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Shawn McCarthy is a senior counsel and Robyn Gray is vice-president in the energy and environment practice with Sussex Strategy Group.

While the politics of climate change are fought over the carbon tax and oil pipelines, financial-market regulators are engaged in a seismic shift that could increasingly drive investment capital away from high-emission businesses and toward those that accelerate the transition to a low-carbon economy.

The Canadian Securities Administrators (CSA) recently released new guidance for issuers of corporate securities and their advisers that clarifies their responsibility on climate-risk disclosure. At the same time, Ottawa’s financial regulator has signalled to banks, insurance companies and pension funds that they are expected to assess and disclose their own climate-related risk.

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Driven by global institutional investors, the demand for increased transparency on the risks posed by climate change is a stark example of the disappearing distinction between environmental best practices and prudent economic management.

Still, much work needs to be done to ensure consideration of climate-change factors is front and centre with Canadian boards of directors and senior executive teams when they set their business strategies. And that they communicate the risks and opportunities clearly to investors in a way that allows for comparisons across major industries.

The next Liberal finance minister – whether Bill Morneau stays in the post or it’s someone else – should strengthen the regulation and supervision of climate-related financial matters as it works to unleash private-sector capital to finance a low-carbon transition.

Even with a minority government, the Liberals can pursue policies in the financial sector that reflect the advice of the Expert Panel on Sustainable Finance. That panel, led by former deputy governor at the Bank of Canada Tiff Macklem, provided a series of recommendations in a report last June.

The Liberals have the support of three smaller parties – the New Democrats, the Greens and the Bloc Québécois – to pursue more ambitious climate action, and the financial market policies would be less contentious on the Prairies, where Prime Minister Justin Trudeau is facing a serious backlash to his policies.

Indeed, there has already been considerable movement on sustainable finance, although climate-related factors have not yet become a “mainstream” financial concern, as the expert panel recommended.

In a recent prebudget submission, the Chartered Professional Accountants association urged the government to implement the panel recommendations that cover areas of federal jurisdiction. They include efforts to “embed climate-related risk into monitoring, regulation and supervision of Canada’s financial system.”

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As part of that process, major energy, industrial and financial companies should be required to conduct a rigorous analysis of what impact there would be on their businesses if the world embraces the measures needed to meet the climate goals of the Paris accord.

The Canadian Securities Administrators’ guidance should add some momentum, although it is up to provincial securities agencies to implement and enforce. While the CSA statement does not impose new regulations, it makes clear that long-term climate-related risks that arise from anticipated policy and technology developments should be considered “material” for the purposes of disclosing them to investors.

In other words, Canada’s energy and financial corporations, among others, should disclose how efforts to combat climate change could affect their long-term financial health, even if it’s not clear the degree to which policies will be implemented or new disruptive technology deployed.

It is up to the individual company to determine whether climate-related factors are material for the purposes of disclosure. But again, the CSA provides some direction: “If an issuer concludes that a climate-change-related matter would likely influence or change a reasonable investor’s decision whether or not to buy, sell, or hold securities of the issuer, we expect it to be disclosed, even if the matter may only crystallize over the medium- or long-term or if there is uncertainty whether it will actually occur.”

Those matters include both physical issues – the impact of increased severe weather on an insurance company’s profit and loss, for example – and transition risks that arise from government policy and the deployment of new technology.

Federal financial regulators have set down their markers and are committed to monitoring developments to determine what further action is required of them.

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The Office of the Superintendent of Financial Institutions has targeted insurance companies, which face both physical risks and challenges to their investment strategies, given their long-term liabilities. OSFI has been less vocal with regard to the country’s banks and the degree to which their lending practices and underwriting will be affected by climate change.

The regulator, however, does expect “a regulated institution’s board of directors and senior management to understand and consider climate-related risks and adopt a strategic approach to addressing them,” spokesman Colin Palmer said. “OSFI will continue to evaluate the progress made by institutions in identifying, monitoring and assessing climate-related risks.”

More robust disclosure complements a robust policy of carbon taxes and regulations along with public investment. Credible analysis of risks and opportunities facilitates the growing commitment of institutional investors and many global corporations to allocate substantially more capital to emerging low-emissions sectors, and to technology and business strategies that reduce greenhouse gases in incumbent industries.

On the flip side, failure to disclose material risks will leave companies liable not only to regulatory sanction, but to the potential of lawsuits from disgruntled owners of underperforming assets.

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