Climate change disclosure

Along with the economic, social, and political environment in which it operates, the Canadian law related to climate change is evolving rapidly. Laws and stakeholder expectations about the public disclosure of climate change-related risks is no exception. 

Disclosure of climate change-related risks differs from many other forms of public disclosure. This is because of the uncertainty about the effects of such risks, and, in many cases, the length of time those effects take to materialize. As society's focus on climate change has grown in recent years, stakeholders, major institutional investors, and governance entities are increasingly demanding more robust and specific climate change-related risk disclosure to inform their business decisions. 

In Canada, climate change-related risk disclosure is informed by both international and Canadian entities. 

At the international level, two of the major driving influences on climate change-related risk disclosure standards are the Taskforce on Climate-Related Financial Disclosure (TCFD) and the Sustainability Accounting Standards Board (SASB) framework. The TCFD has provided a common international disclosure framework using four widely adoptable recommendations about climate-related financial disclosures. The SASB Framework assists in identifying the information needed by investors, lenders, and insurance underwriters to appropriately assess and price climate-related risks and opportunities. The SASB Framework also offers an industry-specific analysis of existing climate-risk disclosure. Moreover, its standardized disclosure framework aligns with the initiatives of both the Securities Exchange Commission and the Financial Stability Board. 

Turning to Canada specifically, on August 1, 2019, the Canadian Securities Administrators released a notice in response to increased investor interest in climate change-related risk disclosure. The 2019 Notice acknowledges that there is significant room for improvement in climate change-related risk disclosure and seeks to provide uniform disclosure standards. The 2019 Notice does not create additional disclosure standards. Rather, it expands on the guidance provided in CSA Staff Notice 51-333 – Environmental Reporting Guidance, published in October 2017. That earlier notice provided guidance to issuers about existing continuous disclosure requirements relating to a broad range of environmental matters, including climate change. 

The 2019 Notice provides specific guidance about how issuers should frame climate change-related risk disclosure in their Annual Information Form and Management Discussion & Analysis. The disclosure should avoid vague or boilerplate language, and instead provide relevant, clear, understandable, and entity-specific information that allows investors to understand how the specific issuer's business is affected by climate change risks. The 2019 Notice states that there should be disclosure of a climate change-related risk if it is likely to affect a reasonable investor's decision to buy or sell securities of an issuer where the information in question was omitted or misstated. This materiality threshold is important, as issuers should consider whether material risks should be included regardless of whether they are expected to crystalize in the near-, medium- or long-term. 

In terms of specific disclosure guidance, the 2019 Notice indicates that climate change-related risk disclosure should generally address physical and transitional risks in both the short- and long-term: 

• Physical risks include risks that result from climate change that are event driven. These include increased severity of extreme weather events, such as cyclones, hurricanes, or floods, or longer-term shifts in climate patterns, such as sustained higher temperatures, if those events have direct financial implications for an issuer. Those financial implications may include direct damage to assets and indirect effects resulting from supply chain disruption; and
• Transitional risks are less direct than physical risks. Transitional risks include reputational, market, regulatory, policy, legal, and technology-related risks, which may arise as a result of a transition to a lower-carbon economy in response to climate change.

Despite the enhanced guidance provided by the TCFD, the SASB Framework, and the 2019 Notice, the precise legal requirements of disclosure of climate change-related risks remain relatively vague and subjective, as compared to other disclosure requirements. Securities issuers should consider these issues carefully and stay informed in this area to ensure that their public disclosure aligns with the most up-to-date corporate guidance and stakeholder expectations.