Introduction
Overview
Government action
TCFD implementation in Canada
Comment
Over the past five years, there has been significant consolidation of climate change standards and reporting frameworks. In particular, the framework developed by the Task Force on Climate-related Financial Disclosure (TCFD) has gained acceptance as the predominantly accepted global framework. The TCFD was established in 2015 at the direction of the Financial Stability Board to develop climate-related disclosures to promote more informed investment, credit and insurance underwriting decisions. Chaired by Michael Bloomberg and made up of 32 members, the TCFD published its recommendations (the TCFD recommendations) in 2017. With the TCFD recommendations receiving endorsements from several different countries and being referenced by the government, private sector entities and securities regulators in Canada, it is expected that the TCFD recommendations will play a notable role in the future development of climate change policies in Canada.
In January 2021, The Global Risks Report 2021, published by the World Economic Forum and based on survey results from over 650 members of the World Economic Forum's leadership team, listed extreme weather, climate action failure and human environmental damage as the most likely global risks to occur over the next 10 years. In the midst of the covid-19 pandemic, respondents also indicated that climate action failure was the most concerning risk to the world and a close second to infectious diseases in terms of expected impact over the next 10 years.
The physical effects of climate change are impossible to ignore and are impacting businesses worldwide. The International Panel on Climate Change (IPCC) released its sixth assessment regarding the climate crisis in July 2021 and described the findings as "code red for humanity". According to the IPCC report, with greenhouse gas emissions (GHG) continuing to rise, it is unlikely that the average global temperature rise will be limited to 1.5 degrees Celsius, and it is possible that two-degree-Celsius warming will be surpassed prior to 2050. In a two-degree-Celsius warming scenario, among extreme weather events, droughts and fires, up to 5 billion people could lack a source of fresh water by 2050.
By 2030, estimates by the National Oceanic and Atmospheric Administration predict more than 90% of the world's reefs will be threatened by warming ocean temperatures and acidification (both directly caused by climate change) and local pressures. Coral reefs support more than 275 million people worldwide, protect coastlines in more than 100 countries and account for 15% of gross domestic product in more than 20 countries. Present day losses continue to mount. For example, a report from reinsurer Munich-Re attributed losses due to extreme weather events caused by climate change at over US$210 billion dollars in 2020 alone. This number excludes lost profits, costs associated with supply chain issues and failure to get product to market.
Canada is a signatory to the Paris Agreement. Under the legally binding Paris Agreement, signatories commit to keeping the increase in global average temperature to 1.5 degrees Celsius above pre-industrial levels. As part of the agreement, signatories also provide their nationally determined contributions (NDCs). Measured in metric tonnes of carbon dioxide equivalent (CO2e), the globally accepted metric to measure GHG emissions, the NDCs represent the amount of emissions reductions a country intends to make by 2050.
With the United States' renewed commitment to the Paris Agreement following President Joe Biden's election, Canada has updated its NDC to reduce its national emissions by 40-45% from a 2005 baseline, the equivalent of 403 metric tonnes of CO2e. Canada's GHG emissions were 730 metric tonnes of CO2e in 2019, which is exactly what they were in 2005, representing a 0% reduction over 14 years; however, the good news is that the economy continued to grow during that time, indicating a reduction in carbon intensity over the same period. The story is much the same across the globe. According to the World Meteorological Organization and the International Energy Agency, developed nations will need to cut their emissions by 50% by 2030 – eight years from now – in order to stay below two-degree-Celsius warming.
Initially targeted at the financial sector and certain key non-financial sectors, the TCFD recommendations have since been applied across all sectors of the economy. The financial sector includes banks, asset managers, insurers and asset owners. The non-financial sectors include firms operating in sectors that face particularly high climate-related risks:
- energy;
- transport;
- agriculture, food and forest products; and
- buildings and materials.
In Canada, the federal government committed to engage with provinces and territories "with the objective of making climate disclosures consistent with the TCFD disclosures, part of regular disclosure practices for a broad spectrum of the Canadian economy". The federal government has also committed to requiring all Crown corporations to adopt the TCFD recommendations. Crown corporations holding more than C$1 billion in assets must begin this reporting as of 2022. The Bank of Canada, along with many other central banks, committed to align its future disclosures with the TCFD recommendations. As outlined below, regulators have also indicated that future reporting requirements may also mandate TCFD-aligned climate risk disclosure.
Securities regulators in Canada are also considering how to best regulate climate-change-related disclosure and have taken note of the TCFD recommendations for that purpose. On 18 October 2021, the Canadian Securities Administrators (CSA) published for comment proposed climate-related disclosure requirements, which are largely consistent with the TCFD recommendations. The proposed National Instrument 51-107 – Disclosure of Climate-related Matters (the proposed instrument) would, subject to limited exceptions, apply to all reporting issuers other than investments funds and would require disclosure related to:
- board oversight of climate-related risks and opportunities;
- material climate-related risks and opportunities and the company's strategy to address them;
- climate risk management; and
- the metrics and targets used by a company to assess and manage climate-related risks and opportunities.
Notably, unlike the CSA's 2019 guidance on climate change-related risks (for further details, see "The CSA Releases Additional Guidance on Disclosure of Climate Change-Related Risks") the proposed instrument, in its current form, would impose additional reporting requirements on public companies. The public comment period expired on 17 January 2022.
On a provincial level, the Ontario Capital Markets Modernization Taskforce (the Taskforce), which was created in February 2020 to conduct a review of the Ontario capital markets regime, published its final report on 22 January 2021. In the final report, the Taskforce recommended that all non-investment fund public issuers should be subject to mandatory disclosure of material environmental, social and governance (ESG) information and, specifically, climate change-related disclosure that is compliant with the TCFD recommendations. The proposal also highlights that the mandatory disclosure would include scope 1, scope 2 and, if appropriate, scope 3 GHG emissions on a "comply-or-explain" basis. In March, the Ontario government's provincial budget highlighted that the Ontario Securities Commission (OSC) would begin policy work to inform further regulatory consultation on ESG disclosure in 2021. In its 2021-2022 Statement of Priorities, the OSC noted that improving climate change-related disclosure was a key priority and highlighted the Taskforce's recommendation in that regard.
There is increasing global pressure for firms to report on climate-related risks and opportunities. Disclosure has largely been voluntary until now; however, governments, regulators, asset owners and financial institutions are moving to make such disclosure mandatory. The TCFD recommendations are the leading global reporting framework that firms are using to align their disclosure and produce substantive climate-related financial disclosure.
For further information on this topic please contact Kristyn Annis, Michael Vandenberghe, John A D Vellone or Jason Saltzman at Borden Ladner Gervais by telephone (+1 416 367 6749) or email ([email protected], [email protected], [email protected] or [email protected]). The Borden Ladner Gervais website can be accessed at www.blg.com.