Effective Climate Governance: A New Guide to Assist Corporate Boards, Investors and Asset Managers

Climate-related financial risk, along with other environmental, social and governance (ESG) factors, are increasingly top of mind for Canadian investors.

In November 2020, the Chief Executive Officers of eight of the largest pension fund investment managers in Canada, representing $1.6 trillion in assets, issued a statement recognizing the need for a post-COVID-19 recovery that puts sustainability at the centre of the effort; seeking standardized ESG disclosure from portfolio companies, aligned with the Taskforce on Climate-related Financial Disclosure (TCFD) framework. The federal government has just announced that it is encouraging its crown corporations to disclose progress on emissions reductions using TCFD and it is currently conducting public consultations as to whether it should require federally-regulated pension funds to disclose ESG in their statement of investment policies and procedures.

In order to seriously scale up sustainable investing and effective climate governance, corporate and pension boards need the tools that can support their efforts. One such tool is the new Audit Committees and Effective Climate Governance, A Guide for Boards of Directors developed by the Canada Climate Law Initiative (CCLI). Whether you are an asset manager, asset owner or advisor, this comprehensive guide offers insights as to what you can expect from investee companies and their management of climate-related risks and opportunities. While the board of directors has responsibility for oversight of the company’s strategic planning, risk management and business plan, its audit committee is commonly delegated responsibility to undertake detailed scrutiny and oversight of financial reporting processes. It has a pivotal role in disclosing climate risks and opportunities in the financial statements, increasingly essential for investor confidence in the company’s financials.

Given the increasing financial impacts of climate change, directors have a duty to ensure that they are managing and disclosing climate-related risks and opportunities. Investors are increasingly committed to responsible investing, incorporating ESG factors into decisions on investments, managing risk, and enhancing financial returns. The 2018 Global Sustainable Investment Review reported that sustainable investing assets have grown to US $30.7 trillion globally. The 2020 Canadian Responsible Investment Trends Report observes that in Canada, there are $3.2 trillion in responsible investment assets under management, a 48% growth over a two-year period. It reports that responsible investing now represents 61.8% of Canada’s investment industry. That amount is poised to grow substantially, given investor interest and clear signals from the federal government that Canada’s future relies on sustainable and responsible investment.

In seeking to attract capital, the board relies on the audit committee to assess the quality and accuracy of climate-related financial disclosures, and the new Guide offers practical, detailed questions that audit committees should be asking their managers and internal auditors. Key factors for accurate assessment of the company’s financials include assessment of both acute and chronic physical risks, economic transition, and litigation risks; changing consumer, debt and equity investor expectations; regulatory requirements; and best practice guidance. As the audit committee’s leadership role evolves, its comprehensive valuation of financial risks and opportunities will support the rapidly growing responsible investment market.

Canadian securities regulators have been clear that climate change is now a mainstream business issue and that companies must disclose material climate risks and how they are addressing them. They have cautioned that boilerplate disclosure of climate-related financial risks is no longer acceptable. The Audit Committees and Effective Climate Governance guide offers practical tips and insights as to regulator and investor expectations. Audit committees have a central role in ensuring the company’s financial reporting is comprehensive and accountable. This guide draws together current legal and best practice guidance for audit committees, to assist them in taking a leadership role in effective climate governance.

The guide also helpfully tracks how the different frameworks, such as the Sustainability Accounting Standards (SASB) and the TCFD, fit together in the Canadian context. It sets out expectations by Canadian securities regulators of company disclosure, situates Canadian accounting standards requirements in recent developments in International Financial Accounting Standards and the World Economic Forum’s core set of ‘Stakeholder Capitalism Metrics’, and discusses how disclosures can be used by boards to align their mainstream reporting on performance against ESG indicators, including climate change.

External auditors are increasingly integrating climate issues into external audits, and it is only a matter of time before they will raise climate issues as a ‘key audit matter’ for some entities, so the audit committee must be prepared. The guide offers a series of questions that the audit committee can ask, in terms of assuring itself that financial reporting accurately reflects the company’s governance, strategy, risk management, and metrics and targets relating to climate change. It offers practical tips on what investors are looking for in financial statement and management discussion and analysis (MD&A) disclosure. Climate risk and opportunities, along with other ESG factors and financial metrics, are important to assessing investee companies’ value.

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Author

Dr. Janis Sarra

Professor of Law, and Principal Co-investigator

University of British Columbia, and Canada Climate Law Initiative

Dr. Janis Sarra is Professor of Law, University of British Columbia, and Principal Co-investigator, Canada Climate Law Initiative. Dr. Sarra held the title of UBC Presidential Distinguished Professor from 2014 to 2019; served as Associate Dean and founding Director of the National Centre for Business Law. She has more than 120 publications in corporate governance, corporate and securities law, and financial services law. Her most recent book is From Ideas to Action, Governance Paths to Net Zero.