In Canada, the impact of climate change is becoming increasingly visible.

In a speech last year,  the Deputy Governor of the Bank of Canada spoke of “material and pervasive effects” on the Canadian economy, pointing to a confluence of climate-related weather activities in increasing number, ranging from forest fires, storms, droughts, invasive species and road closures to warming weather patterns—all of which pose potential risks to investors.

Research sponsored by the federal government estimates that the cost of climate change to the Canadian economy will reach between $21 billion and $43 billion by 2050.  Little wonder then that investors are becoming increasingly concerned about the material risks around climate change.

In December 2015, the Financial Stability Board (FSB) established the TCFD to develop voluntary, consistent climate-related financial risk disclosures for companies to use when providing information to investors, lenders, insurers and other stakeholders. The final recommendations of the TCFD were released in June 2017 after a collaborative process of global stakeholder consultations.

Last year, as part of its 2018 reporting framework, the PRI incorporated pilot climate reporting indicators based on the June 2017 TCFD recommendations. The aim was to improve industry disclosure and enable investors to implement TCFD guidance. In total, 480 PRI signatories (from 1449 globally) completed the indicators in the 2018 Reporting Framework, of which 28 were Canadian signatories (From 88 in Canada reporting).

The 2019 PRI Reporting Framework will continue to include pilot climate reporting indicators based on the TCFD. The indicators will be updated to incorporate signatory feedback including the need for streamlining and more practical guidance. The PRI will continue to drive TCFD implementation across markets, encouraging regulators, companies and investors to advance further.

Last year, the PRI, in conjunction with Baker McKenzie, produced a local review, which looked at the recommendations from a Canadian perspective.

The review found that Canada’s existing regulations requiring climate disclosure are not yet consistent across sectors or in relation to the scope or medium of reporting. As Canada has been relatively slow to implement comprehensive regulations incentivising or compelling companies to consider and disclose climate risk exposure, adoption of a clear framework consistent with the TCFD’s recommendations is likely to assist significantly in enabling companies to understand the ideal scope of their disclosures and to integrate climate risk awareness into their businesses and existing (or developing) reporting systems.

Such a framework would improve the quality and consistency of information available to investors, particularly in terms of identifying vulnerable and less vulnerable companies, and particularly companies which are regarding the transition as an opportunity to improve their sustainability and attractiveness to investors.

Climate-related disclosures made as part of mainstream financial filings will not only ensure the quality of information disclosed, but also promote and normalise the inclusion and importance of this information within the corporate and investor communities in Canada, in the context of this slow evolution of regulation on the subject. Additionally, detailed and commercial disclosures will maintain and perhaps improve investor confidence, due to the ability to consider and rely on the types of information the TCFD recommends be disclosed by all sectors, including climate risk consideration at a company’s board level, how climate risks and opportunities are contemplated by the company’s strategy and its risk management processes, and the quality of the company’s methods for measuring and monitoring the impacts of those risks and opportunities on its business.

The disclosure framework would be widely adoptable across sectors, enabling clearer and more consistent comparison between companies within a jurisdiction. This is likely to assist Canadian companies and investors in carrying out effective disclosure and in understanding disclosed information despite Canada’s multiple sub-national legal jurisdictions.

Given Canada’s unique position regarding climate risks, including its large area and diverse range of likely physical climate-related impacts, and its natural-resource reliant economy, adoption of a reliable and transparent disclosure framework will be a central element in its smooth transition to a lower carbon economy and maintaining the stability of financial markets as the transition occurs.

The report recommended that federal and provincial regulators including the Canadian Securities Administrators, to endorse the TCFD recommendations, and that the Toronto Stock Exchange and TSX Venture Exchange should reference them in their reporting guidance.

The report further noted that Canada currently has limited corporate disclosure covering ‘ESG’, or environment, social and governance factors—those elements used to measure the sustainability and ethics of a business. In addition, climate change tends to be grouped under the rubric of environmental requirements, but not addressed as a stand-alone concern. It concluded that Canadian climate disclosure is “progressing relatively slowly”.

Implementation of the TCFD’s recommendations will assist the financial sector, and those areas of the non-financial sector which face additional risk exposure during and after the transition to a global lower carbon economy, to understand and act effectively upon material climate-related risks.

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.

Alberta’s Deputy Minister of Climate Change urges investors to recognize province’s changes, climate-change leadership

Lost in its image as Canada’s oil and gas production centre is the fact that Alberta – as a province and as a society – has gone through a significant change in the last decade, including establishing a world-class climate-change framework.

That’s the assessment Eric Denhoff, Deputy Minister of Environment and Parks and the Alberta Climate Change Office, provided to a standing-room-only session at the 2018 RIA Conference on June 6th in Toronto. The session was moderated by Jamie Bonham, Manager of Extractives Research & Engagement with NEI Investments, who opened with the comment that NEI was “interested in developing a greater appreciation of what Alberta is trying to do on the climate change file so that we can have a better dialogue on where we need to go next. Like any jurisdiction in Canada, there is always room to improve, but if we don’t acknowledge the genuine and substantive efforts that Alberta has made on this file we put further progress at risk. The current focus on simplistic solutions and polarized debate is just not helpful.”

Mr. Denhoff explained, “All I am asking is that people begin to see Alberta through a bit more contemporary lens. We advocate a portfolio approach to investing – not looking at individual companies but looking at Alberta as a place to invest that is, in our view, the most successfully regulated environment for companies to operate in North America.”

For example, he said, it is easy to believe an investment in an aerospace or tech firm in California is more responsible. “But you need to look at the overall portfolio, because carbon pricing on oil and gas in Alberta is much more stringent than in California even though they wave a good flag.”

Climate change initiatives

According to Denhoff, Alberta is committed to an ambitious climate-change plan that includes:

• Eliminating pollution from coal-generated electricity by 2030
• Ensuring 30% of electricity generation will be from renewable sources by 2030
• Reducing methane emissions from oil and gas by 45% by 2025
• Enforcing the legislated upper limit of 100 megatonnes (Mt) of oil sands emissions.

Mr. Denhoff said the province’s energy efficiency program – at $600 million the largest in North America – has exceeded expectations.

“We thought about 30,000 homeowners would take advantage of the support for retrofitting their homes. More than 150,000 signed up, 10% of all homes in the province”

Other provincial energy efficiency initiatives are also oversubscribed, including an aggressive Indigenous solar power initiative. Mr. Denhoff also cited the recent creation of the largest contiguous protected boreal forest in the world with the addition of more than 1.36 million hectares to the province’s parks.

Leveraging money from its carbon pricing system, Alberta is investing $1.4 billion in green and clean tech innovation projects. That includes $440 million for projects related to the oil and gas industry, $400 million in green loan guarantees, $240 million for industrial energy efficiency projects and $225 million for the development of emissions-reducing technology.

Mr. Denhoff said Alberta’s carbon pricing system provides a sophisticated combination of carrots and sticks to reward innovation and drive down emissions across 13 sectors – a significant achievement that was accomplished in only one year.

He added that the government is committed to making adjustments for firms that can demonstrate that their competitiveness has been adversely affected by the carbon pricing system. Avoiding carbon leakage – perhaps the worst-case scenario for this system – has been one of the government’s guiding principles.

Jamie Bonham noted that industry support has been critical to the success of implementing the Alberta climate change plan, but that this support has not been universal. “We have engaged with many of the leaders in the Alberta energy industry on this specific issue and see their vocal support for climate regulation as a huge positive. We would, however, like to see this commitment extend beyond the small group of leading companies and encompass the broader industry and industry associations. Success in Alberta will require that the whole industry is engaged, and constructive, in the process.”

Rolling their eyes

Addressing the issue of the federal government’s buy-out of the Trans Mountain pipeline, Mr. Denhoff said many Albertans roll their eyes when people complain about the investment.

For one thing, he said, the number of pipelines doesn’t make a difference when Alberta has legislated a 100 Mt limit on oil sands emissions.

For another, he said, the federal government has invested billions of dollars to prop up the auto industry, billions more to help companies like Bombardier and Pratt & Whitney, and projects like the Muskrat Falls power initiative, all with little or no public opposition.

“What drives Albertans a little bit crazy is that we get up in the morning and have this unbelievably regulated industry – of course we can always do more but it is way better than virtually any jurisdiction in the world – but some people are happy to import oil from corrupt states like Venezuela, Nigeria, or other failed corrupt states around the world where there are no environmental standards.”

Albertans, he said, “are expending an extraordinary amount of effort, compared to almost any jurisdiction I know of, to get it right on emissions reduction, the regulatory environment, and on climate change. They feel they’ve made a real college try and they feel they get nothing for it.”

That is why, Mr. Denhoff said, he asks investors to look at the whole picture of what Alberta is doing. “When I look around the world at who is making the biggest change, who is most committed, Alberta is right up there.”

Disclaimer
The views expressed in this article are attributable to the individuals who spoke at the 2018 RIA Conference. They do not necessarily reflect the views of the Responsible Investment Association.