations then went to work on developing a target operating model for the related investment initiatives, but with the ability to adjust and optimize the approach to meet the company’s needs—and any potential regulatory surprises—going forward.
4
Crucially, the project also focused on getting the finance team involved from the start, which allowed EIG to tangibly measure results for itself and investors. That includes basics like more clearly defining and allocating capital costs—for example, purchasing more expensive equipment because it has a reduced environmental impact over a longer term—and also covering more complex details, such as quantifying and reporting greenhouse gas emissions (one of the SEC’s contemplated proposals from its March draft guidelines).
A key principle for this client project is the idea that profit and planet do not have to be mutually exclusive. “We think it’s a false dichotomy to position our investment strategy as either returns-focused or ESG-focused,” says Emily Rodgers, EIG’s ESG director. “With the right approach, we believe we can deliver attractive returns to our investors while also leading the transition to a net-zero economy.”
An incentive for change
EIG’s focus on the business impact of climate change and broader ESG concerns is rapidly becoming a common trait among leading-edge companies. In a recent large-scale KPMG survey, two out of three companies cited climate change as a risk to their business, and companies’ ESG reporting efforts had doubled in the past two years.
64%
Percentage of G250 companies that acknowledge climate change as a risk to their business.
50%
Less than half of G250 companies have leadership-level representation for sustainability efforts.
But turning that intent and effort into measurable results requires real skin-in-the game commitments. For EIG, that has meant clearly defining the financial impact wherever possible. One example: The firm has committed to forfeiting 25 percent of its carried interest in certain investments if they fail to meet the carbon emissions targets. “Everyone throughout our firm is aware of these targets,” Rodgers says. “They’re essential to our collective success.”
And beyond just working with our own clients, KPMG itself has a very detailed, metrics-driven ESG commitment, with specific goals across a wide range of areas, including reduced carbon emissions, renewable energy targets, more diverse hiring, and billions in new investments on ESG initiatives.
Want to see how we are doing? Check out our latest KPMG Impact Plan update.
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