More and more companies are disclosing information on environmental, social and governance (ESG) issues that they consider to be relevant for investors — and for good reason: investors are asking for more details than ever. And even though authorities have given some guidance to increase transparency on climate change risks, Canada is lagging behind and many are hoping that mandatory disclosure will come sooner rather than later.

Despite progress in recent years, investors still find themselves looking at an incomplete picture of ESG information, according to Brian Minns, Vice-President, Sustainable Investing at Addenda Capital. “These could be issues related to climate change, water use, employee relations, etc. Better information to help investors make better decisions about how companies are managing these important risks, which we know have a material impact on financial performance or returns.”

As a general rule, publicly-traded companies must disclose any “material” factors to investors. There are already specific disclosure obligations in terms of governance, adds Brian Minns, but this isn’t the case for environmental and social issues. “A couple of times now, the Canadian Securities Administrators (CSA) have provided guidance, once on environmental, once on climate change, basically saying that this is likely to be a material issue and as such, you should provide disclosure around these topics.”

Current practices

According to a study of 40 companies listed on the Toronto Stock Exchange conducted by CPA Canada in 2019, 80 percent produced regulatory filings that disclosed climate change-related strategies. More specifically, 70 percent of them disclosed policy-related risks (e.g., carbon pricing), while only 58 percent disclosed physical risks (e.g., climate events, resource shortages).

That type of information is in high demand, the CSA pointed out in 2018. Following a consultation on climate change risks with investors, analysts, ratings agencies, investor advocates and academics, the CSA reported that “substantially all users consulted were dissatisfied with the state of climate change-related disclosure and believe that improvements are needed.” Some felt that the current obligations may be adequate, provided that they were accompanied by “additional guidance and education, while others maintained that new disclosure requirements should be imposed.”

These obligations are fast approaching. The Taskforce on Climate-related Financial Disclosures (TCFD) framework, stemming from an initiative of the Financial Stability Board, continues to gain support. In late 2020, New Zealand became the first country to formally adopt it for implementation in 2023. The New Zealand disclosure framework is based on a “comply-or-explain” approach, meaning that if publicly-traded companies, asset managers, banks and insurers covered were ever unable to disclose their risks and policies, they would have to say why. The United Kingdom also intends to move forward with the TCFD framework.

Canadian approach

How long will it take for the TCFD to come to Canada? “Implementation of the TCFD framework will take time, and there are valid challenges to overcome,” wrote the Expert Panel on Sustainable Finance last year. Pressure to adopt is rising, however. “The reporting challenges are surmountable, and offset by the opportunity for companies and investors with sound sustainability practices to share their value-creating story with global audiences.”

The Panel suggested a progressive approach with the same formula observed elsewhere: if a company is unable to comply, it’ll have to explain why. Mandatory disclosure of climate-related issues will be implemented in Canada within five years, Brian Minns believes. That said, on other ESG issues, the future isn’t as clear.