Executive summary

The report highlights the need to balance energy security, affordability, and decarbonisation as the world transitions to renewable energy sources. It examines the changing landscape in fossil-based energy production and consumption towards renewable energy sources. The energy sector can support the transition to a net-zero economy by building momentum on carbon neutrality pledges, embracing digital transformation and technology, and collaborating across the sub-system sectors.

Introduction

The report challenges traditional risk assessment approaches’ adequacy, particularly for assessing the multi-faceted and complex characteristics of ESG-related risks in the energy sector. The energy system faces significant risk from the changing ESG landscape and evolving operational and business models in response to the transition to a net-zero global economy.

Assessing and prioritising ESG-related risks

Effective risk management balances risk exposures, benefits, and expenditures. The report identifies the challenges of identifying, assessing and prioritising ESG risks in financially measurable terms, and provides examples of dissociation between meeting sustainability targets and transforming practices. The report suggests identifying appropriate core metrics that are leading indicators of current and emerging risks related to ESG factors.

Understanding the energy landscape

The report outlines the roles of sub-system sectors, including energy infrastructure, electrical grids, and the built environment, in reducing ESG-related risks in the energy system. The report proposes incorporating future trends’ potential downstream exposures into risk management processes, such as circular design principles and transparency in carbon disclosure to achieve carbon neutrality and support sustainable development goals.

KPMG’s dynamic risk assessment methodology

The paper outlines a Dynamic Risk Assessment methodology that examines, understands, and manages the interconnections, complexity and aggregated impacts of ESG-related risks. For example, the report identifies aligning the ESG agenda with organisational strategy and culture as critical factors in Dynamic Risk Assessment.

Energy study – insights and findings

The report finds that the energy sector faces several challenges as it transitions to renewable energy sources, including policy gaps, market fragmentation, and digital security. In contrast, the report identifies opportunities for investments in renewable energy that demonstrate positive ESG and financial performance. As noted in the report findings, companies operating in the world’s energy system are facing unprecedented change as they seek to limit the global average temperature increase to below 2°C.

Key themes and possible actions

The paper identifies several themes and actions necessary to mitigate ESG-related risks in the energy sector, including cross-functional engagement and collaboration across all levels of the organisation, identifying appropriate metrics for assessing risks, and establishing risk monitoring thresholds for the most influential and influential risks. The report highlights the importance of mitigating corporate performance risks and focusing on intervention points applicable to the specific risks.

Conclusion

Based on the report’s key findings, it concludes with recommendations for companies operating in the energy sector to integrate ESG-related risk management into business decision-making and performance. The report’s intended actions will enable companies to act as advocates for energy system transformation by responding proactively to the critical risks and opportunities identified.