CD Howe: Climate Risk Reporting Needs Clarity to Succeed

January 29, 2021

BRITISH COLUMBIA – Amid growing calls from regulators, financial standard organizations and institutional investors, Canadian corporations face pressure to adopt transparent climate-risk reporting, says a new report from the C.D. Howe Institute. But first, they need greater clarity on the metrics and standards involved.

In “Duty to Protect: Corporate Directors and Climate-Related Financial Risk,” author Janis Sarra provides insights on how boards can better gauge and offset climate-related risk, and what tools and reforms can help guide corporate directors through the transition to a low-carbon economy.

She recommends that Canada clarify and adopt mandatory uniform reporting on climate metrics and finance, so that corporate officers and directors can offer investors information that is transparent, comparable year over year and comparable between companies in a sector.

Climate risk is top-of-mind for government, corporations and the public, and there’s mounting pressure from investors for companies to reduce carbon-emitting activities. Recent announcements by the Bank of Canada, the UK Government and US President Biden on significant climate action signals international movement on climate-related issues.

“The UK and New Zealand governments have already announced mandatory disclosure of climate-related risks for companies and financial institutions, as have the EU member states,” says Sarra, “and with President Biden moving on all fronts of climate action, Canada risks falling behind.”

Corporate directors have the legal and fiduciary duty to act in the best interests of their company as they develop strategies to address climate-related financial risks to their business. However, clarifying and adopting mandatory uniform reporting on climate metrics and finance would benefit both corporate officers and investors.

Sarra suggests directors could benefit from a common taxonomy – a set of metrics and definitions. For financial institutions, a green-and-transition taxonomy would allow them to communicate clearly their investment priorities to stakeholders and how they are managing climate-related financial risks; for others, clarity would help focus their attention on the transformative potential of their operations.

Canada’s largest banks, insurance companies and pension funds are funding development of a made-in-Canada transition and sustainable finance taxonomy that recognizes Canada’s heavy dependence on natural resources and other high-carbon-emitting sectors and its commitment to moving to net-zero carbon emissions by 2050. Sarra notes that it is critically important that Canada’s transition taxonomy align as much as possible with existing international standards and best practice developments in the European Union, UK, the United States and China.

Sarra calls on governments to provide more clarity through legislative reforms. At the federal level, changes to regulations under the Canada Business Corporations Act, the Bank Act and the Insurance Act or other guidance on best practice would further support directors in the transition to a low-carbon economy. “These changes would make it crystal clear that managing material climate risks is a core obligation,” says Sarra.

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