Last month, the federal government released its draft legislation to institute a minimum price on carbon. Starting in 2019, businesses in every province will have to pay for the carbon they emit into the atmosphere, whether it’s through a provincial system or a federal “backstop.” This is a clear signal that carbon pricing is here to stay. Any kind of backtracking would require major, synchronized, and controversial policy changes by multiple levels of government. On top of that, carbon pricing is now a clear global trend; China just rolled out the first phase of the largest carbon market in the world.
If there is one thing this new normal makes exceedingly clear it’s this: climate change is a material issue. Canadian businesses and investors must not only recognize, but also embrace this reality. As Warren Buffett quipped, “Predicting rain doesn’t count. Building arks does.” So how should the business community adapt to this new reality? The logical, and necessary, place to start is disclosure.
For global investors, and increasingly Canadian investors as well, climate-related financial disclosure is a growing concern. On par with business development plans, succession and risk management strategies, and diversity policies, a firm’s approach to climate disclosure is a telling window into the state of its corporate governance. Thoughtful and meaningful disclosure practices signal that a company’s management and board are thinking about the long-term, taking their duties seriously and not exposing themselves to liabilities.
Lest there be any question of how seriously the investment community is taking this issue, consider the fact that the Financial Stability Board Task Force on Climate-related Financial Disclosures is supported by pension funds, asset managers, banks, and insurance companies which collectively manage over $81.7 trillion. The days when climate change was relegated to the realm of environmentalists, rather than core financial decision-making, are over. Attracting investment in the 21st century will be increasingly difficult without enhanced disclosure.
This new mindset isn’t limited to the financial sector. As I write this, the Canadian Securities Administrators are in the final stages of a climate disclosure review report. They’ve been gathering information and looking at best practices around the world, and we can expect their report soon. The question they’re asking: does Canada need to do more to support meaningful disclosure practices? Many institutional investors and asset managers, including Addenda Capital, would say the answer is yes.
Canada ought to be a regulatory leader in this area. Prudence is part of our financial sector’s DNA. In the early-to-mid 2000s, some in the global financial community criticized Canada’s approach to regulation and risk management as overly burdensome and hampering growth. Yet it was that prudent, forward-thinking, best-in-class approach that allowed us to weather the great recession better than any other G7 economy.
Of course, adding new disclosure requirements isn’t trivial. They create a new obligation for businesses, which in turn requires resources. That’s all the more reason to do it right from the outset, by adopting standards and regulations that will be compatible with others in a globalized economy.
Fortunately, there is a roadmap available. This past summer, the Task Force on Climate-related Financial Disclosures—created by Bank of England Governor Mark Carney and chaired by Michael Bloomberg—delivered a detailed set of recommendations on how to implement climate risk disclosure. Their recommendations are likely to become the global standard, in much the same way that balance sheets and accounting principles have become harmonized worldwide.
Royal Bank, the Canada Pension Plan Investment Board and the Chartered Professional Accountants of Canada have all expressed support for the TCFD’s recommendations. They’re embracing the inevitable. Many other investors and businesses are waiting to see what the CSA reports back, which makes that an excellent opportunity to align with Mr. Carney’s global effort and galvanize them to action.
Climate change is real. Its business implications are real. Canada has a chance to be prudent and to capitalize on an emerging opportunity. The forecast calls for rain, so let’s build that ark.
Roger Beauchemin is the President and CEO of Addenda Capital, one of Canada’s largest multi-asset investment firms with over $27 billion under management.
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