The CSA issues new guidance in disclosing material climate change-related risks
by Jeff Holloway and Nicole Broeke (Summer Research Student)
On August 1, 2019, the Canadian Securities Administrators (CSA) issued CSA Staff Notice 51-358 Reporting of Climate Change-related Risks (the Notice). The Notice was released in response to the CSA's own reviews of certain TSX-listed issuer disclosure practices, as well as an increased focus from institutional investors on climate change risk disclosure and concerns expressed by shareholders regarding insufficient disclosure. The Notice was intended to assist an issuer's ability to identify and assess material climate change-related risks.
While the Notice does not create or modify any legal requirements, it reinforces and expands upon the guidance previously provided in CSA Staff Notice 51-333 Environmental Reporting Guidance for continuous disclosure requirements of environmental matters, including climate change, and builds upon guidance from other regulators, proxy advisory firms, and stakeholders such as the Sustainability Accounting Standards Board and the Financial Stability Board's Task Force on Climate-related Financial Disclosures. The CSA intends the Notice to be an educational tool that can help guide an issuer's disclosure of material climate change-related risks.
The Notice focuses primarily on disclosure required in an issuer's Management Discussion and Analysis (MD&A) and Annual Information Form (AIF), but also touches on best-practices for voluntary disclosure.
Management and the board should avoid boilerplate disclosure and take steps to assess materiality of risks applicable to their own business
The CSA expects boards and management to take appropriate steps to understand and assess the materiality of all short-, medium- and long-term climate change-related risks applicable to their business. They must provide relevant, clear and understandable entity-specific disclosures of these risks. The Notice encourages the board and managers to also assess their own expertise with identifying, evaluating and managing climate-related risks and to avoid vague and boilerplate disclosure.
The Notice provides a list of questions to help boards and management self-assess material climate change-related risks and prepare appropriate disclosures. Some of the questions and considerations that management and the board should reflect upon in preparing their disclosure include:
For the board
- Gauge the board's awareness of how investors use climate-change related risks in making their investment and voting decisions
- Determine whether the board has been given sufficient information to appropriately oversee management's assessment of risks
- Ensure the board is comfortable with the methodology used by management in identifying and assessing the materiality of climate change risks
- Assessment of the effectiveness of controls and procedures in place related to climate change-related risks and their ability to gather reliable and timely climate change-related information
- Assessment of appropriate expertise to understand and manage climate change related risks
- Assessment of financial impact of physical risks (such as damage to assets, supply chain disruption, availability and quality of water, or availability of financing) and reputational, market, regulatory, policy, legal or technology-related risks
- Identifying which business unit or division is responsible for identifying and managing the risks
- Identifying any climate change-related litigation threat to the issuer, now or in the future
- Assessment of current and future financial impacts of material climate change-related risks on the issuer's assets, liabilities, revenues, expenses and cash flows over short, medium and long-term horizons
- Identifying which of the issuer's required regulatory filings require disclosure of material climate-change related risks
- Assessment of the issuer's water use and exposure to potential effects of severe weather events
- Assessment of how climate regulation and costs of compliance impact capex requirements
Issuers must disclose material information likely to affect an investment decision
An issuer's MD&A and AIF only require disclosure of material information; Materiality for the purposes of climate change-related information is determined based on whether a reasonable investor's investment decision would be influenced or changed if the information had been omitted or misstated. All material climate-change related risks must be disclosed even if they will only crystallize long-term or their occurrence is uncertain. However, that uncertainty may be accounted for in the materiality assessment.
The Notice provides the following guiding principles to assist an issuer in determining materiality for climate risks:
- No bright-line test: there is no uniform quantitative threshold for when particular information becomes material. Its materiality may vary between industries and individual issuers.
- Context: even when one or more facts are not material on their own, they may be material as a whole. Issuers should assess facts in their entirety as applicable to their own business. What is material to one issuer may not be material to another.
- Timing: if the impact of a climate change matter is reasonably expected to grow over time, early disclosure may be important. This is especially for industries with longer operation and investment cycles, or where new technologies will be required.
- Trends and uncertainties: the time horizon of a known trend or uncertainty will likely be relevant to a materiality assessment. Materiality will often turn on the probability the trend or event will actually occur and the anticipated magnitude of its effect.
Even if an issuer is not directly involved in a carbon-intensive industry, they will likely still have some exposure to climate change-related risk. The CSA advises that issuers may need to adapt their existing risk assessment methods to better evaluate these risks, which may involve adjusting to account for a longer time horizon.
Materiality assessments should consider both quantitative and qualitative factors and should attempt to identify both physical and transition risks
In addition to identifying the existence of material climate-change related risks, issuers should also consider both quantitative and qualitative factors in assessing materiality. Where possible, issuers should attempt to quantify potential financial and other impacts of each risk. In some instances a quantitative evaluation is already required by applicable securities legislation, such as the requirement to disclose in an issuer's AIF the financial and operational effects of environmental protection requirements in the current financial year and expected effects in future years. The CSA encourages issuers to use reasonable assumptions and estimates and advises that benchmarking such quantitative measurements against industry peers may be appropriate.
In attempting to assist issuers with assessing risk factors material for their disclosure, the Notice groups potential risks into two non-exhaustive categories: physical risks and transition risks. Physical risks include event-driven risks, such as increased severity of extreme weather events, as well as longer-term shifts in climate patterns that may cause sea-level rise or chronic heat waves. Physical risks may have financial implications such as damage to assets and supply chain disruptions, as well as changes in water availability and quality, food security, and extreme temperatures. Transition risks include factors such as:
- reputational risk arising from stakeholder perceptions regarding the issuer's commitment to a low-carbon economy;
- market risks related to supply or demand shifts for certain products;
- regulatory and policy risks associated with increased regulation of climate change-related matters, such as the pricing of greenhouse gas emissions or enhanced disclosure requirements;
- risks related to exposure to legal action; and
- technological risks arising from the introduction of new technologies displacing old technologies and disrupting a part of the economy, including investments in and substitutions for lower emission alternatives.
Transition risks may also have financial implications, such as higher costs from increased regulation and litigation, shifts in consumer perception and preferences, increased shareholder concern or negative shareholder feedback, and market or industry stigmatization. The Notice includes select questions for management to consider when assessing the extent to which applicable climate change-related risks affect the issuer.
Voluntary disclosure will be subject to the same standards as required disclosure
In addition to disclosure requirements imposed by applicable securities laws, issuers may voluntarily disclose climate change-related information in their continuous disclosure documents or in other disclosure, such as sustainability reports. If an issuer chooses to voluntarily disclose such information, such disclosure should be prepared in the same manner as though it were required. Voluntary disclosure must have no misrepresentations (may be subject to liability), and must not obscure material information. Boards and management should also ensure that if information contained in any voluntary disclosure is material, it must be included in and consistent with the issuer's continuous disclosure filings.
Disclosure requirements concerning forward-looking information continue to apply to climate-change risks
If an issuer chooses to include forward-looking information in its climate-change related disclosure, such as a target reductions in greenhouse gas emissions or implications of risks and opportunities under various scenarios, such information will continue to be subject to applicable securities regulations regarding forward-looking information. The information must be clearly identified in the document as forward-looking information, and must include cautionary language as well as any material assumptions used by the issuer in developing the information. Any issuer must also include any updates to previously disclosed material climate-related risks and discuss in its MD&A any events or circumstances during the period that are likely to cause actual results to differ from such material information previously disclosed.
Key takeaways for issuers
Climate change-related risks can be difficult to assess and identify—and even more difficult to quantify—given the high levels of uncertainty and potential long-term horizon expected before the issuer may be affected. While the CSA acknowledges that difficulty, an increased focus has been placed on climate-related risk disclosure not only by the CSA but also by institutional shareholders and other stakeholders. An issuer should spend more time assessing the degree to which their business is exposed to or will be affected by such risks. These assessments should be conducted regularly and should include an assessment of whether the issuer's board and management are sufficiently equipped to ensure material climate-related risk factors are considered, addressed and disclosed.
Disclosure of climate-change related risks should be company-specific as the CSA has made it clear that boiler plate disclosure will not suffice. Disclosure should not be limited to short-term effects on the company, and where possible, should include quantitative evaluation of how the business will be impacted.
A copy of the Notice can be found here.
This article is intended as general information only and is not to be taken as legal advice. If you require additional information or assistance with the foregoing please get in touch with our Business Law team.