The Ministry of Finance in Ontario on Friday released the final report from its Task Force on Capital Market Reform, which recommends that the province mandate publicly-traded corporations to disclosure climate change-related financial risks in a manner that aligns with international standards.
The task force's recommendation echoes calls from institutional investors, chartered accountants and the World Economic Forum that promote the need for mandatory standards that allow for comparative analysis of climate-risk among firms.
The task force was led by Walied Soliman, Canadian chair of the global law firm Norton Rose Fulbright.
Its recommendation on mandatory disclosure of risks related to environment, social issues and governance (ESG) includes climate-related issues. It proposes Ontario adopt a framework laid out by the task force on Climate-Related Financial Disclosure, a leading international effort that was established by global Financial Stability Board.
The disclosure standard recommended by the TCFD covers governance, strategy and risk management. The task force recommendation diverges from the TCFD by excluding the use of scenario analysis that lays out long-term risks related to the world succeeding - or not - to hold global temperature increases to well below 2-degreesC.
The Ontario government is currently working on a draft of a new Capital Markets Act that would rewrite the rules under which the Ontario Securities Commission and Toronto Stock Exchange operate. The task force urged the province to release draft legislation of its proposed Capital Markets Act for public commentary by the end of the year.
For background, publicly-traded corporations already have an obligation to report all environmental, social and governance risks that could materially impact the company’s financial results or value.
However, investors are concerned current disclosure practices are not standardized, making it impossible for them to compare the relative risks facing companies competing in the same industry.
Central bankers, including current Bank of Canada Governor Tiff Macklem and former Bank of England Governor Mark Carney, have warned the unanticipated shocks from climate change could undermine the stability of the financial system. A proper recognition of risk would, on balance, drive capital from high-risk ventures to more sustainable ones.
There would be a transition phase for all issuers to comply with the new disclosure requirements, beginning when the new requirements are implemented. The length of each issuer’s transition phase would depend on the issuer’s market cap at the time the requirements are implemented, ranging from two years for large companies to five years for firms with market cap less than $150-million.
The task force report again illustrates that Canadian companies must be better prepared for the financial risks that will arise as society seeks to avert the worst impacts of climate change while adapting to the effects that are already baked in due to higher CO2 concentrations in the atmosphere.
This point was recently emphasized in a recent opinion piece by Sussex’s Shawn McCarthy and Robyn Gray in the Globe and Mail.
Contact your Sussex representative directly to discuss strategies to deal with climate-related financial risks in your sector.