system change not climate change / DisobeyArt

A dire report on climate change has made clear that companies should be providing investors with better risk disclosures, an area where Canadian firms lag their global peers.

On Aug. 7, the United Nations’ Intergovernmental Panel on Climate Change (IPCC) issued its starkest warning yet about the trajectory of global warming. The report, which concluded that human-induced climate change is creating extreme weather conditions across the globe, also warned that more warming is assured for at least the next 30 years under any emission reduction scenario. Changes to the oceans, ice coverage and global sea levels are probably now irreversible for hundreds, if not thousands, of years.

While avoiding the worst outcomes in terms of global temperature rise may be possible, the report made clear that more dramatic action is required than currently promised under the Paris Agreement.

Given this increasingly dire need for emission cuts, the demand for better climate-related risk disclosure from companies — which can translate into action on emissions — is growing too.

Institutional investors that are serious about climate-related risk need data from companies to calculate the carbon intensity of their existing portfolios and to help guide the transition to a more sustainable, low-carbon economy. Yet, the disclosure from Canadian firms lags that of the world’s leaders.

According to a report published in April by the Institute for Sustainable Finance (ISF) at Queen’s University’s Smith School of Business, Canadian firms trail European and U.K. ones in reporting on greenhouse gas (GHG) emissions. The research found that about 67% of the firms listed in the S&P/TSX Composite index provide disclosure on emissions. That’s well behind issuers in Europe (79%) and the U.K. (99%), and about on par with the U.S.

More important, the ISF found that only 27% of TSX-listed companies have set emissions reduction targets, compared with 53% firms listed on the S&P 500 and two-thirds of the firms listed in the FTSE 100 index.

Of the TSX-listed firms that have set targets, only 25% (about 7% of companies overall) explicitly link executive compensation to meeting emissions reduction goals. Another 47% loosely tie executives’ incentives to emissions, and the other 28% do not gear compensation to environmental targets.

Companies that have set targets account for a large share of emissions: these 60 firms account for about half of the emissions by firms listed in the index, so their action could prove significant.

The ISF estimated that if these companies achieve their emission reduction goals by 2030, they would reduce their emissions by 34.2% from 2019 levels. This would translate into a 17.3% reduction from 2019 emissions by listed firms overall.

That said, there’s plenty of room for Canadian issuers to improve when it comes to both disclosure of and action on GHG emissions. The Canadian Securities Administrators have set guidance requiring companies to disclose material climate risks, but don’t mandate the specific form or content of that disclosure.

Pressure is growing for policy-makers to demand more action from companies. This year, Ontario’s Capital Markets Modernization Taskforce recommended that securities regulators mandate material climate-related disclosure that complies with the standards developed by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD). These standards include mandatory disclosure on governance, strategy and risk management, and disclosure of Scope 1 and 2 GHG emissions, with the possibility for Scope 3 emissions.

Scope 1 refers to emissions created directly by a company, while Scope 2 covers emissions generated indirectly through consuming purchased heat and electricity. Scope 3 covers all other indirect emissions from sources such as the company’s consumption of goods and services, business travel and employees’ commuting.

The Ontario government endorsed the capital markets task force’s recommendation in the spring budget, which directed the Ontario Securities Commission (OSC) to work on new mandatory disclosure standards. This year’s federal budget also included a pledge to eventually require TCFD-compliant disclosures from Crown corporations and for TCFD reporting to be adopted throughout the economy.

In the OSC’s latest statement of priorities, the regulator pledged to develop a rule introducing climate disclosure requirements for public comment. However, the OSC has yet to publish its proposals. According to an OSC spokesperson, the regulator remains committed to carrying out consultations before its fiscal year ends in March 2022.

The U.S. Securities and Exchange Commission (SEC) is expected to propose its own mandatory climate-related reporting rules by the end of this year. To date, the SEC has only provided guidance. But in response to growing investor demand for more useful and meaningful disclosure, SEC Chairman Gary Gensler has asked SEC policy-makers to develop proposals for mandatory climate risk disclosure standards.

SEC policy-makers were asked to consider mandating both qualitative and quantitative disclosures. At an online conference in July, Gensler said he has tasked SEC staff to propose how companies should disclose their emissions — including Scope 1, 2 and possibly Scope 3 emissions — and how they should disclose their plans to meet big-picture goals such as net-zero commitments.

SEC staff also were asked to consider requiring specific metrics in certain industries, such as banking, insurance and transportation, and to consider whether fund managers should be required to disclose the underlying data they use in compiling portfolios that are marketed to investors as being “green” or “sustainable.”

While much more than beefed-up disclosures will be required to answer the climate alarm sounded in the latest IPCC report, that disclosure is an essential prerequisite to mobilizing capital in hope of averting environmental catastrophe.