Why Climate Risk Disclosure is Key to a Sustainable Economy
By Céline Bak, December 19, 2018
It will take significant private sector investment for Canada (and the world) to reach the goals laid out in the Paris Agreement.
The kind of changes needed to avoid the consequences of over 2°C global warming — embracing low-carbon technology and techniques around energy production, transportation, and agriculture — require an infusion of capital beyond what governments and taxpayers can cover.
Likewise, there’s a clear need to draw investment away from the wrong kind of activities. Companies with high-carbon emitting lines of business and business models, however, rarely reflect climate change on their balance sheets according to the latest report from the Task Force on Climate-Related Financial Disclosures. Despite available voluntary standards, companies seldom disclose their physical risks from climate change or the business risks from emerging climate change-related regulations.
The result? Investors get a distorted, incomplete view of the market and the status quo continues.
Current strategies are good, but not enough
Fortunately, work to get us off this perilous path is underway, both at home and abroad. The Canadian government’s carbon price backstop will ensure a price on pollution exists in every province. The Expert Panel on Sustainable Finance (EPSF), appointed by the Minister of Environment and Climate Change and the Minister of Finance, will soon provide recommendations on harnessing the country’s financial assets for a successful low-carbon transition. There are likely to be strong calls to action, too. In the panel’s words, “If we want to capture the large market opportunities and establish the rules affecting our financial industry and our key economic sectors for ourselves, we need to move faster and more decisively.”
Canada has several international examples to take notes from. The European Union has actively developed the policy framework for sustainable finance as well as an action plan to enforce it. Their progress on the file is remarkable, especially considering animosity from several member countries.
The main takeaway from our G20 peers? Climate risk disclosure must become mandatory. The federal government should amend the Canadian Business Corporations Act to require that companies include certain climate change-related disclosures and environmental reporting in their annual reports. It should also require all federal institutions, including regulators, to do the same.
Everyone must be involved to effect change
Other entities have roles to play. The Toronto Stock Exchange should join the UN Sustainable Stock Exchanges Initiative — an excellent initiative to encourage environmental, social, and corporate governance — while the Bank of Canada should clarify how much the disclosure of climate-related risks is relevant to their 2019 Financial System Review. The Chief Actuary of the Office of the Superintendent of Financial Institutions should report on climate risks to the fully funded status of the Canada Pension Plan Investment Board. And the Office of the Superintendent of Financial Institutions should engage with the Central Banks and Supervisors Network for Greening of the Financial System.
Given the 10-year window for meaningful action laid out by the Intergovernmental Panel on Climate Change's latest report, Canada should focus its efforts on environmental actions that deliver the best bang for its buck. With the investment system underwriting so much of our lives, there’s no question what the primary focus should be.