Climate-Related Disclosures: A Material Issue

As the effects of climate change intensify, drawing public attention and stoking political debate, securities regulators are paying close attention to the impact of these developments on our capital markets. Our aim is to provide investors with consistent, comparable, and decision-useful information about the material climate-related risks facing public companies so that they can make informed investment decisions.

At the Ontario Securities Commission, we are focusing on developing climate-related financial disclosure requirements for public companies that are harmonized across Canada and aligned to international standards, with modifications necessary and appropriate for the Canadian context.

As climate change has become increasingly politicized and polarizing, efforts by securities regulators to establish appropriate disclosure standards have been under greater scrutiny. There is a view by some that we are overreaching our function and advocating for a particular social agenda, when in fact our work in this area is driven by market demand and is consistent with the principles of securities regulation and the OSC’s statutory mandate.

The basic premise of our disclosure-based regulatory regime is that if investors have timely, accurate, and complete financial and other information, they can make informed choices about where to invest their money. At the heart of this regime is the concept of materiality, which generally refers to information that would influence or change a reasonable investor’s decision to buy, sell or hold securities if it were omitted or misstated.

Climate change represents a wide range of complex and multi-faceted risks that could materially affect a company’s enterprise value. These risks span the short, medium, and long term and present considerable challenges that companies must try to navigate.

Examples of short-term effects include physical risks such as shifts in climate patterns and extreme weather events that can cause physical damage to people, property, and critical infrastructure. Related to this are soaring insurance costs for certain types of businesses and in certain locations. Earlier this year, the head of one of the world’s largest insurance brokers warned that climate change has already created a “crisis of confidence” for insurers around the ability to predict loss. These concerns have become more immediate as flooding, drought, wildfires, and extreme heat waves have become more common and hit closer to home.

In the medium term, companies must consider transitional risks including costs from new policies, laws, and regulations (such as for greenhouse gas emissions) designed to mitigate climate change. In fact, some of these risks have already arrived. Companies may also be left with stranded assets whose value has deteriorated because of a shift toward more sustainable practices.

Over the long term, companies must anticipate a less predictable future that may include population migration, supply chain disruptions, changing consumer preferences, and even litigation risks for big polluters and companies that fail to adequately consider the effects of climate change on their activities.

These are just a few of the many factors that boards and senior management must contend with as they navigate this complex issue. Naturally, as with any time of transformation, some companies will be more impacted than others, and new opportunities will arise for those who are well prepared.

Put simply, how companies are identifying and responding to the risks and opportunities presented by climate change is material information that must be disclosed to investors. This is not a determination made by regulatory bodies; it is investors themselves who are demanding it. Initially driven by institutional firms that invest the largest asset pools over the longest time horizons, climate considerations have become a core issue for many mainstream investors.

We have heard that many companies find it challenging to determine what climate-related information should be included in their reporting. We were an early leader in offering guidance on climate-related disclosure and we continue to work with our regulatory partners to strike the right balance as we develop disclosure requirements.

Back in 2010, the OSC, together with our provincial counterparts in the Canadian Securities Administrators (CSA), published a notice that set out guiding principles to consider when making materiality determinations regarding environmental matters. It provided examples of entity-specific disclosures to assist companies in understanding their disclosure obligations.

Then, in 2019, amid growing concern by investors about a lack of transparency on climate readiness, the CSA issued further guidance outlining the role of boards and senior management in preparing and approving clear and relevant climate-related risk disclosures. By this time, several voluntary disclosure frameworks had been developed, including by the Sustainability Accounting Standard Board and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

The CSA’s initial climate-related disclosure rule proposal, published in 2021, was modelled on the TCFD recommendations. It is still being considered in light of significant international developments, notably the International Sustainability Standards Board (ISSB) standards released in June of this year and the forthcoming U.S. Securities and Exchange Commission proposals.

Through our active involvement with the International Organization of Securities Commissions (IOSCO) and our CSA partners, we have been engaged with the ISSB as they have led efforts to develop a global framework for investor-focused disclosures.

In July, IOSCO formally endorsed the ISSB Standards, concluding that they are appropriate for the purpose of helping globally integrated financial markets accurately assess relevant risks and opportunities around climate change and sustainability. It also concluded that the standards form an appropriate basis for the development of a robust assurance framework to apply to such disclosures. The CSA also welcomed the ISSB Standards and indicated its intention to conduct further consultations to adopt disclosure standards based on them, with modifications for the Canadian context.

We recognize that, while disclosure of material climate change-related risks is important for investors to make informed investment decisions, this disclosure presents potential burdens for all public companies, especially smaller ones with more limited resources. Throughout our discussions with the ISSB and in other international forums, we have strongly advocated for proportionality and scalability to be reflected in the standards. It is important that they work across different markets, industries, and company sizes, especially for Canada’s many early-growth public companies.

The Canadian Sustainability Standards Board (CSSB), which became operational in June, includes strong representation from Canada’s resource-based sectors and will be instrumental in supporting the uptake of ISSB standards in Canada and highlighting key issues for the Canadian context. The CSA has begun to engage with the CSSB through a dedicated working group and we look forward to building this relationship.

Our disclosure-based regulatory regime depends upon investors having access to information about the material risks and opportunities that companies face, and how they are addressing them. Ultimately, the entire financial ecosystem benefits from credible and comparable information on climate-related risks and opportunities, which will increasingly be used in capital allocation. Driven by investor demand, we will continue our work to promote appropriate disclosures that investors can use to make decisions as they navigate this defining global issue of our time.

Our reviews of climate-related disclosures (published in 2018 and 2021) have showed that, while the quality of these disclosures has gotten better, there is still plenty of room for improvement. While boards wait for the adoption of climate-related disclosure requirements, they can use this intermediate period to get themselves ready. They can set up their governance and risk management structures to address material climate-related risks – and position themselves well to meet their investors’ evolving information needs.

Grant Vingoe is the Chief Executive Officer of the Ontario Securities Commission