Corporate Climate Risk Disclosure needed to protect Pensions

To protect pensions, companies should be required to come clean on climate risk” writes Keith Stewart of Greenpeace Canada in an Opinion piece in the National Observer on November 27.  Stewart reports that Greenpeace Canada has filed a formal request under Ontario’s Environmental Bill of Rights, for the Ontario government to review the need for mandatory disclosure of climate-related risks in corporations’ financial filings. The government’s response is expected by the end of 2017.  This is the latest of recent and ongoing calls for increased corporate disclosure of the risks posed by climate change,  to protect investors and financial stability.  The issue has even made it to the conservative Report on Business of the Toronto Globe and Mail newspaper, in  “Business risk from climate change now top of mind for Canada’s corporate boards” (November 22)  . The article warns that Canada’s  stock markets are  particularly vulnerable to a potential “carbon bubble” in the valuations of fossil-fuel-dependent companies, given that the Toronto Stock Exchange is so heavily weighted with energy and mining companies (20 per cent for that category, as compared with only 2 per cent for clean technology and renewable-energy companies).  And that’s not the worst:  on the TSX Venture Exchange, mining and oil and gas companies account for 68 per cent of the index.  (Such a resource sector dependency was part of the reasoning given by the Norweigian Wealth Fund for its proposal to divest oil and gas investments (Nov. 16)).

Another related Globe and Mail article provides an excuse for the current state of climate risk disclosure in Canada in  “Companies Looking to Report Environmental Data Also Navigate Inconsistent Frameworks” (Nov. 22) . The article states that “There is a dizzying number of best-practice guidelines for climate disclosures” and lists the major ones – with information drawn largely from the Carrots & Sticks database . In fact, Carrots & Sticks lists  nine sustainability reporting instruments unique to Canada, in addition to widely-recognized international ones such as the Principles for Responsible Investment (PRI) Reporting Framework  and the OECD Guidelines for Multinational Enterprises  .  (Carrots & Sticks  is an initiative begun in 2006 by KPMG International, Stichting Global Reporting Initiative, UNEP, and the Centre for Corporate Governance in Africa, with the goal of encouraging and harmonizing financial disclosure guidelines.)

Most recently, the Task Force on Climate-related Financial Disclosures, led by Marc Carney and Michael Bloomberg, released their  landmark Final Report and Recommendations in 2016. The following Canadian pension funds have, at least on paper, supported it:  Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan, OPTrust, the Caisse de dépôt et placement du Québec and the British Columbia Investment Management Corporation.  The Canadian Securities Administrators  launched a Climate Change Disclosure Review  in March 2017 to investigate and consult re Canadian practice, which will issue a report “upon completion of its review”.

And across the globe in Australia, the  Australian Prudential Regulation Authority (APRA), the  regulator of the financial industry, has  also announced an industry-wide review of climate-related disclosure practices.  On November 29, an Executive Board member of the APRA delivered a speech, “The weight of money: A business case for climate risk resilience” , in which he outlines the Australian perspective on climate-related financial risks, and states:  “So while the debate continues about the physical risks, the transition to a low carbon economy is underway, and that means the so-called transition risks are unavoidable: changes to market sentiment, new financial or environmental regulations, or the emergence of new technologies with the potential to prompt a reassessment of the value of a large range of assets, and consequently the value of capital and investments.”  The speech is summarized in The Guardian.

Investment in Fossil Fuel Companies is on Shaky Ground – and that Includes Pension Funds

In a report released on March 26, authors Marc Lee and Brock Ellis warn of a possible “carbon bubble”, akin to the high tech or housing bubbles that have rocked financial markets in the past. The study finds that at least 78% of Canada’s proven oil, bitumen, gas, and coal reserves must remain in the ground in order to keep global temperature rise under 2 degrees C. This stranded, unburnable fossil fuel is part of the carbon liability of oil and gas companies, and has not been adequately recognized and accounted for by financial analysts. Because the Toronto Stock Exchange is highly weighted towards the fossil fuel sector (with 405 oil and gas companies and a total market capitalization of over $379 billion on the TSX in 2011), the authors argue that this failure to account for these climate risks means that large amounts of invested capital are vulnerable – including the pension assets of working Canadians. They also point out the intergenerational inequity implied in ignoring the interests of younger workers in pension fund management. They propose a series of measures to deflate the carbon bubble and green Canada’s investment markets as part of an orderly transition to a clean energy economy.  

Unburnable Carbon, a report by the Carbon Tracker Initiative, discusses the implications of these stranded carbon assets for world and U.K. financial markets. A 2013 update will be available in late April.

Meanwhile, the U.S. campaign for divestment of fossil fuel investments, spearheaded by Bill McKibben and 350.org, is gathering momentum in Canada. See the website ofhttp://gofossilfree.ca/ to follow the campaign to lobby universities to divest themselves of any investments related to fossil fuel companies.

LINKS

Canada’s Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds is available at:  http://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2013/03/Canadas%20Carbon%20Liabilities.pdf

Unburnable Carbon
 (2012, and forthcoming 2013 update) is available at the Carbon Tracker website at :http://www.carbontracker.org/carbonbubble

“Global warming’s terrifying new math” by Bill McKibben in Rolling Stone, July 2012 at: http://www.rollingstone.com/politics/news/global-warmings-terrifying-new-math-20120719