Though written mainly for a financial audience, a new report from the International Institute for Sustainable Development (IISD) is relevant to the livelihoods and pensions of all Canadians. Leveraging Sustainable Finance Leadership in Canada: Opportunities to align financial policies to support clean growth and a sustainable Canadian economy was released on January 16, examining and making recommendations for Canadian companies to disclose climate change risks to their shareholders and to the public. A press release summarizes the report. Why is it so important? It concludes with an analysis of financial disclosure in the oil and gas industry, (found in Annex E), and this warning about the dangers to us all of stranded assets: “When these emissions are counted via proved and probable reserves, as disclosed by Canadian oil and gas companies, a picture emerges of significant, undisclosed—and therefore unaddressed—risks to Canadian companies, financial institutions, pension beneficiaries and savers…. Once the implications of the Paris Agreement are fully priced into the market, oil and gas asset valuations will shift. If this change is sufficiently large, debt covenants may be triggered in companies. This will in turn impact financial institutions, including banks, insurance companies and pension funds. Debt downgrading could ensue, and bank capitalization thresholds could be impacted.” (And a related risk for oil and gas companies: in December 2018, the Canadian Shareholders Association for Research and Education (SHARE) joined an international campaign for improved disclosure by oil and gas companies of the water-related risks of their operations ).
What is to be done? Canada’s transition to a lower carbon economy requires private investment capital, and Canada’s financial markets cannot operate in isolation. Canada has a lot of regulatory “catching up” to do regarding climate risk, (outlined in “Data Gap” in Corporate Knights magazine in May 2018) , and evidenced by the examples given throughout the report of current practice amongst European Union , G7 and G20 countries. The report shows the state of Canadian regulation, with frequent reference to the two major Canadian studies to date on the issue: the Interim Report of the government-appointed Expert Panel on Sustainable Finance (Oct. 2018), and the Canadian Securities Association Staff Notice 51-354 (April 2018). In Leveraging Sustainable Finance Leadership in Canada, author Celine Bak, sets out a three-year policy roadmap for Canada, calling for Canadian laws and statutes to be updated to require mandatory disclosure of climate risk by 2021. The report also calls for the Toronto Stock Exchange to join the UN Sustainable Stock Exchanges Initiative, and that the the Canada Pension Plan Investment Board be required to report on the climate change risks which might affect its fully-funded status. Detailed and concise summaries are provided in the Annexes, titled: “An Overview of the Key Reports on Corporate and Financial Sector Climate- and Environment-Related Disclosure”; “G20 and G7 Precedents for Implementation of TCFD Recommendations in Canada”; and “Analysis of EU Sustainable Finance Proposed Actions, EU Laws and Canadian Equivalents”.
Expect more discussion and publications about sustainable finance issues, as Canada’s Expert Panel concludes its public consultations at the end of January 2019, and releases its final report later in the year. The European Union Technical Expert group on Sustainable Finance (TEG) is also expected to report in June 2019, and the international Task Force on Climate-Related Financial Disclosures Task Force will publish a Status Report in June 2019, updating its first report, published in September 2018, with analysis of disclosures made in 2018 financial reports .