Canadian businesses are under increasing pressure to disclose their climate-related business risks as part of a global effort to reorient the financial sector to support the transition to a net zero economy.
Provincial securities commissions are, however, considering a proposal from the Canadian Securities Authority that does not correspond to the mandatory disclosure framework sought by the federal government.
The apparent lack of provincial ambition could leave Canadian companies behind in seeking international capital to fund emission reductions and transformative business strategies. And that would force Finance Minister Chrystia Freeland to step into the breach.
Although securities regulation falls under provincial jurisdiction, the federal government has tools to encourage regulators if they fail to do so. Ottawa may have to set a higher bar than the provinces are willing to accept and force federally regulated financial institutions – and, by extension, their corporate clients – to meet it.
In the mandate letter she received from the Prime Minister in December, Freeland was tasked with working with provinces and territories to adopt mandatory climate-related disclosures based on international best practices. Ottawa‘The new Sustainable Finance Action Council is working on this and other banking issues.
In October, the Canadian Securities Administrators (CSA) – which represent provincial commissions – released proposed rules for climate risk that would allow companies to opt out of such disclosure altogether, or at least significantly limit the scope. their evaluation and reports.
The CSA and provincial securities commissions are currently holding consultations and must decide in the coming weeks whether to accept the proposed rules and what the scope of the reporting requirements will be.
While the CSA warns of an onerous regulatory burden if companies are forced to report all emissions, failure to meet international standards would come at a cost, two leading financial experts warned last month in a Globe and Mail opinion piece. “Strong and credible disclosure reports are essential” for Canadian companies to compete for capital, wrote Sean Cleary and Jim Leech, who are respectively chairman of the Sustainable Finance Institute at Queen’s University and Chairman of its Advisory Board.
The stakes are huge for the Canadian economy, especially for oil and gas producers whose business plans are most vulnerable to climate-related risks, including the widespread adoption of low-carbon technologies, such as as electric vehicles (EVs) and new regulations to reduce emissions.
The federal government has pledged to release an updated plan to cut emissions by the end of March, to incorporate liberal promises such as electric vehicle mandates, emissions cuts in the oil industry and a network net zero by 2035. Implementing sustainable finance reforms should be an important part of this effort.
Comprehensive climate-related disclosure sends clear signals to lenders and investors about the relative risks and expected returns of investing in fossil fuel companies, and between those companies and companies offering low-carbon alternatives.
It also forces business leaders to fully analyze their own organizations.‘ the risks and opportunities that will arise as a result of climate change and the global effort to avoid the worst impacts of global warming.
International standards require disclosure of the full spectrum of emissions resulting from a company’s operations. For an oil company, for example, they include: Scope 1 emissions from its production facilities; Scope 2 emissions from the energy it uses to produce crude and Scope 3 emissions when customers burn fuel in a vehicle or industrial plant.
CSAs‘ The proposed rule presented two options: a framework for reporting the full range of emissions with an opt-out option for companies that explain why they do not, and mandatory reporting of domain 1 emissions with an opt-out option for domains. 2 and 3. The CSA rule would not require companies to stress test their business plans against scenarios in which the world would succeed in meeting Target 2C, despite broad international support for of such a measure.
Failure to plan scenarios or disclose Scope 3 would lead companies to tell half the story of their climate-related risks.
Oil companies that succeed in reducing emissions from their operations while increasing crude production continue to release more carbon into the economy and, eventually, into the atmosphere. About 80 percent of the greenhouse gases (GHGs) associated with a barrel of crude are emitted during its use and are therefore considered Scope 3.
Taking full emissions into account is important when, for example, the federal government must decide whether to grant tax breaks to business investments that result in lower emissions at the production stage, but more than oil production and therefore more GHGs overall.
Such data is also necessary for investors and banks which have made a commitment to reduce the carbon intensity of their assets under management or their loan portfolios.
The‘There is no doubt that mandatory disclosure and scenario planning will be a burden on businesses. There are big data gaps that need to be filled, and federal and provincial governments will need to work with industry to make analysis and reporting as effective as possible.
Freeland must act quickly to point out Ottawa‘s intention to adopt a rigorous and mandatory declaration, even in the absence of such a measure by the provincial securities commissions.
In her mandate letter, the minister is tasked with requiring federally regulated financial institutions, pension funds and government agencies to publish climate-related financial disclosures and net zero plans. These rules should include Scope 3 reports and scenario analysis.
To meet these requirements, banks and pension funds should require full disclosure from their clients and the companies in which they invest. Likewise, mandatory disclosure for federal organizations such as the Business Development Bank of Canada and Export Development Canada will be sent to their clients.
In an ideal world, provincial securities regulators will listen to experts like Cleary and Leech of the Sustainable Finance Institute, who are pushing for more rigorous disclosure, and strengthen proposed regulations.
In a world that desperately needs an aggressive response to accelerating warming and its impacts, climate finance must become “business as usual,” and full disclosure is a big step in that direction.
Shawn McCarthy writes on energy and climate change and is Senior Counsel at the Sussex Strategy Group. He is also vice-president of the Canadian Committee for the Freedom of the World Press.
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