Laura Zizzo is founder and CEO of Mantle314, a climate risk management consulting firm.
The federal government’s Expert Panel on Sustainable Finance’s final report had 15 recommendations for how Canada can build a stronger, greener and more resilient economy. Yet, it is up to the federal and provincial governments to determine when and how many of the recommendations are implemented. While political parties draw intractable and irreconcilable lines in the sand on how to deal with climate change, there is a developing ecosystem in Canada for sustainable financial services and there is no reason why Canadian companies need to wait for governments. What is worrisome is whether these companies are taking the right approach.
The report lays out a path for Canadian businesses to comply with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations. As part of a “comply or explain” policy, the panel recommends TCFD compliance in Canada proceed in two phases. The first phase focuses on the strategy, risk, metrics and governance aspects that deal with oversight: How does a business oversee and identify climate risks and opportunities? The second phase requires disclosing steps to address and adapt to climate change and how these are integrated into the overall organization, based on assumptions and the application of scenario analysis.
At this point in time, few Canadian companies have the people and processes in place to provide adequate disclosure for investors and harness the opportunities of a low-carbon economy. Too many companies still feel that climate disclosure is for the annual sustainability report or public accountability statement.
This is where governance is key because investors are going to ask questions: Is there a board committee overseeing climate-related risks to the company’s operations? Is there a person accountable for climate risk? Do they have authority i.e. do they report to the chief executive? Are performance metrics tied to the role? Does leadership consider the potential litigation risk of climate-related issues?
In effect, investors are looking for climate-related risk and opportunity to be assigned within organization charts to see if these companies are taking climate issues seriously. Who do the climate, environment, sustainability and ESG (environmental, social and governance) people report to? It is typical today for these functions to be located in the philanthropy, marketing or corporate social-responsibility units. Investors want to see that information also funnelling to risk, strategy, finance and legal, with clear accountabilities all the way up to the board.
We are starting to see climate-risk functions being developed and moved to the risk and finance departments, but we’re not out of the woods yet. Reporting and disclosure is really difficult if you do not have taxonomy (a classification according to a predetermined system to provide a framework for disclosure). The perceived lack of clarity for businesses on what constitutes climate risk and how to disclose it, as well as what constitutes a green investment, is impeding progress.
The panel’s report recommends the Department of Finance work with the Canadian Standards Association to develop a clear taxonomy for green and low-carbon economy transition fixed-income products, to better unlock investor capital. It also recommends that Chartered Professional Accountants of Canada support the development of a climate lens for accounting, assurance and auditing standards.
Many Canadian businesses have lost first-mover advantage and are at a disadvantage against global competitors who are moving much faster. Just days after the release of the panel’s recommendations, the European Union Technical Expert Group released its sustainable finance taxonomy and green bond standard. Investors in the EU now have a common language and clarity on low-carbon issues. Much of what the EU released will be relevant in Canada, and we should leverage it wherever possible.
The Bank of Canada listed climate change as one of six vulnerabilities to the Canadian economy, partly because of the inconsistent nature of TCFD compliance in Canada. In the review, the central bank stated “asset prices may not fully reflect carbon-related risk,” because of the lack of information on the carbon exposure of firms and because of the difficulty associated with accounting for uncertain and complex future events. If assets are mispriced rapid repricing causing “fire sales” coupled with other market vulnerabilities could destabilize the financial system, the bank warned.
Other jurisdictions are moving faster than Canada to bring in TCFD compliance and enhance transparency for investors. Britain’s Green Finance Strategy, released July 2, recommends full TCFD compliance for all publicly listed companies and large asset owners by 2022 – a full two years ahead of the proposed timeline for Canadian companies. Meanwhile, France encoded climate disclosure into its legal system in 2015.
Canada needs to be proactive and to see these shifts as an opportunity. By seeing the opportunity for innovative sustainable financial products, being more active in how businesses disclose climate strategies, and being creative in how we address climate risk, we can ensure global investment in green business comes to – and stays in – Canada.