Regulators eye mandating climate disclosures

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Canada’s securities regulators have proposed requirements to standardize climate-related disclosure by companies, but they leave open the possibility that not all carbon emissions will have to be accounted for.

Canadian Securities Administrators (CSA), the body of provincial securities commissions, said in a news release on Monday new mandated measures would provide the consistency companies and investors alike have demanded as they assess risks to businesses related to both the physical climate and the transition to a lower-carbon economy.

The recommendations for disclosures in businesses’ annual filings to regulators mostly follow those set out in a reporting template developed by the Task Force on Climate-Related Financial Disclosures (TCFD) that is being widely adopted by public companies and other organizations around the world. But they would leave companies with wiggle room related to reporting some emissions and analyzing how their businesses might fare in various climate scenarios.

All of the country’s securities commissions would have to adopt the regulations.

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Grant Vingoe, chairman and chief executive officer of the Ontario Securities Commission, said the measures would place Canada among the first in the Group of Seven countries to mandate climate-related disclosure.

“On the eve of COP26, these proposals are a win for investors, who will have access to more consistent, comparable and useful information, and a win for issuers, who stand to attract more capital from domestic and international investors who increasingly expect action and clear disclosure on these issues,” Mr. Vingoe said in a statement.

COP26, or Conference of the Parties, is the UN-led climate summit set to start in Glasgow, Scotland, at the end of October. The global financial industry will play a major role in discussions, as decisions about allocation of capital dictate how to reduce CO2 emissions. Standardized reporting is seen as a key tool for making such decisions.

Early this month, the Institute for Sustainable Finance at Queen’s University’s Smith School of Business issued a report urging Canadian governments and regulators to accelerate efforts to improve disclosure of emissions to stay competitive with Europe, and it noted many business leaders have called for standardized reporting.

The CSA recommendations closely follow those set out early this year by the Ontario Capital Markets Modernization Taskforce, especially the adoption of TCFD reporting.

Former central banker Mark Carney and billionaire ex-mayor of New York Michael Bloomberg led the effort to develop the TCFD standards. Besides emissions disclosure, they include such requirements as explaining the role of executives in assessing climate risks and how they are integrated into overall corporate risk management. They also include industry-specific standards based on types of climate risk.

However, some CSA recommendations fall short of what many climate activists want.

The first has to do with reporting different categories of emissions, known as scopes. Under one option, companies would be required to disclose scope 1 emissions, or those from sources owned or controlled by the company; scope 2, or indirect emissions from the purchase of power, heat or steam; as well as scope 3, or indirect emissions created, for example, when consumers use a product. The latter is the most difficult to quantify.

Companies could be exempted from disclosing their emissions for any of the three categories if they provide an explanation.

Under a second option, only scope 1 would have to be disclosed.

The CSA regulations also would not require analysis of various climate scenarios, a key TCFD recommendation. Such analysis involves assessing corporate risks based on a range of potential policy and industrial changes for targets to keep the average increase in global temperature to 2 C or less. The body said the decision to omit scenario analysis was made to minimize costs and regulatory burdens. It also said it had heard concerns from investors about the usefulness of the information.

But excluding that measure and requirements to disclose scope 3 emissions would put investors at a disadvantage as they are less able to judge whether businesses will be resilient to coming changes, said Keith Stewart, senior energy strategist at Greenpeace Canada.

“How would you change your business plan in a low-carbon world? What would you have to do to survive in it, or thrive? That’s where you [would be] forcing the companies to rethink their business plan, so it becomes less of a box-checking effort,” Mr. Stewart said.

The CSA also said new rules would reduce costs for companies, which now report climate-related data using a patchwork of different disclosure templates. In its review of the current situation, the CSA found disclosure has improved in recent years, but in some instances, it was limited and non-specific.

It said 92 per cent of companies reported some climate-related risk data in their regulatory filings, but on average, only 59 per cent of the risks were presented as “relevant, detailed and entity-specific.” The remaining reporting was “either boilerplate, vague or incomplete.”

The new requirements would be phased in over a one-year period for companies listed on the TSX, and three years for smaller ones, such as those on the TSX Venture Exchange and Canadian Securities Exchange.

The CSA said it would accept submissions to comment on the proposed regulations through Jan. 17, 2022. The new rules would come into force some time after the end of next year.

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