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The State of Canadian Climate Disclosures

May 28, 2020

Climate-related financial disclosures by some of Canada’s largest companies are improving, but more work is required to boost the quality of disclosures and to align with industry best practices, according to a report Manifest conducted for the Chartered Professional Accountants of Canada.

In 2019, CPA Canada commissioned Manifest to conduct a study of the climate-related disclosures provided by 40 TSX-listed companies in their regulatory and voluntary reporting. CPA Canada recently released the teaser for this study and they plan to release the full study in 2020.

The 2019 study builds on the results of a similar 2016 study, assessing Canadian climate disclosures prior to the release of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Since their release in June 2017, the TCFD recommendations – with four main categories and 11 sub-categories – has become an industry best practice for climate-related disclosures.

We highlight in the 2019 study that companies are making more disclosures than previously. On average, companies disclosed in 4.2 of the 11 TCFD sub-categories and only one company, a utility, disclosed in all 11 sub-categories. Furthermore, only half of the companies disclosed about their governance and even fewer disclosed about their physical risks, raising questions about what companies are prioritizing while managing their climate-related risks.

Demand for enhanced risk disclosure is growing

With companies facing the overlapping COVID-19 health and climate crises, emergency preparedness and planning for future upheaval are being increasingly recognized as essential to business planning and providing investors with decision-useful information. To that end, disclosure of climate-related risks has taken on an even greater significance. More investors, companies, and regulators are understanding that climate-related risks and opportunities need to be assessed and integrated into financial disclosures. Since the release of the TCFD recommendations in June 2017, over 1,000 organizations, representing a market capitalization of over US$12 trillion (as of February 2020), have endorsed the framework.

How we conducted our review for CPA Canada

The objective of the 2019 CPA Canada study was to assess whether the introduction of the TCFD has impacted how companies are making climate-related disclosures and assess alignment of these disclosures with the TCFD recommendations.

For the study, we assessed 2018 financial statements, including annual information forms (AIFs), management discussion and analysis (MD&A) documents, and information circulars. To assess how voluntary reporting compared to mandatory reporting, we reviewed voluntary disclosures, such as corporate social responsibility (CSR) documents, sustainability reports, and documents from the CDP (formerly known as the Carbon Disclosure Project).

Although we did not make direct comparisons to the findings from the 2016 study or attribute any changes solely to the TCFD recommendations, the 2019 study does make general observations about the changes we observed in disclosure documents and how the TCFD has impacted the quality and quantity of climate-related disclosures provided by Canadian issuers since the previous study.

Disclosure consistency gaps remain

In the 2019 study, the results show that compared to 2016, more disclosures are being made by issuers, and these disclosures are somewhat aligned with the TCFD recommendations. The companies reviewed, however, did not consistently disclose under TCFD’s four categories: governance, strategy, risk management, and metrics and targets.

Most of the companies reviewed made some disclosure of climate-related information in their regulatory filings, although the extent and decision-usefulness of these disclosures varied widely. Interestingly, only half of companies reviewed included disclosures about their governance of climate-related risk and opportunities. The TCFD emphasizes the importance of disclosures related to governance, and governance disclosure is one of the lowest-hanging fruit when developing a TCFD-aligned report. Companies looking to disclose their climate-related risks and opportunities should prioritize the development (and disclosure) of governance processes to effectively manage their climate-related risks.

Further, just under a third of companies disclosed acute or chronic physical risks. Our review indicates that there is an increased awareness of the potential impacts of physical risks, such as floods disrupting supply lines. More awareness, however, is required to fully understand and manage physical risks across sectors and companies.

Key takeaways for companies issuing disclosures

Some key takeaways for companies to consider when disclosing climate-related risks and opportunities include:

  • Now is the time for issuers to improve their disclosures in order to provide decision-useful information to investors. This will help investors better understand issuers’ climate-related risks, and as well ensure issuers do not fall behind when it comes to TCFD-aligned disclosures.
  • As the climate changes, climate-related risks are having material financial impacts on Canadian companies. Disclosure of material climate-related risks should be included in regulatory reporting. Even if a company conducts an assessment and determines that it faces no material climate-related risks, it is worth disclosing this information because it shows investors that the organization has considered the implications of these risks.
  • Varied use of language and terminology makes it difficult for third parties to assess the intent and quality of disclosures. More explicit reference to climate, instead of a general reference to the environment, is required to determine whether disclosures are TCFD-aligned.
  • Companies should move beyond merely disclosing how climate-related risks are identified and should explain how climate-related risks are integrated into their business strategy and financial planning.