Climate change is reshaping the energy sector – KPMG

By Sander Jansen, Senior Manager, Sustainability Services
KPMG in Canada

The energy industry is no stranger to sustainability. Many energy companies have traditionally approached sustainability from a compliance lens, as regulations, particularly in Canada, have been relatively stringent. More recently, however, companies, large and small, have been motivated to become more forthcoming in their sustainability responses and disclosures to deliver assurances to key stakeholders that they are recognizing and addressing the evolving sustainability risks and opportunities – a topic that seems to have gained further significance with many calling for a greener way forward post pandemic.

An important driver for energy companies to go beyond compliance, is the rapidly changing investor expectations. Increasingly institutional investors, in Canada and internationally, are integrating sustainability or environmental, social and governance (ESG) considerations in their investment decision-making processes. For them to meaningfully inform their investment thesis they rely on credible and informative company disclosures, and they`re passing these expectations down to their investment companies. This can take different forms, including shareholder resolutions or through support for ESG reporting frameworks and standards. For example, in his 2020 letter to CEOs BlackRock`s CEO and chairman Larry Fink requested companies to publish their disclosures in line with industry-specific SASB guidelines and disclose climate-related risks in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations.

Amongst the many ESG aspects, climate change has gained significant traction in recent years. In fact, the World Economic Forum released its 2020 Global Risk Report and for the first time in the report’s history, all top 5 risks to our economy were environmental risks, with most of them climate-related, including extreme weather, climate action failure and natural disasters. This has flipped the conversation of climate change on its head. It’s no longer simply about what companies are doing to reduce their climate footprint, but the burning question for companies today is “how is climate change impacting our financial and operational performance?”

There have been differing views as to whether the COVID-19 pandemic has caused companies to shelf ESG actions and targets, including those related to climate change. It is true that many companies have shifted their priorities in the immediate to short-term, but equally there appears an appreciation for a clean and inclusive recovery pathway. In May 2020 alone, 155 companies, with a collective worth of $2.4tn, signed a joint statement urging world governments to align their recovery efforts with climate science. In addition, a coalition of 330 companies, with combined market valuations of $11.5 trillion, called on US congress to include climate in the COVID-19 recovery plan. This comes on top of the Canadian Federal Government`s requirement that companies who are seeking finance under the Large Employer Emergency Financing Facility (LEEFF) program need to publish annual climate-related disclosure reports consistent with the TCFD. Together, these intentions and initiatives by business and governments suggest that climate change will be part of the post-pandemic rebuild in some shape or form.

With climate change maintaining prominence, it makes sense for Audit Committees to understand the various climate-related risks and opportunities for their businesses. For example, more and more energy companies are asking themselves the question; “What does the transition towards a low carbon economy mean to our asset base and ability to produce well into the future?” As societies are simultaneously demanding more energy and reductions in greenhouse gas emissions, the energy paradigm as we know it is being challenged. Already, some large oil and gas companies are responding to this by making a switch to “energy” companies that supply a diverse range of fuels, electricity and other energy services to consumers. Others, like Cenovus Energy Inc, Canadian Natural Resources Limited, BP, Repsol SA and Equinor, and mining company Teck Resources, are taking more aggressive measures by pledging to achieve “net zero” or carbon neutral emissions. Whether it is through diversification, deep decarbonization or incremental measures, the energy industry will play an important role in the transition towards a low carbon economy. In fact, according to the International Energy Agency the transition will be significantly less complex and less expensive with the oil and gas industry actively involved, raising the important question; how can the energy sector equally be an enabler and beneficiary of the energy transition?

If you’re an Audit Committee member, there is value in understanding these evolving expectations and what it means to oversight. From a disclosure perspective, commonly used market-driven reporting frameworks including SASB and TCFD can provide guidance to boards on how to effectively communicate on aspects that are considered to be critical to the energy sector today. Beyond standards and frameworks, there may be opportunities to explore the role of disclosures in changing the narrative by informing how the energy sector can equally be an enabler of the energy transition.

What should Audit Committees be asking?

• To what extent is the energy sector prepared for a low carbon future? What does it mean for the current asset base?
• Do we have the right talent mix on the Board and Audit Committee to understand and manage climate change risks to the business?
• How is sustainability being managed within the company, and what’s the oversight in relation to it?
• To what extent is the Audit Committee tuned in with evolving reporting expectations? Similarly, what extent is the organization aligned with sustainability disclosure expectations?
• Are we reporting the ‘bare minimum’ when it comes to sustainability, or could we be going further for our stakeholders?
• Are we taking advantage of the outside experts, frameworks, and standards that companies can leverage to prepare the sustainability reports?

For more information on our sustainability services, please contact:

Sander Jansen, Senior Manager 
Sustainability Services, KPMG in Canada
sanderjansen@kpmg.ca

Atin Prakash, Senior Manager
Audit, KPMG in Canada
atinprakash1@kpmg.ca

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