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Jul 4, 2017

Canadian Securities Regulators Turn Attention to Climate Risk Disclosures

By Thomas A. Fenton and Gaurav Gopinath

On March 21, 2017, the Canadian Securities Administrators (CSA) announced that it will undertake a review of public company disclosures of climate-related risks. The review will assess Canadian and international disclosure practices and collect anonymous feedback from investors and issuers. The announcement builds upon CSA Staff Notice 51-333, released October 2010, which issued guidance on environmental risk reporting, and follows on the heels of a December 2016 report published by the Financial Task Force on Climate-Related Financial Disclosures (TCFD), which recommended new voluntary global standards for climate-related risk disclosure. The TCFD was spearheaded by Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, who appointed former New York City Mayor Michael Bloomberg to lead the industry-led task force. The annex to the TCFD report contains sector-specific recommendations on disclosure surrounding governance, strategy, risk management and risk assessment metrics. 

Climate Change: An Evolving Risk Factor

The impact of climate change is becoming increasingly visible. In a speech earlier this year, the Deputy Governor of the Bank of Canada spoke of “material and pervasive effects” on the Canadian economy stemming from increased occurrences of forest fires, storms, droughts, invasive species and road closures to warming weather patterns. These phenomena cause operational disruptions, devalue physical assets such as mines, and generally pose severe risks to public issuers.

The effect on the insurance industry is particularly telling. A recent study by 29 insurance industry bodies states that insuring climate catastrophes, which have risen in frequency by 600% over the last 60 years, is costing insurance companies heavily. The cost of climate insurance is likely to rise in response, if not disappear entirely if insurance companies find it unprofitable.

Rising Disclosure Standards

How then should public issuers manage disclosure of climate-related risks? Issuers are already required to disclose material risks, but the CSA announcement suggests heightened climate disclosure requirements are imminent. In the United States, the Securities and Exchange Commission has already issued interpretive guidance in response to investor petitions, and Canadian regulators are likely to face similar pressure as part of the planned consultation with investors. Public issuers would be well advised to take a proactive approach and thoroughly audit their climate risk exposure.

In conducting such audits the category of “climate-related risks” should be construed broadly. Natural disasters are clearly climate-related, but what about policy risks such as the inflationary impact of carbon pricing, or write-downs of “stranded assets” in the face of shifting regulation? What about the risks posed by long-term structural changes in the global energy system? Moody’s, which now incorporates climate risks into its corporate credit ratings, delineates three categories of risk: (1) short-term regulation, (2) long-term regulation and (3) direct hazards. Issuers should seek to assess their exposure across the risk spectrum in order to avoid misrepresentations or material omissions in their continuous disclosure filings.

Research sponsored by the federal government estimates that the cost of climate change to the Canadian economy will reach between $21 billion and $43 billion by 2050. A portion of this cost will be borne by government, but the brunt will undoubtedly fall on issuers and the investing public. The CSA review reflects a growing global concern that market participants may not be pricing climate risk accurately due to gaps in disclosure. As the climate risk factor continues to evolve, issuers would do well to approach the issue proactively. 

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