Who’s writing your climate narrative?

We hear a lot about climate-related divestment in energy, but investors are paying increasing attention to climate change risk in all sectors. If your disclosure is poor, it leaves you offside and out of the loop
By Mai Nguyen

It’s material: Suncor (Edmonton facility, above) is on the forefront of climate-risk reporting. Regulators want companies in all sectors to follow suit

On Easter Monday, Suncor Energy Inc. quietly released a 15-page report that laid out several plausible climate futures and how it plans to stay “climate resilient” in a low-carbon economy. In a note addressed to shareholders, CEO Steve Williams wrote: “As a major supplier of energy to Canadians and globally, we have a responsibility to navigate strategically between the aspirational and the realistic.”

For institutional investors and other stakeholders, particularly the socially responsible ones, this was a better surprise than discounted chocolate. It essentially gives them a crystal ball view into how Suncor (TSX:SU) will tackle every probable climate change scenario, from the rise of electric cars to the possibility that there will be no new export pipelines out of the Athabasca oilsands region.

It’s Suncor’s first stand-alone report on this sticky topic, which was published in response to a shareholder resolution passed last year urging the company to reveal more details on how it will measure and ensure its ability to thrive in a low-carbon future—and it marks a watershed for climate disclosure. But it’s not surprising that it came from Suncor. It’s been leading the conversation among its energy peers around reducing greenhouse gas emissions and has voluntarily published sustainability reports since 2009.

More significantly, Suncor’s report could signal the beginning of what will be expected of public companies—that is, better climate risk disclosures. It’s certainly timely, given that the Canadian Securities Administrators, which encompasses the country’s provincial and territorial stock regulators, announced in March that it’s embarking on a review project to assess how large TSX-listed companies across all sectors are disclosing the financial impacts of climate-related risks (translation: how are they doing it, if at all?). According to the CSA, the review stems from increasing demand from investors who want to better protect their portfolios as well as the introduction of several voluntary reporting frameworks, including those set by the Sustainability Accounting Standards Board and the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, a business and investor-led initiative headed by Michael Bloomberg and Mark Carney.

The impetus is clear: following the Paris climate agreement and a scary warning from Bank of Canada deputy governor Timothy Lane about climate change’s “material and pervasive effects on Canada’s economy,” it’s impossible these days for corporations to not feel some pressure to disclose their climate risks. “There is a broad consensus among governments globally that the world needs to transition to a low-carbon economy,” says Dustyn Lanz, chief operating officer of the Responsible Investment Association in Toronto. “As a result, investors need reliable, comparable data to make informed decisions about how companies are managing their exposure to climate-related risks.”

Currently, public companies in Canada are required to disclose material risks, which includes risks related to climate change or other environmental threats. This spring and summer, CSA staff will review mandatory disclosure filings and voluntary sustainability reports filed for 2016. It will also invite companies to share their disclosure practices through anonymous online surveys and focus groups. They’ll also look at what other jurisdictions have set as requirements and review a number of voluntary disclosure frameworks.

Alison Trollope, communications director for the Alberta Securities Commission, says the review’s goal is to gain better insight into what companies are disclosing. In an e-mail, Trollope added: “This includes better understanding of any challenges and costs facing TSX-listed issuers in providing this information.”

According to Lanz, the CSA review has the potential to bridge any gaps between what companies are reporting and what investors find useful. As it stands, the current state of cli- mate disclosure needs major improvements as it leaves investors with barely usable information. “If the review results in enhanced disclosure requirements, issuers will need to consider how their reporting practices and business strategy will need to evolve,” he says.

Poor disclosure can force investors to seek third-party data to get the information they need. It could also leave them dissatisfied enough to divest. Institutional investors con- trolling more than $5 trillion in assets have already dumped some or all of their fossil fuel stocks to mitigate their climate-related risks. To keep investors happy, a comprehensive report like Suncor’s offers the desired level of transparency while allowing companies to drive their own narrative, says Sarah Keyes, sustainability principal at the Chartered Professional Accountants of Canada. “Reporting is really about building trust in the market and it’s a chance for companies to tell their full value-creation story,” she says.

In 2016, CPA Canada, which works with major organizations to help them cope with climate change, examined the regulatory filings of 75 Canadian public companies and found that only a quarter of companies disclosed strategies on how they’ll transition to a low-carbon economy. It also found that the terminology was too inconsistent for investors to make any decent comparisons between reports. For instance, one company could refer to extended heat waves as an extreme weather event while another could call it a natural catastrophe. “There is no standardized dictionary for how to refer to these types of issues in regulatory filings, which makes it difficult for investors to figure out if companies are talking about the same issue,” says Keyes.

Until regulations are improved, Keyes says that corporate leaders would benefit from completing the CSA’s anonymous online survey and, if invited, participating in the focus groups so that regulators can find ways to reduce the burden of disclosing climate risks. (The CSA will publish a report once its review is completed this summer.)

Corporate leaders might also want to take a look at the recommendations proposed by the Task Force on Climate-Related Financial Disclosures, says Jane Ambachtsheer, partner of the responsible investment practice at Mercer Investments and one of two Canadian members of the Task Force. It’s one of the voluntary frameworks being reviewed by the CSA and it gives organizations a clear idea of how they should disclose climate risks, including the financial and reputational risks of moving into a lower-carbon economy and the physical damages of natural disasters like hurricanes and floods. The Task Force also outlines major opportunities for companies that adapt to a low-carbon economy, such as cost savings and increased competitiveness.

Even though the Task Force doesn’t finalize its guidelines until June, corporate leaders around the world have already begun discussing the recommendations, says Ambachtsheer. “If we can promote consistent frameworks for disclosures and analysis, then we can help people focus less on what and where to disclose, and focus more on managing companies in a challenging time,” she says.

It’s a message Suncor has already taken to heart, recognizing that for it and other Canadian companies to be successful, better climate-risk disclosures must be the new norm. As CEO Williams told his audience at Suncor’s last AGM: “There isn’t a go back to how we were.”

Photography courtesy of Suncor Energy Inc.

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