The recently released CSA Report on Climate change-related Disclosure Project provides some valuable insights into the current Canadian disclosure landscape and the information disconnect between investors and issuers that we often refer to.
The work done by the CSA is particularly timely, as there is a rising acknowledgment of climate change and its impact – making “E” the new “G” in the ESG integration focus for investors. It is also increasing awareness of the need to see climate change as a business issue.
As always when we talk about disclosure, what’s most important to determine is the materiality of issues – and more specifically, the materiality to investors. From a capital markets perspective, information is material if there is a substantial likelihood that a reasonable investor would consider the information important to an investment decision.
In the case of climate change, investors are unsure whether companies have undertaken a process to clearly understand the materiality of climate change to their business. What’s more, many companies seem to misunderstand the implications of climate change-related risks and financial impacts on their business, well beyond their own carbon emissions. In fact, this notion of the impacts of climate change on organizations – rather than the other way around - is the basis of the Task Force on Climate-related Financial Disclosure (TCFD) recommendations.
Do companies have a process to clearly understand the potential financial impacts of climate change? Part of my work with companies is helping them identify which ESG issues are material to their investors. Climate change often surfaces as an important issue, and it may or may not be material; what’s important is to ask the right questions and have the proper governance and management processes in place – and if the issue is indeed material, to disclose decision-useful information about it.
Not only does the CSA propose to develop new guidelines and education with respect to the business risks and opportunities and potential financial impacts of climate change, it also proposes to develop new disclosure requirements regarding governance and oversight processes in relation to material risks and opportunities in general, not just climate change.
I believe this actually opens the door to improving company disclosure on other environmental, social, and governance issues.
To me, this is a great step in the right direction, because the information disconnect and the need for better disclosure to investors is not just about climate change, it’s about all material ESG issues. I believe that’s where the market needs to go and as I read the CSA report I’m encouraged to see that’s where regulators are starting to go.
This report may well serve as a shot across the bows of Canadian public companies. The question is now: are companies ready for the next phase of disclosure requirements on ESG issues?