What grade are Canadian businesses getting for climate-related disclosures?
November 1, 2022
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:
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).
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.
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Written by Peter Forrester- Cofounder and Principal at Sustrio