CIBC, left, and Toronto Dominion Centre, in Toronto's Financial District, are photographed on Sept. 3, 2020.Fred Lum/The Globe and Mail
Canadian companies are churning out thousands of pages of disclosures each year about the environmental issues they face, including climate change. The people reading them, such as the investment managers at the giant Caisse de dépôt et placement du Québec, will put billions of dollars into the ones that get it right.
But there’s a big problem: The level of disclosure and standards companies use to report on a sprawling range of issues, from their records and ambitions for reducing carbon emissions to potential costs to their businesses from policy changes, are all over the climate map.
“The state of disclosure is highly variable … there are some good disclosures in Canada, very good ones, and there are some who are not good at all,” says Bertrand Millot, the head of Climate Risk and Issues for the Caisse. “We’re a very bottom-up investor, we do thorough analysis of the companies that we invest in, and climate is part of that picture. When you see companies are not thinking about it, that’s certainly a red light."
Investors are demanding more and more information from companies about how their operations affect the environment – and how the environment affects them. So far, the companies have struggled to respond, choosing competing standards of disclosure or simply offering up little information at all.
The bar, however, is being raised again. Big institutional investors are now expecting not just historical data, but clear disclosure on what companies will do and face in the future when it comes to climate risk. And they’re expecting the disclosure from companies in all industries, not just in sectors long understood to have large impacts on the climate, such as energy or mining.
Canadian companies – many of which lag global peers in disclosure – are finding they will have to spend time, money and effort reporting on those issues as part of a total environmental, social and governance, or ESG, disclosure package. Otherwise, they face losing favour as global capital flows to where climate-risk disclosure is best. And as those companies struggle to respond to investor concerns, in many ways, their job keeps getting harder, because the standards for reporting keep getting more diverse and complex.
Ground zero: the oil patch
Some of Canada’s leaders in fulsome disclosure – and therefore, the ones that spend the most time and expense grappling with it – are companies in the oil patch that are often embroiled in the heated debates over emissions and climate change. They have already been stung more than any others as major global financial institutions have trumpeted decisions to pull their investments over environmental concerns, especially carbon emissions.
Deutsche Bank said this summer it would no longer finance new oil sands projects, while Zurich Insurance Group said it would exit as lead insurer for the $12.6-billion Trans Mountain oil pipeline expansion project. In May, Norges Bank Investment Management, Norway’s sovereign wealth fund, said it would no longer invest in the Canadian oil sands sector because of what it called “unacceptable greenhouse gas emissions.”
The companies and the Alberta government were quick to dispute the data Norges used to arrive at its decision, calling it flawed. But for any industry that relies on a broad base of investors for capital-hungry operations, this is the worst possible outcome in a world of intensifying focus on ESG issues. Good disclosure is key to convincing investors that corporations are not only operating responsibly, but also managing their exposure to huge future costs and legal battles – though even that may not convince some divestment advocates.
Two of the companies spurned by Norway’s sovereign wealth fund – Suncor Energy Inc. and Cenovus Energy Inc. – have poured major corporate resources into reporting, both as supporters of the international Financial Stability Board’s Task Force on Climate-related Financial Disclosures, or TFCD. Their reports delve into minute detail, such as scenarios for their businesses based on scales of potential carbon prices and global temperature limitation goals. The reports also spell out the roles of directors on ESG issues and targets for reducing greenhouse gases over the next decade and beyond.
The industry is not naive when it comes to what it faces with a skeptical world in working toward cutting emissions both on a per-barrel and absolute basis, says Martha Hall Findlay, the former politician and think-tank director who signed on as Suncor’s chief sustainability officer early this year. "We totally recognize that it’s not all wonderful. We have really big challenges, especially GHG [greenhouse gases], ahead of us, so that kind of disclosure can be tough,” she says.
Suncor has 25 employees dedicated to gathering data and producing its ESG report, not including numerous others through the company’s operations who contribute.
Pension funds and other institutions, meanwhile, are demanding that level of disclosure as their pension plan members and investors in their funds focus on ESG issues. Indeed, most institutions now have dedicated ESG staff, says Al Reid, Cenovus’s executive vice-president of Stakeholder Engagement, Safety, Legal and General Counsel.
“For years you would talk to a portfolio manager when you did an investor call and they might ask you a few sustainability questions and they might not," Mr. Reid says. “Increasingly, the ESG side of the house, the people that are advising, are probably getting a seat at the table. They are saying, ‘We need this information to make the investment decision that we want to make. How much, how soon, does this company do better, is it doing worse?’”
Is a universal standard emerging?
New data show that ESG disclosure practices are still very much in flux. Canadian corporations still lag their U.S. counterparts by a wide margin in disclosing climate risks. According to Montreal-based ESG consultancy Millani, 66 per cent of companies in the S&P/TSX Composite Index published a sustainability report in 2019, compared with 90 per cent of the S&P 500. Many now call them ESG reports.
Of those that published a sustainability report, Millani said, the disclosure varies widely and the companies adhere to different standards. About two-thirds used what is called the Global Reporting Initiative, or GRI, to guide their report, while about one-third used an ESG framework from the Sustainability Accounting Standards Board, or SASB.
Many climate-related considerations are quantifiable, but to date, there have been simply too many ways of quantifying them, says Jim Leech, former chief executive of the Ontario Teachers' Pension Plan Board, one of Canada’s largest institutional investors. “It’s a Wild West show – still,” Mr. Leech says.
“At the end of the day, investment decisions are made by a whole bunch of people and institutions where they have a spreadsheet and they plug in the various parameters. Heretofore, they haven’t really had a column that allows them to plug in on ESG – maybe on governance, but not on environment and social," says Mr. Leech, who is on the advisory board for the Institute for Sustainable Finance at Queen’s University.
One of the biggest dilemmas in the field for companies is what to provide disclosure about, says Andrew MacDougall, a lawyer with Osler, Hoskin & Harcourt LLP, who specializes in corporate climate-risk reporting. “When we have conversation[s] with our clients, that’s the hardest challenge because you do have a variety of reporting standards that are out there that look for quite a bit of information. And they don’t all take the same approach in terms of reporting.”
That, however, is changing, as the Caisse, every major Canadian pension plan, the country’s six major banks and its three major life insurers have endorsed the framework from the TCFD, seen as the current international gold standard for reporting. The TCFD issued its first recommendations in 2017, with billionaire and former New York mayor Michael Bloomberg and former Bank of Canada and Bank of England governor Mark Carney leading the effort to arrive at consistent financial risk reporting by companies to provide information to investors, lenders, insurers and others.
The framework has four major categories and 11 subcategories of climate-related disclosure. More so than some other standards, the TCFD requires forward-looking disclosure about climate plans and future impact.
“We need to move beyond headline carbon data to consider transition risk,” says Richard Manley, the head of sustainable investing at the Canada Pension Plan Investment Board. The CPPIB, which manages $434-billion in assets, was a founding member of the FSB task force. “The impacts are far more far-reaching across the industrial complex,” Mr. Manley says.
The Caisse’s Mr. Millot says, “We are really looking at what the company is going to do about this issue. What’s it done in the past is important, but for climate change, it’s really the future we’re looking at.”
The Canadian Coalition for Good Governance, a group of major Canadian institutional investors, endorsed the TCFD framework earlier this year, says the coalition’s executive director, Catherine McCall. “It’s important that we be part of the solution, and this is the one of the best frameworks out there. I think that companies are becoming increasingly aware of TCFD, and we’re bringing it up in our engagement meetings with them, and there seems to be a desire to start along that path."
And it is a path, or a journey, Ms. McCall says.
“You could start very simply and provide a narrative description of the different disclosure elements that they asked for," she says. “So I think that as companies realize that it’s not this huge thing that they have to comply with right away, there’s more willingness to get on board and start slowly and and move along.”
A January study by CPA Canada, a national body for accountants, examined the disclosures of 40 unnamed large companies listed on the Toronto Stock Exchange and found that while 98 per cent provided some disclosure in at least one of the four major TCFD categories, only one company disclosed in all four and the corresponding 11 subcategories. On average, companies disclosed in 4.2 of the 11 subcategories.
“I think that we’re still in the early stages, quite frankly, of evaluating climate risk across our portfolios," says Alison Schneider, the vice-president, responsible investment for Alberta Investment Management Corp., the province’s public-sector investment manager. "And that’s a function of the availability of the climate data that’s out there.”
Is regulation the answer?
The gradual pace of adoption has raised the question of whether Canadian regulators or lawmakers will play a role in pushing the issue forward. And so far, there have been signs that it will happen.
Canadian securities regulators are paying more attention, although to date the issue has been dealt with within the framework of existing securities law, rather than by introducing new disclosure requirements.
Last summer, the Canadian Securities Administrators (CSA) published guidance for public companies. Instead of asking them to publish specific information about environmental risks following a set standard, the CSA said companies should disclose climate risks in their annual information form and regular management discussion and analysis forms if those risks are “material” to the business.
This means ESG disclosure remains voluntary, and any requirement to report climate-change-related risk is company-specific.
The CSA did, however, encourage board members and managers to be more thorough in analyzing potential physical risks – such as forest fires, floods and hurricanes – and “transition risks” related to things such as reputation, supply chains and regulatory changes. If these risks are material to a business, the CSA said, they should be disclosed “even if the matter may only crystallize over the medium- or long-term, or if there is uncertainty whether it will actually occur.”
Securities regulators in Ontario could soon go a step further. An Ontario government task force, appointed to review the province’s capital markets, recommended in July that the Ontario Securities Commission mandate the disclosure of “material ESG information” in compliance with either TCFD or SASB standards.
Rupert Duchesne, a task force member and the former CEO of Aimia Inc., said the proposal garnered widespread support from investors, and little pushback from securities issuers. “Corporations I think are fairly fatalistic about this,” Mr. Duchesne says. “Having been a CEO for 12 years, I can say this with some authority: Corporations will report what they’re asked to report, provided it’s not foolish or time wasting.”
The task force did receive one important piece of feedback, Mr. Duchesne said. “For goodness sake, don’t have multiple reporting measures ... cut out the duplication, make it efficient, give us enough notice to get it right.” Any move toward mandatory reporting will also need to be phased in, he added, to give smaller issuers that are working with smaller resources time to adjust to the increased regulatory burden.
In some jurisdictions, stock exchanges are leading the charge on ESG reporting. Earlier this year, for example, the Hong Kong Stock Exchange proposed changing its listing requirements so that companies will have to report climate-related risks.
In Canada, the TMX Group, which runs the Toronto Stock Exchange, is taking a more measured approach. The group doesn’t want regulators to be “prescriptive” around environmental disclosure, says Loui Anastasopoulos, president of capital formation for the TSX.
“We’re mindful of increased [regulatory] burden on issuers,” he says, noting that mandatory reporting could be particularly challenging for smaller companies. More than half of the companies in the S&P/TSX Composite aren’t as large as the smallest U.S. S&P 500 company by market capitalization, according to S&P Global Market Intelligence.
At the same time, the TMX is developing a tool to make it easier for listed companies to analyze and disclose ESG metrics. “If we do the things we’re doing – educating, providing tools to facilitate better reporting – issuers are going to get there, because at the end of the day they want access to capital, and the more you do around ESG the better your chances are going to be to attract that capital,” Mr. Anastasopoulos says.
This issue of disclosure was front and centre in the spring when Ottawa insisted that companies taking advantage of a COVID-19-related loan program issue reports up to the standards of the TCFD. The Large Employer Emergency Financing Facility (LEEFF) program was designed to rescue distressed companies, mostly oil and gas producers and airlines, with at least $300-million in annual revenue. It was a formidable requirement, as less than a third of Canadian companies disclose to that standard, according to Millani.
Ottawa announced its support for the TCFD in its 2019 budget, in which the Liberal government encouraged federal Crown corporations to adopt its standards where appropriate and relevant. Finance Canada told The Globe and Mail in a statement that several Crown corporations are already making disclosures in line with some of the standards, including Export Development Canada, the CPPIB and the Public Sector Pension Investment Board. The department said the Office of the Superintendent of Financial Institutions is also incorporating climate-related risks into its supervisory and regulatory practices, and the Bank of Canada is including such risks in its financial vulnerabilities assessment work.
Meanwhile, most of Canada’s Big Six banks have published reports outlining their efforts to adhere to the standard. Modelling the potential impact of climate change, however, is a herculean task for lenders whose portfolios span multiple industries and geographies.
The challenge is largely technical: Banks need access to reliable climate and natural disaster data, expertise in geographic information system (GIS) software, highly tuned statistical models and robust disclosure from borrowers.
Toronto-Dominion Bank, for instance, took part in a 2018 pilot project sponsored by the United Nations Environment Programme Finance Initiative that used mapping tools to assess credit ratings for 20 power and utilities companies in the bank’s loan portfolio under various climate change scenarios. The assessment showed that the majority of the companies likely face a one-notch credit downgrade.
But the exercise also showed how hard climate change modelling is. “More efficient tools need to be developed to assess the full portfolio and obtain disclosure quality results," the bank said.
The global context
Developments in Canada are taking place within broad international efforts that have gained momentum this year.
The most recent attempt at developing a global standard for ESG disclosure arrived this week with the release of a World Economic Forum report laying out 22 core metrics drawn from several different standards. The report was developed in partnership with the big four international accounting firms: Deloitte, EY, KPMG and PwC.
In April, the Council of the European Union adopted a “taxonomy” laying out what counts as sustainable economic activity from a regulatory perspective, with the goal of standardizing disclosure. Britain’s Financial Conduct Authority has proposed a new “comply or explain” model that will require large public companies in Britain to disclose climate-related risk in line with TCFD standards, or explain why they have failed to make the disclosures.
Change is slower in the United States. Despite a push last year by Democratic lawmakers to mandate ESG disclosure, the U.S. Securities and Exchange Commission did not include specific ESG requirements when it updated its general disclosure rules earlier this year. Like Canadian regulators, the SEC continues to focus on the existing “materiality” rules, which require companies to disclose any risks that could have a significant financial impact. The commission suggests the same rules should apply to climate-change-related risks.
The lack of movement on the issue from the U.S. could prove to be a stumbling block in Canada, which often takes its cue on financial regulation from south of the border. Any meaningful change will have to involve the U.S. as part of a broader global consensus, says Alan Reid, managing director of financial institutions at the credit rating agency DBRS Morningstar.
“It really doesn’t matter if Canada decides that it is going to become completely ESG compliant and have the highest standards across the entire globe, because if the United States isn’t doing it, and Russia, the other neighbour, isn’t doing it, then who cares? This has got to be something global,” Mr. Reid says.
Sarah Keyes, of Toronto’s ESG Global Advisors, however, says that “all indications are suggesting that laws and regulations elsewhere are moving to make it mandatory,” noting New Zealand’s requirement that its banks adhere to TCFD.
“The trickle-down effect is if financial institutions are being forced to report against the TCFD, and if these large global asset owners and asset managers are reporting against the TCFD, they’re going to push the companies in which they’re investing to provide that TCFD-aligned disclosure so that they can actually report back to their clients and beneficiaries," she says.
Mr. Manley of the CPPIB thinks it could take “years” for widespread TCFD adoption, “but I’m optimistic that climate reporting is something that will start to snowball.”
For institutional investors, better corporate disclosure helps those who invest money in the institutions' funds understand that there are important nuances within industries seen as large emitters, says Russell Moldowan, vice-president, private wealth at Pacifica Partners Inc. The Vancouver-based firm manages $250-million for clients in Canada and the U.S. In many cases, clients' comments are “unfortunately binary,” he says.
“A lot of them have been asking for no fossil fuels in their portfolio, and no polluters – those types of things, Mr. Moldowan says. “Instead, we’d like to get them to the point where they recognize who is taking steps to play their part in climate change.”
Even if Canada has aspirations to move to a net-zero carbon economy in the coming decades, it remains an energy-producing country, supporting employment and infrastructure in many provinces, and so one solution is a climate-risk reporting framework that is best in class.
“We have oil and gas companies that are trying to become more involved with renewable technology. Other ones where they understand there’s climate change and are shifting their resources to be able to manage their business in light of it, and also to take advantage of it,” Mr. Moldowan says. "We don’t mind that.”
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