Jim Leech is a member of both the Order of Canada and the Order of Ontario, chancellor emeritus of Queen’s University and a former president and CEO of the Ontario Teachers’ Pension Plan. He is currently chair of the advisory board for the Institute for Sustainable Finance.
Sean Cleary is a professor of finance, the founding director of the master of finance program at the Smith School of Business at Queen’s University, and the chair of the Institute for Sustainable Finance.
Right now, experts are weighing in on a decision that will affect not only Canada’s regulatory landscape but the future of the country’s competitiveness. That includes the ability of our businesses to attract global capital and to manage the risks and seize the opportunities of the transition to a net-zero world. That decision is if and how we mandate the disclosure of climate-related material data.
In October, the Canadian Securities Administrators (CSA) announced proposed new rules for companies’ climate-related disclosures, joining a growing movement in eironmental, social and governance (ESG) criteria that has most recently seen similar developments in Britain, the European Union and other jurisdictions. With the deadline for comments on the CSA’s proposal just weeks away, the window to shape Canada’s trajectory on this issue is closing. We applaud this important initiative, which we view as a definitive step in the right direction. We fully expect (and hope) that this will be the start of an evolving journey to mandate improved and critical disclosures on sustainability-related issues. We have a tremendous shot at getting this right from the start, but gaps in the proposed rules could cost us that opportunity.
With ESG issues and the effects of climate change gaining widespread acceptance as falling squarely within the scope of fiduciary duty, better disclosures are no longer a nice-to-have – but a necessity. A growing chorus of voices has made that clear. Take the rare joint call for better disclosures by Canada’s eight largest pension funds, collectively responsible for more than $1.6-trillion in assets. This past summer, the country’s 10 largest pension funds issued a similar joint statement in response to the U.S. Securities and Exchange Commission’s request for input.
The CSA’s proposal aligns with this momentum. We applaud components that will improve the completeness, consistency and comparability of climate-related financial disclosures, including implementing a significant portion of the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Making such disclosures a regulatory requirement in Canada is central to achieving these objectives, and we need to act quickly.
That said, there are three key areas where the proposed requirements fall short.
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First, the decision to exclude climate scenario analysis is a significant missed opportunity. Scenario analysis is a fundamental component of identifying a company’s exposure to climate risk. The process is consistent with TCFD requirements, which are rapidly becoming the global standards. Excluding this requirement limits the ability of capital providers to comprehensively analyze the impact of climate change, disadvantaging Canadian companies on the global scene. In the absence of such information, capital providers often err on the side of caution and adopt a pessimistic view of the risks and opportunities a particular company faces.
We do recognize that addressing scenario analysis could be complicated for companies and would not want to see this impede the timely implementation of the CSA recommendations. A phased-in approach to this requirement would be a reasonable compromise.
Second, we strongly disagree with providing issuers the option to not disclose their greenhouse gas emissions as long as they can provide an explanation for doing so. Many firms currently disclose their emissions in Canada. In other jurisdictions, such as the EU and Britain, a much higher percentage of firms do so. Such information is essential for capital allocators, regulators and the companies themselves as we transition to a net-zero economy by 2050.
For companies, not having a starting point measurement for emissions is inexcusable and severely inhibits the development of legitimate transition plans. The lack of availability of such information complicates data issues for regulators and capital allocators as they plan their own transition strategies toward net zero. Importantly, there is strong evidence that once firms start reporting GHG emissions, they take actions to reduce them.
Third, while TCFD reporting requirements are comprehensive with respect to climate-related matters, reporting in alignment with the Sustainability Accounting Standards Board (SASB) framework is very complementary, as it provides more in-depth information on other critically important ESG issues. The strong demand for both TCFD and SASB reporting is evident in the joint statements by Canada’s largest pensions, which called for disclosures aligned with both frameworks. It is also evident in the proxy voting policies of numerous large global institutional investors. Similar to the implementation of scenario analysis disclosures, a phased-in approach makes sense with respect to SASB disclosures.
The global market is placing increasing value on climate solutions and resilience, as well as companies’ progress and plans to address important social and governance issues. At the same time, it is punishing those who fail to prove they are up to the task. For Canadian firms to compete, strong and credible disclosure reporting is essential. Implementing the CSA proposal will help Canadian businesses, capital providers and policy makers rise to this challenge. But addressing the gaps first would significantly enhance the impact. Mandating climate-related disclosures is a foundational step in Canada’s journey to thrive through the massive economic transition that’s already well under way. Let’s get this step right.
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