Financial services at risk from lack of disclosure on climate issues

Insufficient disclosure about corporate action on climate change poses a growing risk to the Canadian financial services industry, suggests a new report from the International Institute for Sustainable Development (IISD), which calls on government and regulatory policymakers to take action to embrace sustainable finance.

Specifically, the Winnipeg-based independent think tank’s report calls for policy action from the federal government, the Bank of Canada (BoC) and federal financial and provincial securities regulators to improve climate-related disclosure obligations, providing a basis for companies to invest in greater disclosure capacity.

Current disclosure by corporations, generally, and financial institutions, in particular, is viewed as relatively weak by global investors—and Canada is no exception, the report notes.

“This means that climate risk, be it regarding adapting to the physical risks of climate change or addressing the transition risks to business models from a shift to a low-carbon global economy, is not fully accounted for in corporate planning or disclosed to investors. The result is an accumulation of climate risk in capital markets,” the report states.

To help address these growing risks, the report recommends a three-year plan that includes the federal government amending corporate law to require certain climate-related disclosures in annual reports; the Canadian Securities Administrators reviewing their supervisory practices for climate-related financial disclosures; the chief actuary of the Office of the Superintendent of Financial Institutions reporting on the climate-related risks to the funding status of the Canada Pension Plan; and the BoC clarifying the significance of disclosure of climate-related risks to the 2019 Financial System Review.

“Disclosure on energy transition plans is what global investors are looking for,” said Céline Bak, senior associate at IISD and author of the report, in a statement. “Otherwise, investors will assume that targets are just that and that capital is not being allocated to meet those targets. This is a risk to Canada’s financial sector—particularly given how much capital is invested in Canada’s energy sector.”

The report also recommends that the Toronto Stock Exchange join the UN Sustainable Stock Exchanges Initiative; that Natural Resources Canada propose legislation requiring regular reporting from energy sector companies on the assessment/mitigation of climate-related risk; and that Environment and Climate Change Canada propose legislation for regular reporting on efforts to deal with climate-related physical risk by all federal public entities.

“Governments can ban products or fund environmental projects—and that matters. But greening the financial ecosystem will deliver exponential returns. That’s the kind of action needed for Canada to actually move the needle on productivity and clean growth,” Bak added.

Alongside policymakers’ efforts to enhance disclosure, the report also says that governments and regulators in Canada should monitor emerging international frameworks to assess the sustainability of economic activity and that Canada should seek a leadership role in international efforts to strengthen the international financial and monetary systems against systemic shocks.

“As an oil-producing country, sustainable finance presents very real opportunities and challenges for Canada,” the report states. “It will require institutions, market supervisors and private sector actors to engage proactively to address the particular challenges faced by this country, the likely scale of which could have impacts globally and nationally through systemically important financial institutions.”

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The staff of Advisor.ca have been covering news for financial advisors since 1998.