On August 1, 2019, the Canadian Securities Administrators (CSA) released CSA Staff Notice 51-358 in efforts to clarify the scope of disclosure for reporting issuers, specifically for smaller issuers. Securities law in Canada requires reporting issuers to disclose material risks affecting their business and, where applicable, the financial impacts of such risks.
While this notice does not produce any new legal ramifications, it is intended to reinforce and expand upon the guidance provided in CSA Staff Notice 51-333 Environmental Reporting Guidance. The driving factor to release this notice was motivated by the following considerations:
- Increased investor interest. Many investors, particularly institutional investors, have become increasingly focused on insufficient disclosure on climate change-related risks.
- Room for improvement in disclosure. Based on CSA’s review of the disclosure of a sample of TSX-listed issuers, they noted that many provided boilerplate disclosure on climate-change related risks or no disclosure at all.
- Domestic and global developments. There have been global and domestic initiatives for voluntary disclosure frameworks, such as the Climate Risk Technical Bulletin published by the Sustainability Accounting Standard Board.
The CSA guidance reminds issuers of the disclosure required in their Annual Information Forms and Management Discussion and Analysis, specifically reiterating the materiality threshold. Information is likely material, and therefore disclosable, if a reasonable investor’s decision to buy, sell, or hold a company’s securities would be affected if the information was omitted or misstated; and the materiality of a known trend, demand, commitment, event or uncertainty turns on an analysis of probability of its occurrence. The guidance notes that issuers will be exposed to climate change-related risks uniquely and will affect issuers in different ways. While there is no bright-line threshold for materiality, the guidance suggests that issuers consider both quantitative and qualitative factors in determining materiality, that they look at overall context, that timing is considered, and that trends, demand, commitments, events and uncertainties are assessed.
The role of the board of directors & management
The board has a role in strategic planning, risk oversight and the review and approval of an issuer’s annual and interim regulatory findings. Management also has a key role to play in risk management and the preparation of annual and interim regulatory filings. With regards to risk oversight specifically, boards and management should be taking appropriate steps to understand and assess climate change risk and the materiality of this to their business. Some specific examples of questions that board and management should consider include:
- Is oversight and management of climate change-related risks and opportunities integrated into the issuer’s strategic plan, and if so, to what extent?
- Has management appropriately considered how each of the different categories of climate change-related risks may affect the issuer (e.g., physical and transition risks)?
- Has management considered which business divisions or units have responsibility for identifying, disclosing and managing material climate change-related risks and what their reporting lines are to senior management? To what extent are these responsibilities integrated with mainstream business processes and decision-making?
What are Climate Change-related Risks?
The following are the types of climate change-related risks that issuers may face:
- Physical risks. These can be acute or long-term shifts in climate patterns. Examples include changes in water availability, sourcing and quality, or extreme temperature changes affecting operations and supply chain.
- Transition risks. These are reputational, market, regulatory, policy, legal and technology-related risks. An example of a regulatory risk would be increased regulation of climate change-related matters, such as enhanced disclosure requirements.
- Opportunities. Efforts to mitigate and adapt to climate change also produces new opportunities to issuers, such as the development of new products and services.
In conclusion, reporting issuers should use this guideline to ensure that they are complying with disclosure requirements required by securities law in Canada. As more investors focus on climate change-related risk and environmental, social and governance (ESG), the more relevant the subject matter becomes.
The author would like to thank Nazish Mirza, articling student, for her assistance in preparing this blog post.
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