A study from the Institute for Sustainable Finance (ISF) suggests Canada's climate-related risk disclosure landscape is “inadequate” and places the country’s financial industry and markets at a disadvantage.

“Less than half of the largest corporations provided meaningful climate-related reports during 2020, and beyond the largest corporations such reporting barely exists at all,” the paper states. 

The study, Partial Disclosure: Assessing the state of physical and transition climate risk disclosure in Canada, was authored by ISF chair Sean Cleary and senior research associate Simon Martin.

Cleary said the study examines an important factor in unlocking capital to support sustainable solutions.

“Right now, a lack of good information is serving as an impediment to some of the capital that could, and should, be forwarded toward such solutions," Cleary said during an interview with SustainableBiz.

With institutional investors demanding high-quality disclosures of climate-related information from corporations, the study says Canada may fall behind in the competitiveness and functioning of its markets if its financial institutions fail to keep up with pricing-in climate risks.

Voluntary reporting standards and frameworks

Cleary and Martin compare three voluntary reporting standards and frameworks used in Canada – the CDP, the Sustainability Accounting Standards Board (SASB) and GRESB – to the Task Force on Climate-related Financial Disclosures (TCFD).

The TCFD is a globally-recognized framework from the Financial Stability Board that develops recommendations for corporate disclosures to support investors, lenders and insurance underwriters in assessing and pricing climate-related risks.

The authors break down climate-risk reporting by examining how they categorize two main kinds of risk: physical and transition.

Physical risk covers natural disasters like hurricanes and extreme flooding, or damage from gradual warming like the melting of glaciers and permafrost. The TCFD says physical risk is “inescapable for all companies.”

Transition risk encompasses the blow to some businesses as the economy moves toward a lower-carbon economy, which creates opportunities for some while leaving others behind. Cleary said this is seen in the contrast between electric vehicle manufacturers and combustion-engine car manufacturers.

The TCFD lays out recommendations for organizations to address physical and climate risk, including conducting scenario analysis.

Cleary and Martin then give an overview of the state of disclosures in Canada.

In October 2021, the Canadian Securities Administrators (CSA) issued a consultation paper on proposed disclosure regulations. However, "the CSA proposal falls short of some important TCFD recommendations, which are clearly becoming the global standard," the paper states.

The Bank of Canada and the Office of the Superintendent of Financial Institutions completed their climate scenario analysis pilot study in January 2022. Pilot participants discovered “significant data gaps.”

Seven experts consulted for the study noted similar shortcomings. Alyson Slater, senior director of sustainable finance at the Global Reporting Initiative, said Canada’s climate-related risk disclosures were “. . . more of a patchwork." Steve Mennill, chief climate officer at the Canada Mortgage and Housing Corporation commented, “We have a lot to do.” 

The present gaps in Canada's climate-risk reporting

Some common themes were discovered by the study authors, who conclude the breadth of climate-related reporting in Canada needs improvement.

Several interviewees noted existing climate data is historical in nature and not forward looking. They also concluded current physical risk models are based on historical experience, and that many of these global models do not reflect the Canadian experience.

The most glaring problem is the dearth of publicly available information. Larger companies and financial institutions have made efforts to be transparent, but as Pamela Steer of CPA Canada observed, “Quality of data varies significantly and tends to degrade as the size of companies decreases. When you get to privately held companies, which are, of course, the vast majority of Canadian organizations, quality moves from degraded to essentially non-existent.”

There were also concerns about the ability of organizations to integrate climate information into strategy and risk management, the limited percentage of disclosures that included scenario analysis, and information gaps on the potential severity of physical risks, or transition interim targets and the transition plans.

The experts also identified a lack of understanding of the importance of climate-risk reports by the preparers and users.

If such gaps persist, Cleary and Martin say it will impact the functioning of Canada's financial markets, including "better pricing for insurance contracts, debt instruments, equity investments, real estate transactions, infrastructure investments and so on." It would also harm competitiveness as institutional investors demand better climate-risk disclosures, but aren't seeing the quality and quantity in Canada compared to other countries.

Recommendations from the report 

Suggestions to improve climate-related reporting include ensuring reporting follows global standards, improving the accessibility of data, and improving the quality and quantity of warming scenario analysis.

To emphasize how important these reports are, Cleary advocated for mandatory global standard reporting on climate-related risk. Proposed disclosure requirements by the CSA should be harmonized with tougher and more thorough standards proposed by the International Sustainability Standards Board and the U.S. Securities and Exchange Commission.

Doing so would provide better information and best practices so smaller companies that struggle with internal capacity to deal with these reports will provide guidance when they have something to emulate, he added.

The authors also suggest improving the availability and accessibility of data that already exists.

“The overall conclusion is that we’re certainly moving in the right direction, but we still have to go further," Cleary said, in both the quantity of reports, especially from smaller businesses, and the quality of the reporting.

All interviewees noted the need for better education, understanding and leadership.

By making education mandatory, Cleary said companies would take it upon themselves to provide climate-related risk reports. There are education programs from the SASB and TCFD, and some companies are hiring consultants. Cleary said the best way to do education is to make it mandatory to a broader number of companies, who can then provide leadership.

The ISF is planning to explore other fields in sustainable finance, including further climate-related disclosure and data issues, projects on natural assets and climate resilience.