During Kilning, When the malted barley is dried with heat. And this heat might be from the burning of peats; when burning these peats, the smoke moves upwards to where the still wet malted barley is. And, the smoky and peaty compounds of the peat will be attached to the malted barley. The time and intensity of the exposure shape the strength of peaty (PPM).

Thus creating a peaty & smoky flavour.  There are other ways to click the peatiness in the liquid such as a peat cask finish.