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Climate Change is Transforming the Financial Landscape through Disclosure, Divestment and Duty

November 23, 2015

The Bank of England governor, Mark Carney, recently delivered a stark warning detailing the various risks global markets and the financial community face as a result of a changing climate. He called climate change the “tragedy of the horizon”. Climate change increases physical, regulatory, reputation and litigation risks in a timeframe that may be longer than our traditional short-term view that permeates many markets and financial imperatives. Physical risks become more prevalent when increased frequency and severity of extreme weather or other climate impacts negatively affect asset management, the availability of insurance or other parameters. Regulatory risks results when more stringent regulatory standards threaten profit losses and resource abandonment. Reputational and litigation risks arise when those harmed by climate change seek compensation from polluters or shareholders seek retribution from reckless decision making. As understanding of potential climate impacts increases, analysts and investors are making decisions based on how companies are managing these risks and rewarding those forward-thinking enough to have a plan for the future. The following are three key areas in which climate change is transforming the financial landscape.


Public companies are legally required to disclose “material” information; that is, information that could impact the value of shares or influence an investor’s decision to buy, sell or hold securities. Investors are increasingly demanding information regarding exposure to climate change risks and how companies are planning to manage these risks. Indeed, environmental sustainability, including low-carbon strategies and climate risk, has been an important concern of shareholder activists in recent years. The concern is that long-term shareholder value may be at stake if companies are not adequately prepared for a climate-adjusted, low-carbon future. The Canadian Securities Regulators released guidance in 2010, which clarified the importance of disclosing material climate risks as part of companies’ continuous disclosure requirements.

Internationally, regulators are adding to the pressure on companies to heighten their disclosure of environmental impacts and strategies to manage environmental risks. The Australian Securities Exchange (ASX) Corporate Governance Council released the third edition of its Corporate Governance Principles and Recommendations (CGPR), which requires ASX-listed companies to disclose how they intend to manage “economic, environmental and social sustainability risks” or explain why they do not have such strategies in place. The European Parliament has also adopted a Directive that requires firms with 500+ employees to report on their environmental and social impact, including “details of the current and foreseeable impacts of [the company’s] operations on the environment…the use of renewable and non-renewable energy, greenhouse gases, water use and air pollution.” Finally, France’s Energy Transition Law now requires listed companies to disclose (i) financial risks linked to the effects of climate change, (ii) measures adopted to reduce those risks and (iii) the consequences of company activities and the use of goods and services it produces on climate change. France’s law also requires institutional investors to disclose information regarding how investment decisions consider Environmental, Social and Corporate Governance (ESG) criteria, including (i) exposure to climate change risks, (ii) the greenhouse gas emissions associated with assets owned and (iii) the contribution to the international goal of limiting climate change.

Other stakeholders initiatives are also pushing companies to go beyond regulatory disclosure requirements and voluntarily report on environmental impacts, climate risks and sustainability strategies. The risks of climate change-related securities litigation are expected to grow as institutional investors, voluntary disclosure initiatives and other stakeholders are putting more pressure on regulators to enhance scrutiny of environmental disclosures more generally in Canada and the U.S.

Divestment and Indices

Divestment campaigns that seek to move money away from fossil-fuel reliant investments due to ethical concerns and financial risks is going global. The movement has grown to encompass individuals, faith-based organizations, foundations, governments, private companies and pension funds in 43 countries. Currently over 436 institutions and 2,040 individuals representing $2.6 trillion in assets have agreed to sell their fossil fuel investments—and these numbers are increasing daily.

This move to decarbonize portfolios has led investors to seek low-carbon financial products and services, such as fossil indexes and diversified mutual funds. In response to this call, S&P Dow Jones Indices and Toronto Stock Exchange just announced the launch of three new climate change index series for Canada. These subindexes will track companies and monitor performance based on certain criteria, such as carbon emissions and ownership of fossil fuel reserves. Julia Kochetygova, Head of Sustainability Indices at S&P Dow Jones Indices, stated “[w]ith an increasing number of Canadian investors basing their investment decisions on how companies manage environmental issues, this S&P/TSX index series will provide an important and relevant benchmark within this space.” A new round of climate change-related exchange-traded and mutual funds that investors can buy and sell are expected to follow in the near future.

Other stock exchanges are also showing leadership on the environment and climate change front. According to data released by the Sustainable Stock Exchanges Initiative in August 2015, 59 stock exchanges around the world have implemented sustainability measures to provide guidance to the investors, including the New York Stock Exchange (NYSE), Bombay Stock Exchange (BSE), Nasdaq, London Stock Exchange, Euronext, Australian Securities Exchange, and Shanghai Stock Exchange.


Climate risks are not only relevant to businesses; they can implicate individual officers, directors and advisors as well. Directors, officers and advisors generally have a fiduciary duty to act in the best interest of the organization they are managing. As fiduciaries, the decisions they make today will affect the performance of their companies or investments in the future. If fiduciaries do not manage risks and opportunities to achieve longer term stability and resilience, these individuals could be exposed to potential liability. In other words, if a director ignores risks and opportunities presented by climate change and fail to manage the projected impacts on their businesses, a court could find that the director breached his duty and hold him personally liable for losses incurred by the company’s shareholders.

The UK’s Companies Act 2006 requires that company directors “promote the success of the company”, including by considering “the likely consequences of any decision in the long term” and the “the impact of the company’s operations on the community and the environment”. Failing to plan and prepare for climate change could be interpreted as inconsistent with this requirement, thus exposing a director to potential liability. Indeed, activist organizations and investor coalitions are closely monitoring the activities of major companies and have pledged to pursue those directors who intend to follow a “business-as-usual” model and fail to protect their investors from the challenge that climate change presents.

Similarly, the duties of pension fund managers have been under heightened scrutiny as of late, particularly as they relate to integrating climate change into their investment decisions. Traditionally, a pension fund manager’s duty was to maximize short-term gain and non-balance sheet factors were not considered as part of their investment strategy. However, there is a growing recognition that a wide range of factors—including environmental, climate change, social and other factors—are relevant to investment decision making. There is also an emerging recognition of a public fiduciary responsibility, especially for very large pension fiduciaries. With this in mind, perceptions of pension fund manager duties are evolving to account for future members and incorporate longer term, sustainable investment strategies that would prepare and plan for climate change.

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As investors, regulators and other stakeholders continue to demand greater transparency and readiness with respect to climate risks, parties will increasingly need to gather, assess, disclose and consider climate factors—both related to carbon pollution and climate adaptation—in planning, information sharing and decision making. By applying general risk management and strategic assessments, investors can make significant strides to future-proof portfolios in a carbon-constrained and climate-impacted global economy.