Climate Risk for the Technology Industry

By Jana Barsten

On Earth Day we reflect on our impact on the environment, in particular, climate change, and the increased demand from stakeholders encompassing investors, regulators, employees, customers, and communities for companies to include an environmental element in their strategy and in their reporting. Nice words are not sufficient to demonstrate commitment and impact -- the demand is to “prove it.” Afterall, this impacts all of us. And profit becomes irrelevant on a dead planet!

But how companies respond to the growing demand to address climate change varies across industries. Among technology companies, the number that acknowledge the risk of climate change has increased over the past few years. Specifically, 50 percent of technology companies acknowledge the risk of climate change in their financial reporting, outpacing other industries, according to KPMG’s Survey of Sustainability Reporting at Tech Companies

 

This growth is in large part due to the work of the Task Force on Climate-related Financial Disclosures (TCFD) in raising corporate and regulator awareness of climate change as a financial risk, and in developing recommendations for disclosure of climate-related risk. The work of the Task Force has resulted in increasing investor scrutiny of corporate disclosures on the topic and growing momentum towards mandatory climate risk disclosure in many jurisdictions around the world.

We’ve also seen a notable increase in the number of technology companies disclosing carbon reduction targets. Approximately 70 percent of tech companies now disclose carbon reduction targets in their reporting. Any leading technology company that does not yet report carbon targets is now clearly out of step with global good practice.

 A closer look:

Critically, the technology industry is comprised of many different sub-sectors with climate risk and disruption occurring at more micro levels. Climate risk assessments should therefore be tailored on a company-by-company basis to evaluate risks properly.

Depending on their business models, leading technology companies have identified a wide breadth of climate risks and are reporting metrics and data to investors on how those risks are managed. Consider differences between some of those areas and acute risk (i.e. increased risk and intensity of forest fires/wildfires and tropical storms) versus chronic risk (the impact on production due to biodiversity loss and other, more longer-term ecological challenges).

  • Software, SaaS, Business Services and E-commerce: These companies typically operate large data centers and should consider the following:
  1. These data centers require high levels of energy consumption and greenhouse gas emissions – it’s imperative that steps be taken to reduce those emissions.
  2. Similarly, companies that transport people or goods should manage their carbon footprint to minimize their impact on climate change and fuel consumption. Today, simply reducing greenhouse gas emissions is not enough to be considered “sustainable” by many.
  3. Platform companies that connect consumers to contractors should also focus on labor standards. The rapidly growing intersectional environmental movement ties environmental issues and labor practices closely together. Failure to do so may result in low worker productivity and high levels of turnover, leading to higher costs for recruitment and training.
  • Hardware and Semiconductors: Tech companies that manufacture components for computers or smartphones face the highest environmental risk, including:
  1. Their need for ultra-pure water for manufacturing (especially important in water scarce regions) and their subsequent disposal of wastewater, which typically contains heavy metals and toxic chemicals;
  2. Proper sourcing of key materials (such as tin, tantalum, tungsten, etc.) for electronic equipment to prevent supply chain disruptions and “dirty” extraction;
  3. Product design and management of e-waste due to a high turnover rate of electronics.
  4. Labor issues (long working hours, poor working conditions, and lax occupational safety standards); and
  5. Sourcing material from conflict zones and high exposure to global trade disputes (due to heavy reliance on countries such as China).

The compounding environmental crises – both acute and chronic – water and air pollution, biodiversity loss, and the increasing severity of these at an accelerated pace will ultimately affect all businesses – especially chronic risks brought about from human-led events.

The world is losing its biodiversity at an alarming rate. To mitigate these risks, it’s imperative that technology companies understand how investments in areas like new data centers, distributed supply chains and other sources of labor and production are contributing to things like severe weather events and biodiversity loss, as well as what risks they face from them.

 

Next steps:

In the future, investors, lenders, insurers, customers and consumers, not to mention their own workforces, will likely be asking about these risks and the disclosures companies are making, and will expect companies to make public disclosures on them. There are several steps technology companies must take in both the near-term and long-term to ensure action is being taken:

    Gain an accurate understanding of their carbon footprint, regularly evaluate their carbon reduction targets and climate goals and draft a detailed roadmap showing how they will meet their goals, including the financial implications.

    Prepare to report more extensively and more transparently on climate risks, targets and goals. These and other ESG disclosures will only become more important as investors and rating agencies rely on them more heavily.

    Hold senior executives accountable. According to The ESG Imperative for Tech Companies, 74% of tech company CEOs feel it is their personal responsibility to ensure their ESG policies reflect their customers’ values. Boards can hold management accountable to this responsibility by linking executive compensation to ESG milestones; literally putting your money and profit where your “mouth” is.

    Raise these topics on the board’s agenda. Investors, customers, employees, potential recruits and regulators will demand more details about organizations’ climate risks and carbon abatement efforts – and their effects on revenue and earnings—as well as cumulative reductions in emissions and other environmental impacts.

    Assess supply chain impacts. Work closely with vendors and customers to reduce carbon impacts throughout the supply chain. According to the KPMG Global Semiconductor outlook, one of the top issues facing this industry is supply chain disruption – whether through worsening disasters such as fire, floods and hurricanes, economic and geopolitical forces or, more recently, the pandemic.

    Help senior executives, including those in finance, accounting, operations, risk, marketing, human resources and investor relations, understand their organization’s energy transition and climate plans and how those plans will affect growth and profits, brand reputation, talent strategy and M&A strategy, among other things.

Looking ahead:

Earlier this year, Acting SEC Chair Allison Lee released a statement directing the SEC’s Division of Corporation Finance to enhance its focus on climate-related disclosures in public company filings. This was followed by another statement from Acting Chair Lee in March, requesting public input on climate change disclosures. The SEC will consider this information in their evaluation of current climate change disclosure rules and guidance and to facilitate future rulemaking activity in this area.

As noted in Climate action gains steam in Washington, “Federal procurement rules may soon require at least some vendors to meet certain climate performance requirements and report on upstream and downstream greenhouse gas emissions… President Biden has directed federal agencies “to procure carbon-pollution-free electricity and clean, zero emission vehicles.” He has yet to specify a timeline, but any changes in procurement policies could have major effects, since the U.S. government is the world’s largest consumer, including one of the largest consumers for the tech industry.  

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Media Contact
Libby Langsdorf
elangsdorf@kpmg.com
Cell: 917-825-2211

 

 

 

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