The Canadian Securities Administrators (CSA) released new guidance on August 1 on climate change disclosure (SN 51-358). The new staff notice expands on guidance previously provided in CSA Staff Notice 51-333 Environmental Reporting Guidance and CSA Staff Notice 51-354 Report on Climate change-related Disclosure Project (SN 51-354). While the notice does not create any new legal requirements or modify existing ones, it emphasizes the importance of material climate change-related risk disclosure to investors and provides guidance to help corporations meet their obligations. Notably, the notice provides expanded guidance to assist corporations assess the materiality of the risks and includes questions that boards and management should consider in preparing for and disclosing climate-related risks.
SN 51-358 not only builds on the previous CSA staff notices, but dovetails with the increasingly prominent climate change risk disclosure guidance by other regulators and proxy advisor firms. Recent publications include the Bank of Canada’s Financial System Review, which advised that Canada’s economy is vulnerable to risks arising from climate change (see previous Norton Rose Fulbright commentary), ISS 2019 Proxy Voting Guidelines Updates, SHARE: Climate voting by large Canadian investors 2016-2017, Glass Lewis 2019 Proxy Paper Guidelines (Canada) and the CCGG Directors’ Environmental & Social Guidebook. In addition to these reports, voluntary disclosure frameworks such as the Climate Risk Technical Bulletin published by the Sustainability Accounting Standard Board (the SASB Framework), and the final recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (the TCFD Recommendations) have become increasingly important as investors voice concerns that they are receiving insufficient disclosure of climate change risks to make informed investment decisions.
The unprecedented number of reports on climate change disclosure and other environment and social governance matters released in the last few years, as well as an uptick in climate change-related litigation internationally, signals this as an important topic not only for securities regulators but also for institutional investors. SN 51-358 continues this trend, focusing exclusively on climate-related disclosures, noting that the risks of climate change are expected to be pervasive, even if they can be difficult to quantify. As a result, corporations of all sizes should consider how this new guidance may affect the risk factor sections of their third quarter MD&A and year-end MD&A and annual information form.
Considerations for the board and management
The CSA recognizes the uncertainty in climate-related risks but noted clearly that “[d]espite the potential uncertainties and longer time horizon associated with climate change-related risks, boards and management should take appropriate steps to understand and assess the materiality of these risks to their business[…] extend[ing] to a broad spectrum of potential climate change-related risks over the short-, medium- and long-term.” So what are boards and management expected to do with this guidance? In general terms, SN 51-358 indicates boards and management should:
- assess expertise: assess their expertise and experience with climate-related risks, with due regard for short-, medium- and long-term risks, to ensure they are asking the right questions when preparing disclosure;
- avoid boilerplate: avoid vague or boilerplate disclosure, so that the information is corporation-specific, comparable, relevant, clear and understandable, with context for how the board and management assess climate-related risks; and
- consult published frameworks: look to voluntary disclosure frameworks such as the SASB Framework and the TCFD Recommendations for information and specific questions to help evaluate climate-related risks and disclosure.
Materiality and climate change
As a general rule under Canadian securities regulations, information must be disclosed to investors if it is material, meaning it would likely affect an investment decision. This is no different in the context of climate risks. As SN 51-358 indicates, only information that is material will have to be disclosed, but corporations should ensure that disclosure (including voluntary disclosure) does not omit or misstate material information. While there is no bright-line test for materiality, the guidance provided in SN 51-358 indicates that corporations should consider the following:
- not just emitters: most industries have some exposure to climate change risks, so corporations are encouraged to thoughtfully analyze climate risks and adapt existing approaches to risk assessment before concluding they have no material exposure;
- particular circumstances: what is significant to one corporation may not be significant to another – the size of the issuer, location and diversity or concentration of operations are important factors in assessing materiality;
- quantitative & qualitative factors: consider both quantitative factors (litigation costs, regulatory penalties, reduced revenues, asset impairments, etc.) and qualitative factors (reputational risk, investor perception, etc.) in assessing materiality;
- timing: if the expected impact of an environmental matter might reasonably be expected to grow over time, consider whether and how early disclosure would be important to investors (e.g., sea rise resulting in repeated flooding of coastal assets, potentially resulting in permanent damage, or a write-off of the asset) – a corporation should not limit its materiality assessment to near-term risks;
- context: consider materiality in light of all of the facts available so that the corporation does not “lose sight of the forest for the trees” by assessing the materiality of individual facts in piecemeal (corporations should consider their actions in the context of all of their operations, as well as the operations of their competitors, to determine how this may create larger-than-anticipated risks); and
- trends & probabilities: where there is a known trend, analyze the probability that the trend will occur as well as the anticipated magnitude of its effect (e.g., impacts of global warming, change in demand for goods).
Note that voluntary disclosure of material information outside of a corporation’s regulatory filings is not sufficient disclosure of such information, and any voluntary disclosure should be consistent with information contained in regulatory continuous disclosure filings, and not misrepresent or obscure material information.
Questions to ask
In addition to these general considerations, the CSA derived questions from both the SASB Framework and TCFD Recommendations to provide specific guidance on the types of issues corporations should consider. Some of the more notable questions include:
- Is the board aware of how their investors are factoring climate change-related risks into their investment and voting decisions?
- Is oversight and management of climate change-related risks and opportunities integrated into the corporation’s strategic plan, and if so, to what extent?
- Has management appropriately considered how each of the different categories of climate change-related risks may affect the corporation (e.g., physical and transition risks)?
- Do the corporation’s regulatory filings contain the required disclosures on material climate change-related risks? Is this disclosure boilerplate or entity-specific?
- What are the major risks associated with the corporation’s water use, particularly in water-stressed regions?
- What is the corporation’s exposure to supply chain disruption climate change-related risks?
- How does pricing and demand for the corporation’s product/services and/or climate change regulation affect capital expenditure strategy for exploration and development of assets?
To properly address the points above, boards and management need to seriously consider whether their existing practices are sufficient to ensure factors that are (i) material, (ii) that may become material, or (iii) can be considered material in the context of factors such as cumulative effects have been adequately addressed and reported. This also includes continued action and monitoring of the corporation’s activities to ensure that climate change-related risks are clearly understood and proactively managed.
Furthermore, while this CSA notice did not create new obligations on corporations, if the trend of publications on this issue, and the CSA’s continued interest is any indication, corporations should spend time now to develop meaningful oversight and disclosure practices to future-proof against regulatory changes that may already be in the works. Guidance in the voluntary disclosure frameworks can help to shape corporations disclosure practices, but are lengthy and require careful thought as to how they apply to a particular corporation’s circumstances. If corporations can address these issues now, it will give them time for such careful consideration and may place them ahead of their competitors, providing fruitful opportunities for innovation and growth going forward.
To read the CSA Staff Notice, click here.
The authors wish to thank articling student Lauren Stelck for her help in preparing this legal update.