Regulatars are circling on climate change and ESG: are you ready?
 
Peter Forrester
November 29, 2022
 
 
Securities Regulators are developing standards for ESG disclosures while enforcing
misleading disclosures
Investors continue to ramp up pressure on businesses to disclose the risks they face related to climate change. It is increasingly important to investors that they understand how businesses are financially impacted in the long term by climate change risks. The companies that make disclosures substantiating their understanding of climate risks and opportunities signal that they are addressing them, and will ultimately continue to have access to investors’ capital.
 
There are, however, two major challenges facing both investors and businesses related to the disclosure of climate risks. Firstly, disclosure standards are largely voluntary and based on developing frameworks, none of which are definitive. Regulators are in the midst of developing mandatory standards, but largely they are not in place yet today. Investors want credible, comparable, complete, consistent and regulator reporting on climate risks, but to date the frameworks and regulations have yet to provide sufficient consensus guidance on these elements. Secondly, to meet the demand for goods and services from business that are addressing climate change risks, businesses are keen to flex their green muscles. They are disclosing what they have determined, based in part on the developing frameworks and regulations, to be the positive ESG benefits of their offerings. 
 
Herein lies the problem. Without definitive disclosure standards, companies are left to their own devices in describing their ESG performance. In particular, they can get themselves in trouble by marketing goods and services which they think have positive ESG benefits, when it just ain’t so. Where this marketing disclosure is relied upon by investors, regulators are increasingly investigating the accuracy of the positive assertions. As we see from last week’s enforcement action by the U.S. Securities and Exchange Commission (SEC) charging Goldman Sachs Asset Management L.P. (GSAM) for failing to implement and follow policies and procedures for funds marketed as Environmental, Social and Governance (ESG) investments, companies need to carefully evaluate their ESG-related disclosures.
 
What are the current requirements to disclose climate-related risks?
Currently, in both Canada and the United States, publicly listed companies are required to publicly disclose material facts and changes that can reasonably be expected to impact the value of the company’s stock (i.e., is material to investors). In essence, each company determines what climate-related risks, or ESG matters, it deems material and wishes to disclose. This disclosure has been augmented by reporting these risks through voluntary standards and frameworks like SASB, GRI, or TCFD. Despite these frameworks being voluntary, investors have increasingly been utilizing these frameworks to evaluate the risk and return of a particular company in its investment decisions.
 
Proposed regulatory requirements
In March of this year, the SEC introduced the “Issuer Rule,” which proposes that public companies provide certain climate-related financial data and information related to greenhouse gas (GHG) emissions in their public disclosure filings. The SEC followed up in May 2022 with the additional “Investor Rule” proposing to require investment funds claiming to be focused on ESG to disclose more details about what these ESG strategies are in their public filings, including prospectuses and annual reports. While not in force, the expectation is that the Investor Rule will be finalized by the end of 2022, and come into force in the following year or so.
 
With the Issuer Rule, public companies in the U.S. will no longer have to make the materiality assessment as it relates to certain climate-related and ESG risks – disclosure will be required. Specifically, public companies will have to report climate-related risks totaling 1% or higher of a total line item in a relevant year’s financial statements.  
 
There will no doubt be further Canadian and global rules that will follow suit. We have already seen the Canadian Securities Administrators and the Office of the Superintendent of Financial Institutions introduce similar, albeit less stringent, proposals.
 
What will attract ESG-related enforcement?
The GSAM case is a good illustration of what will attract enforcement. 
 
GSAM marketed two mutual funds and a separately managed account based on certain ESG attributes. Initially, it did so without having sound governance (policies or procedures) in place relating to how it was conducting its research and selecting securities for inclusion into these investments. When it did put the policies and procedures in place, it at times failed to follow its own policies and procedures. The representative for the SEC, Deputy Director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force gave a good summary of what is required to avoid enforcement:
 
 
“In response to investor demand, advisors like Goldman Sachs Asset Management are increasingly branding and marketing their funds and strategies as ‘ESG.’ When they do, they must establish reasonable policies and procedures governing how the ESG factors will be evaluated as part of the investment process, and then follow those policies and procedures, to avoid providing investors with information about these products that differs from their practices.” SEC press release, “SEC Charges Goldman Sachs Asset Management for Failing to Follow its Policies and Procedures Involving ESG Investments” (November 22, 2022, link).
 
Companies can have good intentions when they describe the beneficial ESG attributes of their offerings, but they must ensure that their descriptions are accurate and true. Not following your own internal policies will only be evidence that the disclosures are not true, and such conduct will be a ready-made formula for enforcement.
 
Expectations going forward
We continue to see the call for increased regulations related to climate and ESG disclosures becoming mandatory. For example, at the recently wrapped-up COP 27, we saw the United Nations’ High-Level Expert Group recommend further mandatory reporting requirements. And just last week we saw the Financial Conduct Authority, the UK financial services and financial markets regulator, announce the formation of a working group to develop a code of conduct for ESG data and rating providers. This was a partial response to the November 2021 call from securities regulator standards-setter IOSCO, which urged more regulatory oversight in the ESG space.
 
It is not a matter of whether mandatory regulation and increased enforcement are coming, but how quickly they will come. To prepare for the regulations, and to avoid enforcement action, companies need to improve their internal processes for carefully analyzing their climate risks, converting these into financial outcomes, reporting performance in a transparent, credible and consistent way, and managing progress of their climate-related risk mitigation strategies. Failure to prepare will threaten access to capital on the front end, and potential greenwashing enforcement on the back end. 
 
 
Sustrio ESG Advisors helps educate businesses on ESG and climate-related reporting, understand the international reporting regimes, perform scenario analysis, and produce quality, data-driven disclosures relevant to investment and financial markets. Sustrio’s legal advisory services also review company disclosures to avoid material misrepresentations. Connect with us to see how we can help your company navigate the energy transition and report on all your ESG matters.
​

My emissions are less than your emissions: how much GHGs does your organization emit?
 

Peter Forrester
November 22, 2022
 
Introduction
This week, activist shareholders were successful in forcing Costco to quantify its greenhouse gas (GHG) emissions and to develop a plan to reduce them. The resolution was made earlier in the year, and called for Costco to “adopt short, medium, and long-term ‘science-based’ greenhouse gas emission reduction targets. These should be inclusive of emissions from its full value chain, in order to achieve net-zero emissions by 2050 or sooner, and to effectuate appropriate reductions prior to 2030.” Despite a recommendation from the Board not to adopt the resolution, it passed with 70% shareholder support. This week, Costco committed to set new targets by next year to reduce GHG emissions. (Reuters, “Costco to set new emission cut targets in deal with activist firm,” November 16, 2022, link).

We are witnessing rapidly increasing pressure on companies to disclose credible, complete, and comparable GHG emissions by the shareholder and investment communities. It does not matter whether that pressure is motivated by sentiments of saving the planet or through protecting corporate value (aka profits) by ensuring climate-related risks are addressed. The pressure is real and increasing rapidly.
 
Not to be outdone, regulators are also increasingly coming to the emissions reduction party, albeit at a regulator’s pace. The U.S. Securities and Exchange Commission (SEC), Canadian Securities Administrator (CSA), and the Office of the Superintendent of Financial Institutions (OFSI) all have proposals out involving making certain climate-related disclosures mandatory, and more is expected.
 
What do investors and regulators want?
Almost every government in the world has signed onto the 2015 Paris Agreement to curb global temperatures to well below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C. To achieve this, GHG emissions must be halved by 2030 and must reach net-zero by 2050. And as was highlighted ad nauseam last week at COP 27, we are way behind on achieving these targets.
 
There is a call for government and businesses to set “science-based reduction targets.” By “science-based” we mean aligned with the Science Based Targets Initiative (STBi). STBi is a partnership between the Climate Disclosure Project (CDP), the United Nations Global Compact (UNGP), the World Resources Institute (WRI), and the World Wide Fund for Nature (WWF). STBi’s mandate is to drive ambitious climate action in the private sector by enabling organizations to set science-based emissions reduction targets.
 
The process on its face is relatively straightforward. Your organization commits to STBi its intent to set a science-based target, it works with SBTi to develop a reductions target in line with climate science, it submits a target and publicly communicates the target, and it reports its emissions reduction progress annually. And as with Costco, this applies to emissions across the organization’s supply chain.
 
Of course, the elephant in the room is that this must all start with an understanding of what your organization is emitting today. To date, many organizations have not even commenced this task because the current regulatory reporting requirements do not apply to their business. As we see with Costco, the challenge with saying you are going to achieve your target by reducing X amount of GHG emissions every year requires you to know how much your business activities are actually emitting now, and therein lies the challenge – many companies have not done the work to determine what their baseline emissions are today.
 
Where to start with understanding your business’ emissions?
Eventually, as evidenced by the International Sustainability Standards Board confirming in October that it will require Scope 3 GHG emission disclosure requirements, companies will be required to disclose their own direct GHG emissions (Scope 1), their indirect GHG emissions (Scope 2), and the upstream and downstream emissions (Scope 3) across their value chains. For clarity:

• Scope 1 emissions include direct emissions from a company’s owned or controlled sources. This includes emissions from company facilities including energy used, combustion from boilers and furnaces, and fleet vehicles.
• Scope 2 emissions are indirect emissions not owned or controlled by a company. This includes emissions from purchased energy, such as electricity purchased from a utility.
• Scope 3 emissions include all direct emissions that occur across a company’s value chain, including upstream and downstream sources. Essentially, these are upstream emissions that are utilized in producing a company’s business or services, and the downstream emissions from customers using its products and services.

 
The global standard framework for measuring and managing GHG emissions from both private and public sector operations is set out by the Greenhouse Gas Protocol. The GHG Protocol was established in 1998 from a partnership between the World Resources Institute and the World Business Council for Sustainable Development. It has established the Corporate Accounting and Reporting Standard, which provides the accounting platform for virtually every corporate GHG reporting program in the world.
 
Determining Scope 3 emissions, and reducing them, is without a doubt going to be a monumental challenge for most companies. But as every journey starts with a few small steps, emissions targets and reductions start with a solid understanding of what your Scope 1 and Scope 2 emissions are today. The sooner companies can have a credible and complete baseline of their current emissions, the quicker they can make and report on progress toward reductions.
 
What does establishing Scope 1 emissions involve?
There is a well-defined process for identifying and accounting for Scope 1 emissions (Scope 2 emissions, being tied to energy use, are somewhat easier to quantify). The process involves the following:

• Establish the organizational reporting boundaries. Consider things such as what corporate entities and assets are to be included and what are the geographical limits of the operations and facilities. 
• Within those established boundaries, identify the GHG emission sources for Scope 1. This includes identifying sources and scope allocations, including stationary, mobile, process, and fugitive emissions.
• Collect emissions data and define calculation methods. There are a number of acceptable approaches including direct measurement, mass balance, and emission factor use.
• Utilize the GHG Protocol to conduct Scope 1 emissions calculations. There are a number of well-established calculation processes and tools that provide consistent and credible results. While not mandatory, this may include a results verification process.
• Report results to company management to develop the emissions target-setting and reduction strategies aligned with the company’s sustainability and Environmental, Social and Governance (ESG) strategy.

 
Are you ready for what’s coming?
Pressure from many different stakeholders will continue to increase for companies to understand and report their Scope 1, 2, and 3 emissions. While we cannot predict the exact timing of additional regulatory requirements for such reporting, it is only a matter of time before the regulations are in place. In the meantime, companies that have a solid understanding of their Scope 1 emissions will be well positioned to meet investor and regulatory demands. Perhaps more importantly, they will have a head start in having data to assist in understanding the risks and opportunities related to climate-change and the energy transition. This in turn can lead to a competitive advantage. So hopefully you can answer the question: “How much do you emit?” 
 
 
Sustrio ESG Advisors helps educate businesses on climate-related reporting, understand the international reporting regimes, perform scenario analysis, and produce quality, data-driven disclosures relevant to investment and financial markets. Our services include dedicated engineering resources for calculating emissions pursuant to the GHG Protocol. Connect with us to see how we can help your company navigate the energy transition and report on all your ESG matters.
 

​COP 27 | An urgent call for greater sustainability efforts and energy transition investments
 
“In just days, we cross the threshold of having more than 8 billion humans on the planet…”
 
“The clock is ticking. We are in the fight of our lives. And we are losing. Green-house gas emissions keep growing. Global temperatures keep rising. And our planet is quickly reaching tipping points that will make gales irreversible. We are on a highway to climate hell with our foot still on the accelerator.”
 ​
(UN Secretary-General Antonio Guterres, COP 27 Opening Remarks, November 7, 2022)
 
What is going on?
 
World leaders gathered in in Sharm El Sheikh, Egypt for the 27th Conference of the Parties (COP 27). Between November 6th and 18th, they will discuss the state of climate change, its largest challenges, and attempt to agree on joint action to be taken to combat it.
 
As you can see from the UN Secretary’s opening remarks, there are serious concerns about the progress the world is making on tackling climate change. The Secretary put it this way in his opening remarks:
 
“The science is clear. Any hope of limiting temperature rise to 1.5 C means achieving global net-zero emissions by 2050. But that 1.5 C is on life support and the machines are rattling. We are getting dangerously close to the point of no return. And to avoid that dire fate, all the G-twenty countries must accelerate their transition now in this decade. Develop countries must take the lead. But developing countries are also critical to bending the global emissions curve.”
 
What key items are on the COP27 Agenda?
 
Signals for what to expect from COP27 were partially established before the conference even began. 
 
For starters, developing countries were successful in getting “loss and damage” on the Agenda. Loss and damage refers to reparations potentially owed to poorer, more vulnerable developing nations for the climate harm caused by wealthy nations and their large-scale historical carbon emissions. This is one of the most controversial issues, as many developed countries reject the notion. Reasons range from how can it possibly be determined if a weather catastrophe was caused by climate change? To the practical concerns that there are simply  not enough funds. Having the topic on the agenda signals there will be much more debate on this point for years to come.
 
The COP 27 Presidency launched the Sharim El-Sheikh “Adaption Agenda.” This is a list of 30 adaption outcomes aimed at enhancing resilience for the most vulnerable communities living in developing nations by 2030. The Agenda is intended to help developing countries with “mitigation and adaption” methods to cope with climate change. It includes items such as protection against extreme weather conditions, threats to food and water supplies, protection of key infrastructure. It also includes finance targets to fund such efforts.  
 
The COP 27 Presidency also identified sustainable transport as a high priority. Two major initiatives are being pushed: The U.S. and Norway are advocating for a Green Shipping Challenge. It encourages entities along the shipping supply chain to announce concrete steps at COP 27 outlining how they will put the shipping sector on a pathway toward Net-Zero by 2050. The U.S. is also leading the Collective 2030 Zero-Emissions Vehicle Goal, encouraging countries to announce plans for reaching a collective goal of 50 percent of vehicles on the road being Zero Emissions Vehicles (ZEVs) by 2030. It follows on the heels of the EU agreement last year to reduce GHG emissions from cars by no less than 50 percent by 2030 compared to 2021 levels.
 
On November 11, 2022 The US, EU, UK, Japan, Canada, Norway and Singapore pledged to dramatically reduce methane, CO2 and other GHGs from the fossil fuel chain. This includes the need to eliminate routine venting and flaring and to carry out repairs in upstream, midstream and downstream oil and gas operations. They called for robust and transparent measurement and reporting to support the reductions. 
 
What can we expect to come out of COP27?
 
If the recommendations coming out of COP27 have anything to do with it, the answer is increased regulations around mandatory measurement, reporting and mitigation of GHG’s. The UN commissioned the “United Nations’ High-Level Expert Group” to make recommendations on the Net Zero Emissions Commitments of Non-State Entities Integrity Matters: Net Zero Commitments by Businesses, Financial Institutions, Cities and Regions (November 8, 2022).   [https://www.un.org/sites/un2.un.org/files/high-level_expert_group_n7b.pdf]. It is chaired by Canada’s former Environment Minister, the Honourable Catherine McKenna. Her speech at COP 27 highlighted recommendations from the report, including:
 
“You must have a detailed transition plan and focus on immediate emission reduction across your value chain and capital expenditures aligned with these targets and the Net-Zero pathway.  You must report publicly and transparently on progress, with verified information that can be compared with peers.”
 
“Second, we set very clear red-lines on greenwashing. This is what you cannot do. If you announce publicly, you put up your hand and say “I’m a climate leader, I am committed to Net-Zero. You cannot claim to be Net-Zero while continuing to build or invest in new fossil fuel supply.”
 
“Deforestation is disqualified. “You can’t buy cheap credits, that very often lack integrity. And very often hurt local communities and Indigenous peoples rather than prioritizing cutting emissions across your value chain.” 
 
“You can’t simply reduce the intensity of your emissions. You need to reduce absolute emissions. You need to reduce emissions across your value chain. That includes reducing scope 3 emissions.”
 
“You cannot say you are a climate leader and lobby against climate action, including through trade associations.”
 
What will clearly be one of the most contentious aspects of the report relates to fossil fuels. Ms. McKenna references the reports recommendation that “Non-state actors cannot claim to be net zero while continuing to build or invest in new fossil fuel supply.” Given that the recent IEA report (2022, October 27) World Energy Outlook 2022 [https://www.iea.org/reports/world-energy-outlook-2022] demonstrates “The share of fossil fuels in the global energy mix in the stated policies scenario fall from around 80% to just above 60% by 2050,” it is clear we still need secure and responsible oil and gas in 2050. This aspect of the report makes no sense. Particularly when responsible producers like the Pathway’s Alliance have committed to Net-Zero by 2050 and is taking current steps to make that commitment a reality, the recommendation is counter-productive. In essence, it is discouraging fossil fuel developers from taking action to achieve Net-Zero, which clearly cannot have been the intent. 
 
We can also expect a huge ramp up of investment in all forms of renewable energy. As the IEA report referenced above laid out in its key findings, “A smooth and secure energy transition will require a major uptick in clean energy investment flows. Getting on track for the NZE Scenario will require a tripling in spending on clean energy and infrastructure to 2030, alongside a shift towards much higher investment in emerging market and developing economies.”
 
EU Commission President, Ursula von der Leyen highlighted the need for investment in her COP27 remarks:
 
“Because we know that every kilowatt-hour of electricity that we generate from renewable sources – like solar and wind, and green hydrogen – is not only good for our climate, but also good for our independence and our security of supply.”
 
Conclusion
 
There is consensus by world leaders that the fight against climate change is not occurring fast enough. This will result in more countries introducing regulations to increase the pace of GHG reductions. There will be many risks and opportunities for businesses. These will include increased mandatory emissions testing, and sustainability reporting that clearly outlines midterm and long-term plans to achieve Net-Zero by 2050. 
 
We will conclude as we opened with strong words from the UN Secretary at the opening remarks.
 
“Humanity has a choice. Cooperate or perish. It is either a climate solidarity pact or a collective suicide pact.”
 
Sustrio ESG Advisors Inc. helps educate businesses on climate-related reporting, understand the international reporting regimes, scenario analysis and produce quality and data driven disclosures relevant to investment and financial markets.

​What is all the fuss about climate-related scenario analysis, and why should you care?
 
Peter Forrester
November 8, 2022
 
 
Introduction
World leaders are gathering in Sharm el-Sheikh, Egypt this week for the 2022 United Nations Climate Change Conference (COP27). They represent most of the world’s countries that are signatories to the 2015 Paris Agreement, wherein they committed to “holding the increase in global average temperatures to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C.” The commitment is based on climate change modelling that shows once we reach 2°C above pre-industrial levels, more extreme and frequent weather events and warming present challenges to human health, access to food and water, damages to land and infrastructure, and displacement of workers.
 
To achieve the “well below 2°C target,” the global economy needs to be Net-Zero by around the middle of the century, or 2050. It needs to stop adding greenhouse gases (GHGs) to the environment, and in fact needs to remove some that currently exist.
 
What’s the business impact?
All sectors of the economy, and all businesses, will be impacted by climate change. Each will have their own unique set of climate change risks, including opportunities to mitigate these risks, and if done correctly, some will have opportunities to profit from solutions to climate change. As part of the risk planning process, investors are increasingly demanding that climate-related risks and opportunities in particular be identified and priced to allow markets to allocate capital appropriately. This is why, as of 2021, according to the Science Based Targets Initiative, 70% of the global economy is covered by Net-Zero pledges. To drive the point home, RBC’s recent 2022 Global ESG Credit Investor Survey finds that environment, social, and governance (ESG) ratings, controversy levels, and climate metrics and risks are the key ESG drivers impacting investment decisions (RBC, 2022 Global ESG Credit Investor Survey, 2022 (link)). 
 
What is the first step?
If organizations are going to identify the impact of climate change on their business, they need to understand what the future risks are. If the world achieves a 1.5°C limit the risks are monumentally lower than if end up at 2.8°C, which is where the UN Environment Programme (UNEP) predicts the range will be in 2100 under current policies. So, like any risk planning process, businesses need to do scenario analysis to plan for a number of different possible outcomes, and, based on their assessment which should be updated regularly, prepare to address the outcomes it determines are most credible and likely.
 
This is where climate-related scenario planning comes in. By assessing a number of climate change scenarios or hypothetical outcomes (referred to as “pathways”), businesses can understand how climate change physical and energy transition risks may impact their business, their strategies and their financial performance. For this reason, the Task Force on Climate-Related Financial Disclosures (TCFD), a global organization of investors, banks and insurance companies, is strongly recommending business conduct climate-related scenario analysis. By considering a range of possible climate-related outcomes, businesses can model how they might perform under different scenarios, and how they can build resilience to the pathways they determine to be credible and likely. This will allow them to better understand and respond to risks and opportunities. It will also allow investors to price in risks appropriately.
 
The challenge
Most companies are not conducting climate-related scenario planning. As reported by EY Canada, “the research shows only 41% of companies in the study conducted scenario analysis” (EY Canada, Global Climate Risk Disclosure Barometer, 2021 (link), p. 9). Without understanding and considering credible hypothetical climate outcomes, the chances that a business has planned to mitigate the considerable risks is very low. As the report notes:
 
“Because climate-related risks are inherently more complex and long term than most traditional business risks, scenario analysis is essential for organizations to understand the physical, economic and regulatory connection between future climate impacts and business and supply chain activities.” (p. 19)
 
Why are businesses not conducting climate-related scenario analysis?
Three words: “it is hard.” A business needs to undertake a coordinated effort across its organization to produce a credible climate-related scenario analysis. This process includes:
 

• Ensuring governance and leadership has made a mandate to utilize such scenario planning to understand its risks and opportunities;
• Conducting a materiality assessment to truly understand the business’ material environment, social, and governance issues (“ESG”);
• Gathering the skills and information to appropriately identify and define a range of credible and science-based climate-related scenarios;
• Evaluating the business impacts under each scenario to allow it to take action on things like resulting revenue impacts, input and operating costs, supply chain impacts and potential business interruptions;
• Identifying and developing potential responses to the risks and opportunities, whether that be changes to business models, portfolio investment changes, or investments in new capabilities and technologies; and
• Reporting and disclosing the outcomes for investors and other stakeholders to evaluate and take action on capital allocation decisions.

 
Businesses also need to review and update the scenario modelling on a regular basis. Inputs and assumptions underlying climate-related scenario analysis are shifting quickly. This includes changes to legal and policy requirements, market and technology shifts, the understanding of physical risks, and demands from stakeholders and the impact this causes on reputational issues for businesses.
 
The good news
There are well-developed methodologies for conducting climate-related scenario analysis. This includes existing scenarios which have been developed by public organizations such as the International Energy Agency and the Intergovernmental Panel on Climate Change, to name a couple. Existing models can be customized to take into account the unique factors each business faces, such as:
 

• Geographic location of the business and its upstream and downstream supply chains;
• The organization’s assets and operations;
• The business’ customers and stakeholders; and
• The demands of its investors and shareholders.

 
Conclusion
The climate-related scenario analysis process takes up valuable resources and requires concerted effort and coordination across an organization. But investors and regulators will increasingly have less tolerance for the lack of such risk planning, and businesses that undertake credible climate-related scenario planning, like any good risk planning and management process, will have a significant competitive advantage.
 
 
Sustrio ESG Advisors helps educate businesses on climate-related reporting, understand the international reporting regimes, perform scenario analysis, and produce quality, data-driven disclosures relevant to investment and financial markets. Connect with us to see how we can help your company navigate the energy transition and report on all your ESG matters.
 

​What grade are Canadian businesses getting for climate-related disclosures?
 
Peter Forrester
November 1, 2022
 
 
Introduction
The pressure for businesses to make climate-related disclosures continues to increase month over month. Climate-related disclosures refer to the voluntary and legal requirement to make public disclosures on how a particular business is addressing the risks and opportunities of climate change. Disclosures can refer to physical risks to operations, or transitional risks related to transitioning to lower emitting energy sources. Traditionally the pressure has come from environmentalists, consumers, employees and regulators. But increasingly it is coming from investors and financial institutions that provide the lifeblood of capital to businesses. They are increasingly demanding a clear and evidenced understanding of how climate-related risks and opportunities are to be priced into the goods and services offered by companies. This growing expectation will increasingly continue to drive where capital flows.
 
Investors are being joined by regulators who are worried about systemic risks to the financial system. The involvement of regulators is underpinning a trend where we are moving from voluntary to mandatory reporting on climate risks in order to ensure that the climate risks are properly understood, priced, and addressed.
 
As international frameworks and standards for climate-related disclosures continue to converge, it is becoming less of an arduous task to conduct a country-to-country comparison of how businesses are doing in relation to reporting, which ultimately will have a large impact on access to low-cost capital, and the competitiveness of business and national economies.
 
How are Canadian businesses doing on climate-related disclosures relative to
international reporting frameworks
In a word, “challenged.” 
 
The Institute for Sustainable Finance (“ISF”) in conjunction with Queen’s University’s Smith School of Business, just released its paper on the state of Canadian climate-related disclosures (Sean Cleary and Simon Martin, Partial Disclosure: Assessing the state of physical and transition climate risk disclosure in Canada (link)). The report analyzed how Canadian companies are performing in relation to the leading international frameworks and standards and anticipated mandatory regulatory disclosures. The result is a timely analysis of where we are at, and where we need to go.
 
The ISF report found that “the quality of reporting firms in Canada is low, with less than half of the largest listed companies in Canada providing TCFD-aligned information” (p. 3). The authors found significant improvement is required in the breadth, quality and accessibility of climate-related reporting. They note a particular lack of quality scenario analysis necessary to address strategic and risk management processes:
 
“Institutional investors are demanding more and better-quality disclosures of climate-related information from corporations. Unfortunately, the current state of climate-related disclosures is seen as inadequate, and climate risks are not being properly priced by financial institutions, with significant consequences for Canadian competitiveness and the functioning of Canadian markets.” (p. 3)
 
Just as interesting as the data they reviewed, they supplemented their research with interviews with seven subject matter experts. While a number of themes were revealed, three stood out for their consensus:
 

1. Information gaps and general lack of leadership: there is a need for quality education at the leadership level to understand the significance of quality climate-related disclosures.
2. Existing data and models are not forward looking: we need to transition from utilizing historical physical models to predict the future in a quickly evolving and changing environment.
3. Much of the information needed exists but is not publicly available and accessible. 

 
The ISF report summed up the experts’ views:
 
“The consensus among interviewees is that Canada has come to recognize the importance of climate-related disclosures, but that we have a long way to go in terms of providing the reliable, consistent, comparable and publicly available and accessible climate-related data that is essential. The critical importance of aligning Canadian regulations with evolving global standards such as the ISSB and SEC was emphasized.” (p. 3)
 
How do we close the gaps?
The IFS report makes a number of recommendations for closing the gap to ensure Canadian businesses remain competitive. These include recommendations around consistent global and mandatory frameworks and standards, including scenario planning in risk assessments, and continued improvement in quality and availability of access to related data. They specifically highlight the requirement to “provide improved education and leadership regarding the importance and purpose for both providers and users of climate-related data” (p. 21).
 
Conclusion
The recommendations of the ISF report resonate with what many ESG practitioners and reporters are seeing, and have been asking for: high-quality, consistent, and comparable data. Without quality, comparable, and consistent data, businesses lose opportunities to address material risks to their business. As a result, they may miss opportunities to capture competitive advantages and may ultimately undermine their ability to access low-cost capital. 
 
As we move from voluntary climate-related disclosures to mandatory disclosures that will be translated into financial reporting metrics, it is critical and timely that businesses prepare for the near future of such reporting. For example, last week the International Sustainable Standards Board (“ISSB”), which is developing international ESG disclosure reporting guidelines, voted unanimously to require company disclosures on Scope 1, Scope 2 and Scope 3 greenhouse gas (“GHG”) emissions.
 
We see Canadian companies like those in the energy sector and renewables industry making great strides to address climate change, improve resiliency, and be leaders in achieving a lower emitting carbon economy. While we continue to accelerate this work, we need to ensure we are accelerating our related climate-related reporting at the level of a global gold standard to support Canadian competitiveness in the future. Ultimately, capital will flow to those businesses that have done the best job of identifying related risks and opportunities and have met global reporting standards that specifically include climate scenario analysis. The ISF report recommendations provide a sound roadmap of how to get there.
 
 
Sustrio ESG Advisors educates businesses on climate-related reporting and helps them understand and respond to international reporting regimes, conduct scenario analysis, and produce quality data-driven disclosures relevant to investment and financial markets.