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Securities regulators need a bolder approach to climate-change disclosure

Janis Sarra is Presidential Distinguished Professor, University of British Columbia and Professor of Law, Peter A. Allard School of Law

Last week, the Canadian Securities Administrators (CSA) published its long overdue study of climate-change. The Report on Climate change-related Disclosure Project was more than one year in the making. After extensive consultations with issuers and investors, securities regulators finally acknowledged the importance of climate-change financial risk, but failed to act meaningfully, announcing yet more study.

The report left Canada once again lagging international developments, all the more noticeable with the governors of central banks globally announcing two days ago the pressing need for regulatory oversight to address climate-related risks to the financial system.

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The report notes that substantially all users consulted are dissatisfied with the current state of disclosure. The CSA announced that it intends to consider new disclosure requirements regarding non-venture issuers’ corporate governance practices in relation to climate change risk but made no commitment that it will require companies to disclose their governance and oversight of climate change-related risks. While it was no surprise that most issuers did not want mandatory disclosure, their costs of complying would be minimal compared with the economic and related effects of having Canadian companies fail to manage emissions reductions and take other climate-related measures.

The CSA report lumps climate change in with the need to consider cybersecurity and free trade, meaning that nothing much will happen anytime soon.

Securities regulators are caught up in the “materiality” issue under Canadian securities disclosure legislation; materiality is currently a determining factor as to whether information must be disclosed to investors. Yet insights from reports internationally and from investors surveyed by the CSA make clear that the current materiality standard does not work for climate-related financial risks, given both the timelines and the existence of risk across the entire economy. Disclosure relating to corporate governance is not subject to a materiality standard in Canada; climate-change should be treated similarly. UK‐listed companies are now required to disclose their greenhouse gas emissions and account publicly for their contributions to climate change on an annual basis and such disclosure is being implemented in other jurisdictions.

The CSA reports that it will continue to monitor the quality of issuers’ climate change-related disclosures. Yet, their survey results reveal that improvements are needed now. It also announced it will develop new guidance to educate issuers about the disclosure of climate change-related risks, opportunities and financial impacts - education is good, but not enough. The Task Force on Climate-related Financial Disclosure, in which Canadians participated, has already proposed detailed tools and guidance that are being adopted globally. CPA Canada, the organization of chartered accountants, is already working to educate boards on how to account for and disclose climate risk. Why would securities regulators seek to reinvent what is already being done?

The Office of the Auditor-General of Canada last month reported that, on the basis of current government policies and actions, Canada is not expected to meet its 2020 target for reducing greenhouse gas emissions and that substantially more effort is needed. The CSA report was the opportunity to require Canadian issuers and other market participants to step up and do their share of ensuring we meet our targets.

What is good in the report? The disclosure review offers some new data. More than half of issuers examined provide specific climate change-related disclosure in their MD&A and/or Annual Information Form, but the other half use boilerplate disclosure or no disclosure at all. More companies undertake some disclosure in their voluntary reports, but most disclose it as a regulatory risk, rather than looking to their own emissions and other activities contributing to climate change. Almost no companies disclose their governance and risk management practices respecting climate change. While 43 per cent of issuers specifically mentioned physical climate change-related risks in their regulatory filings, the majority did not quantify the potential financial impact of those risks. These results alone reveal the urgent need for regulatory reform.

Many investors suggested to the CSA that new regulatory disclosure requirements are necessary to create any meaningful improvements. Many support the TCFD Recommendations, which recommend disclosure of: the board of directors’ oversight of climate change-related risks and opportunities; management’s role in assessing and managing climate change-related risks and opportunities; the process used to identify and assess climate change-related risks; and how such processes are integrated into the issuer’s overall risk management process.

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Canadian governments could adopt legislation similar to that enacted in France to require corporations, financial institutions and institutional investors, including mutual funds and pension funds, to disclose annually the financial risks related to the effects of climate change and the company’s measures to reduce them, including how they are implementing a low-carbon strategy in every component of their activities and how their corporate and investment decision-making is contributing to the energy and ecological transition to limit global warming. It is time to align the public rhetoric with meaningful action.

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