On April 5, 2018, the Canadian Securities Administrators (the CSA) published CSA Staff Notice 51-354 Report on Climate Change-related Disclosure Project (the Notice). The Notice details the findings of its year-long review of Canadian climate disclosures. It summarizes the current state of climate-related reporting in Canada, discusses perspectives of both reporting companies (issuers) and users (investors, analysts, credit rating agencies, etc.) and makes links to current disclosure requirements and reporting frameworks in Canada and abroad. It concludes that users are generally dissatisfied with the current state of climate disclosure made by Canadian issuers and believe that disclosures should be enhanced to better reflect the real and widespread risks (and opportunities) companies face. The Notice outlines that future anticipated work by the CSA will include guidance and education on climate-related issues. It also puts issuers on notice that the regulators will be monitoring the quality of issuers’ disclosure and the evolution of best practices in the area, as well as considering new disclosure requirements regarding corporate governance in relation to risk oversight and management.
Our Key Takeaways
1. Era of Disconnect: The Notice uncovered a disconnect between what users are looking for and what issuers deem adequate climate disclosure, noting “[t]he divergence of views on the materiality of climate change-related risks and opportunities was a central and recurring theme that arose throughout the Project.” The CSA reports a concern from issuers that the demand for climate change information is sometimes driven by “inquiries from stakeholders who appear to be pursuing an agenda that diverges from that of a reasonable investor focused on a financial return on investment.” This view that stakeholder concerns may be driven by “special interests” rather than material business considerations demonstrates that the links between climate change and financial impacts need to be better understood by issuers. Indeed, the Notice specifically states that issuers should consider climate risks and opportunities that may affect their businesses irrespective of the carbon intensity of their operations, such as supply chain disruption due to physical climate impacts or changes in demographics and demand for products as we transition to a lower carbon economy. While the CSA intends to move forward with guidance and education to help close this gap, there is a broader need for education to understand how climate issues are essential to financial performance and the creation of long-term shareholder value.
2. Leaders’ Advantage: There are signs that climate disclosure frameworks are moving towards harmonization. We draw two conclusions from this: first, calls for climate-related disclosure continue to accelerate with no signs of slowing; and second, early adopters may have an advantage in helping set best practices for disclosure and may be rewarded by the market. As users are dissatisfied with current disclosure and increasingly see climate change understanding and preparedness as a proxy for good management, those who produce decision-useful information will likely be at an advantage.
3. Importance of Governance: The Notice acknowledged the growing sentiments that disclosure on governance and risk oversight practices are essential for users to evaluate how thoroughly companies are considering climate-related issues and applying them to their business. It notes that “many users were not confident issuers have reliable processes in place to identify and manage climate change-related risks.” The Notice specifically highlights governance as a focus area in the CSA’s continued consideration of potential new disclosure requirements. A key takeaway from this is that governance of climate risk will be under a spotlight going forward.
4. No Excuses: Last, the Notice discussed existing policies around disclosure and, while not climate-specific, principles that can and should be applied to this issue. The CSA specifically noted that even if issuers lack familiarity and certainty on precise timing or climate change impacts, they are still obligated to take appropriate steps such as providing their shareholders with the information needed for informed voting. Here, the CSA is clearly challenging issuers to approach climate risks in the same way as any other uncertain risk factors they need to assess for business purposes:
“We note that issuers are frequently confronted by a complex array of uncertainties they must take into account when formulating their business strategies and disclosing risk factors and other information…” and,
“[i]f an issuer concludes that a climate change-related risk could reasonably be expected to have a potential material impact on the issuer at some point in the future, it should be disclosed, even if it may only arise over the medium or long term.”
There are no excuses to exclude climate-related issues from this array of uncertainties organizations take into account.
Climate change is a broad and complex topic that manifests differently depending on an issuer’s sector, location and business strategy. Mantle helps clients think through these issues in a tailored way and looks forward to supporting the CSA and others in their efforts to educate and provide further guidance that will support enhanced climate disclosure across economic sectors.
Summary of CSA Staff Notice 51-354
What the CSA Did
The CSA conducted this review to better understand:
- Current climate change disclosure practices of Canadian issuers.
- The materiality of climate change information from issuer and user perspectives.
- User disclosure needs (i.e. what climate change-related information investors need to make informed investment and voting decisions) and whether current climate disclosures are meeting these needs.
- Issuer challenges and experiences identifying climate-related risks and opportunities, quantifying associated impacts and preparing meaningful climate-related disclosures.
The results were based on a review of mandatory and voluntary issuer disclosure documents, issuer surveys, extensive consultations with a variety of stakeholders and research on climate change disclosure trends and frameworks internationally.
What the CSA Found
From an investor and stakeholder perspective, the CSA found that users consulted generally agreed on the following:
- Climate risk exposure is broad and cuts across a range of industries and business units.
- Current disclosure is insufficient and does not adequately reflect the significant climate-related risks to which issuers are exposed.
- Better disclosure of governance, oversight and risk management of climate change risks in particular is needed (users were not confident companies had proper risk identification and management processes around climate risk in place).
- Issuers and their advisors would benefit from more education and guidance on climate change risks and financial impacts.
Areas of disagreement included:
- How company climate disclosures could or should be improved.
- Whether further voluntary guidance on climate disclosures is sufficient or new climate disclosure requirements should be imposed.
- How to treat certain specific climate change information such as GHG emissions and scenario analyses.
From an issuer perspective, there was a strong preference to maintain current requirements and supplement them with voluntary guidance around material climate change risks and opportunities. Issuers raised concerns about regulatory burden and significant costs that mandatory requirements would bring. While the benefits of harmonized disclosure requirements were acknowledged, issuers also warned that a uniform approach could be counter-productive and result in more boilerplate disclosures as opposed to meaningful reporting.
Finally, concerns that the demand for climate change information is driven by “considerations other than investment considerations” and “may not be aligned with shareholder interests” were reported. Some issuers worry that “undue emphasis” on climate change could detract from other pressing risks and impacts that they believe are more material to their business.
Outstanding Issues
There are a few key issues that remain outstanding that further CSA efforts will seek to resolve.
- Mandatory requirements vs voluntary guidance. Some users suggested that the current disclosure requirements together with additional guidance and education may be adequate to enhance climate-related disclosures. Others believed mandatory requirements to provide decision-useful information to investors were necessary. There was some discussion around differing requirements based on company industry and size. Issuers indicated a strong preference to maintain current disclosure requirements with additional guidance and education.
- Assessing materiality. The principal reason issuers offered for not disclosing climate risks was that such risks were not material to their business at this time (recall that in a Canadian securities law context, “material” information is information that would impact a reasonable investor’s decision to buy, sell or hold securities). Uncertainty on timing and measurement of climate change-related risks presented particular challenges with respect to assessing materiality. From the users’ perspective, many indicated that one of their key challenges is determining whether an appropriate materiality assessment with respect to climate change issues was in fact carried out versus merely being overlooked. A “comply or explain” approach was suggested by some users; however, the CSA noted that this would be a departure from the general approach to securities law in Canada, which does not require “negative assurances.”
- How to treat “additional information” such as GHG emissions and scenario analyses. Even though this information is encouraged to be disclosed under the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, the Notice states that these recommendations are not subject to an assessment of materiality and disclosing this information could go well beyond Canadian securities requirements if it was not material.
In the Regulator’s Words
“An issuer’s materiality assessment should not be limited to risks that might reasonably be expected to have an impact upon an issuer in the near term, to the exclusion of risks that may only crystallize over the medium to long term. If an issuer concludes that a climate change-related risk could reasonably be expected to have a potential material impact on the issuer at some point in the future, it should be disclosed, even if it may only arise over the medium or long term.”
“The following chart highlights some of the potential climate change-related risks and impacts (including examples of specific financial impacts that may result from climate change-related risks), the materiality of which should be considered by an issuer:”
Next Steps
The CSA will develop guidance on climate risk reporting and initiatives to educate issuers about disclosure of climate change-related risks, opportunities and financial impacts. It will also continue to consider new disclosure requirements around corporate governance and material business risks, including on climate change issues. Proposed new requirements being considered include requirements to disclose the processes issuers have in place for the identification, assessment and management of material risks, such as the board’s responsibility for oversight and the role played by management.
The CSA plans to monitor the quality of disclosure and emergence of best practices among Canadian issuers to assess whether further work is needed in this area. Finally, it will also monitor developments in reporting frameworks, evolving disclosure practices and investors’ need for more specific types of climate change information such as scope 1 and 2 emissions and scenario analyses.
