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Are your stocks ‘green’ or a climate disaster? A new law may provide the answer

Canadian proposal to mandate climate-change disclosures falls short of U.S. counterparts, says climate and financial law expert Janis Sarra
Climate change is impacting businesses in B.C. and Canada | Photo: Getty Images

Are your savings held in companies that excessively contribute to global warming, operate in increasingly risky conditions and have no long-term plan to transition to a zero-carbon future? Or is your money invested in firms already prepared for climate change?

Canadian securities regulators are aiming to answer these investor questions by proposing a new set of disclosures for public companies. The disclosures will outline the risk — and in some cases opportunities — a public company is running in the face of climate change. Going forward, companies may be expected to list their greenhouse gas emissions, as well as how climate change is impacting their operations now and into the future.

“Climate change is a systemic material risk to the Canadian economy and to Canadian businesses,” said Janis Sarra, a law professor at the University of B.C.

“Investors want Canadian businesses to shift or they're going to move... their capital outside of the country.”

British Columbia felt the brunt of extreme weather in 2021, noted Sarra, pointing to “growing acute events” such as the heat dome in June, wildfires throughout the summer and atmospheric river flooding events in November.

“These are all disrupting businesses,” she said.

Canadian climate disclosures ‘largely consistent’ with other jurisdictions

A corporate governance expert who has turned her work toward researching how climate change is impacting financial markets, Sarra says governments need to come together with civil society and businesses to act collectively.

She describes the incoming securities law as “just one small corner of the whole platform that needs to move, both in Canada and globally.”

The idea of creating pan-Canadian disclosure requirements for public companies was first put forward in October 2021 by the Canadian Securities Administrators (CSA), a collective of provincial regulators such as the B.C. Securities Commission.

The CSA said its proposal is “largely consistent” with guidance from the international Task Force on Climate-related Financial Disclosures, chaired by business tycoon Michael Bloomberg.

There are four key elements to disclosure recommendations: governance — having a board assess risks and opportunities; strategy — reporting short and long-term scenarios involving different climate outcomes; risk management — identifying challenges posed to operations from climate-related events; and metrics and targets — using data to examine risks and opportunities.

'Overwhelming’ support for Canadian climate disclosures

Last month, Sarra, along with fellow Canada Climate Law Initiative members Michael Irish and Jenaya Copithorne, reviewed submissions from a CSA public consultation process last January. According to their March 2022 report, feedback showed “overwhelming” support for climate disclosures.

The CSA heard from 27 investors with $21 trillion in assets under management. Together, they represent “the financial security of millions of Canadians through pension funds, mutual funds and other investments,” stated the research group.

In one submission, Engineers and Geoscientists BC, which works closely with the province’s natural resource companies, was critical of the CSA for not requiring a scenario analysis. Others wanted more requirements for venture companies.

In the end, there was broad acceptance for making emissions reporting mandatory — something the CSA did not initially contemplate in its proposal.

Why climate disclosures matter

Sarra says climate disclosures allow investors and regulators to look at companies and say, “Okay, do I think you have a plan to align yourself with Canada's international commitments to net-zero by 2050?” 

Despite their utility, for Sarra, the CSA’s proposals don’t go far enough to keep pace with U.S. and international financial regulators.

Sarra said the CSA proposal is "a really good first start" but fails to require five-year transition plans to meet net-zero requirements.

Another chief concern: emissions reporting.

Under the CSA proposal, public companies are not required to report emissions — either caused directly through their operations and production, or derived from third-party relationships through the processing, transport, as well as use and later disposal of a product. But, if a company chooses not to report such emissions, it must disclose why. 

Mixed reaction on third-party emissions

Environmental groups such as the David Suzuki Foundation have also backed full and mandatory emissions reporting for public companies. 

Pushback, however, has mainly come from the oil, gas and mining sectors.

The Canadian Mining Association pushed for a longer time-frame to implement the proposal, and it, along with the B.C. mining company Skeena Resources, opposed mandatory reporting for indirect emissions.

Skeena Resources, which supported reporting direct emissions, argued that many categories of indirect emissions are “difficult to calculate and often outside of a company’s control and should not be required disclosure.”

Overall, reaction to the CSA proposal from Canada’s oil and gas sector was relatively positive.

“We acknowledge that expectations and requirements regarding climate-related disclosure are rapidly changing,” stated Enbridge, one of Canada’s biggest oil companies.

Enbridge called the proposal a "prudent and reasonable first step" and that climate disclosures could be "refined over time."

Ben Brunnen of the Canadian Association of Petroleum Producers said the organization supported CSA's approach to climate disclosures. He added: “Reporting Scope 3 (indirect) emissions continues to be a challenge at this time and will prove difficult to provide in a timely manner, if at all.”

U.S. sees stiffer resistance from oil and gas

When last month, U.S. Securities and Exchange Commission issued its draft regulations, it received a much stiffer rebuke from the fossil fuel sector.

According to a report from the Associated Press last month, both the U.S. Chamber of Commerce and the American Petroleum Institute “maintain that the SEC is reaching beyond its authority with the mandatory reporting rules, which would impose substantial costs on businesses.” 

Democrat Senator Joe Manchin stated this week in a letter to SEC chair Gary Gensler that he was concerned about the regulations burdening companies.

“The most concerning piece of the proposed rule is what appears to be the targeting of our nation’s fossil fuel companies,” Manchin wrote, who has had long-term financial ties to the coal industry in West Virginia.

The pushback comes after the SEC, unlike the CSA, proposed mandatory disclosures for all emissions. The proposal exempts smaller companies from indirect emissions reporting; all companies, meanwhile, are not held liable for their indirect emissions reports.

Not everyone agrees within the SEC. On March 21 SEC Commissioner Hester Peirce issued a statement outlining her concerns about the commission’s mandate and the practical application of such disclosures.

“While the existence of anthropogenic climate change itself is not particularly contentious, how best to measure and solve the problem remains in dispute,” stated Peirce, a Republican commissioner.

Describing the SEC as not an expert in climate policy, the commissioner added, “This proposal could inspire future more socially and politically contentious disclosures, which would undermine the SEC’s reputation as an independent regulator.”

Sarra said Canada would benefit from aligning its policies with those of the SEC. 

Many companies, she said, trade on both countries' markets. Without alignment, they may be required to file two sets of disclosures.

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