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Mandatory Climate Disclosures: Are You Ready?

Sustainable development is no longer an option. Is your organization prepared to integrate ESG factors and climate risks in its management process?

On April 7, 2022, the federal government released its 2022 budget, which includes significant measures to build a low-carbon economy and achieve national net zero by 2050.

Mandatory reporting by 2024

Among these new measures, the government is committed to moving towards mandatory reporting of environmental, social and governance (ESG) factors and climate risks across a broad spectrum of the economy based on the Task Force on Climate-related Financial Disclosures (TCFD) framework.

Federally regulated institutions (banks and insurers) will be required to provide climate disclosures based on the TCFD framework by 2024 under the supervision of the Office of the Superintendent of Financial Institutions (OSFI).

This commitment comes a few months after the G7 endorsed a possible mandatory climate change disclosure. The group had stated its support “towards mandatory climate-related financial disclosures that provide consistent and decision-useful information for market participants” and that are based on the TCFD recommendations.

The TCFD framework, first published by the Financial Stability Board in 2017, addresses four key areas aimed at embedding climate-related risk into the financial system and beyond. It encourages companies and institutions to take a holistic approach to the challenges by integrating them into existing business structures of governance, strategy, risk and performance management and publish disclosures on the steps taken.

A measure anticipated by investors

This type of measure has already been implemented by many countries such as France, the United Kingdom, and recently, the United States, by extending TCFD mandatory disclosure to registered public corporations.

Investors have been awaiting this measure. The Canadian federal government is laying the groundwork for the disclosure requirements that every player in the economy will face in the coming years. OSFI also expects “financial institutions to collect and assess climate change risk and emissions information from their clients”. The pressure is expected to increase on Canadian companies and how they manage climate change risks and exposures.

The federal government welcomed the International Financial Reporting Standards (IFRS) Foundation’s selection of Montreal to host one of the two central offices of the new International Sustainability Standards Board (ISSB). This Board will develop standards to enhance the quality and comparability of ESG reporting.

Beyond simply reporting sustainability data, the TCFD recommendations necessitate businesses to consider the wider impacts of climate change, understand the physical and transitional risks on their operating model in order to mitigate them and seize new business opportunities.

This requires input from all departments, the creation of appropriate scenarios and management buy-in. The various players in the organizations, both the board of directors and senior management, have a role to play.

The board of directors’ role

Risk management has become increasingly complex in recent years, and organizations have seen the emergence of new types of risk associated with climate change. Boards of directors must understand and fulfill their fiduciary responsibilities in monitoring these risks and implementing sound governance.

This may involve training these members or recruiting members with the right skills to provide oversight of the measures implemented for management to respond to climate-related risks and opportunities.

The board could consider matters such as:

  • How does it oversee the entity’s overall risk management?
  • How does it monitor climate change risks and opportunities?
  • How does it ensure that all members are aware of and understand climate risk?
  • How does it integrate climate change risks and opportunities into overall enterprise risk management?
  • Are there specific climate change risks or opportunities that require special attention by the board?
  • Do external stakeholder expectations, such as investor mandates or changing client preferences, warrant special attention by the board?

Senior management and managers: accountable for implementing tangible measures

While the board of directors is responsible for the governance of climate-related risks and opportunities, management is responsible for designing, implementing and carrying out the entity’s response to these risks. The challenge is twofold.

From the senior manager’s perspective, the challenge is to understand the impact of climate change on the entity and its long-term sustainability and how to communicate the efforts being made to mitigate it. By asking the right questions, management will be able to identify and prioritize risks and put in place the right measures:

  • How does climate change impact the value chain?
  • What is the entity’s level of dependence on suppliers?
  • Where are these suppliers located?
  • What natural resources are at risk in the production chain?
  • How are products moved along the value chain and what is the impact of climate change at each stage?
  • What is the impact of climate change on the entity’s infrastructure?

For its part, the board must be able to assess the appropriateness of management’s approach by asking the right questions:

  • How is climate risk integrated into the entity’s enterprise risk management program?
  • What climate-related demands have come from investors and other stakeholders?
  • What are the risks and opportunities along the entity’s value chain? For example, are key suppliers at risk? Are there opportunities to increase market share related to investment in renewable technologies? Are key clients seeking more sustainable options?
  • How does the staff perceive the entity’s commitment to environmental sustainability?

Directing external disclosures

Companies have become more aware of the importance of climate change, as evidenced by increased voluntary disclosures of climate risks and opportunities.

Climate change risk disclosure has grown rapidly in recent years; in their 2020 sustainability statements, 397 Russell 1000 companies said they responded to the CDP (formerly Carbon Disclosure Project), and of the 92% of Russell 1000 companies that produce a sustainability report, 38% referenced the TCFD for climate-related financial disclosure.

Private company directors and management are facing increased attention on sustainability and climate risk from private equity firms, lenders, and clients. This is expected to increase with the new federal disclosure requirement. While the disclosure rules do not apply directly to private companies, and inconsistent disclosures still lead to comparability issues, there are many expectations for these companies to report on their ESG and climate strategies.

Other risks to monitor in 2022

Biodiversity risks

This integrated approach is key to ensuring a sustainable future for business, and with the launch of the Taskforce for Nature Related Financial Disclosures (TCND) on June 10, 2021, also supported by the G7, this model will tend to become the norm.

Organizations are becoming aware of their impact on biodiversity and the financial impact of natural losses.

Supply chain risks

This is the financial impact of the supply chain being interrupted or slowed down as a result of weather disasters. This means the organization needs to ask the right questions to support long-term production.

Human capital risks

Consider this risk and the pressure that can be exerted throughout the value chain.

In light of recent federal and foreign regulatory developments, as well as existing climate change risks and opportunities, now is the best time to begin your approach to addressing TCFD recommendations.

Our Management Consulting team has the expertise and experience to help you address these new risk management and sustainability challenges and ESG issues.

This article was written in collaboration with Alicéa Reck, Senior Business Process Transformation Consultant.

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