Written By Kristopher Hanc, John Piasta, Beth Riley and Osie Ukwuoma
On August 1, 2019, the Canadian Securities Administrators (CSA) issued CSA Staff Notice 51-358: Reporting of Climate Change-related Risks (the "Notice") that provides guidance on risk identification and disclosure by reporting issuers as it relates to climate change.
The Notice does not create any new legal requirements or modify any existing legal requirements, but expands on CSA Staff Notice 51-333: Environmental Reporting Guidance, which provides guidance on a broad range of environmental matters (including climate change), and CSA Staff Notice 51-354: Report on Climate change-related Disclosure Project. The Notice provides issuers guidance to assist in identifying and disclosing climate change-related risks with a focus on an issuer's disclosure obligations as it relates to its Management Discussion and Analysis and Annual Information Form.
The CSA advises that it is issuing the Notice in response to increased investor interest in climate change-related disclosure, inadequate climate change-related disclosure practices by issuers and increased domestic and international attention to the effects of climate change.
Boards and Management Considerations
While the CSA recognizes the uncertainty of climate change-related risks and the longer time horizon associated with such risks, the boards and management of issuers have key roles and responsibilities in respect of strategic planning, risk oversight and management and disclosure in respect of climate change-related risks. The Notice advises that "boards and management should take appropriate steps to understand and assess the materiality of these risks to their business … [which] assessment should extend to a broad spectrum of potential climate change-related risks over the short-, medium- and long-term."
The CSA encourages boards and management to asses their expertise as it relates to industry-specific risks so they can ask the right questions and make informed decisions about risk management and disclosure. The Notice advises that boards and management should take care to provide detailed, issuer-specific, disclosure and to convey the information to investors in a way that helps them understand the material risks resulting from climate change.
The Notice includes practical guidelines for issuers, including: listing specific questions to be considered by a board and management for evaluating and disclosing material climate change-related risks; avoiding vague or boilerplate disclosure; and consulting published frameworks (such as the Sustainability Accounting Standard Board's Climate Risk Technical Bulletin and the Financial Stability Board's Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures).
Materiality, Risks and Disclosure
Securities laws generally require issuers to disclose information if it is material. The Notice advises, "information is likely material if a reasonable investor’s decision whether to buy, sell or hold securities in an issuer would likely be influenced or changed if the information in question was omitted or misstated." The Notice provides guiding principles and specific considerations to help assess whether a particular climate change-related risk is material. Guiding principles include the recognition there is no "bright line test" for materiality, but that issuers need to assess the risks in light of their particular circumstances. Assessments are dynamic processes that depend on the prevailing relevant conditions—the time horizon of a known trend, event or uncertainty may relate to an assessment (assessing both the probability and magnitude).
The Notice outlines several forms of climate change-related risks that an issuer may encounter, but its management must assess whether a particular risk applies to an issuer. Some of these forms of risk include, but are not limited to:
- Physical risks—acute physical risks that are event-driven risks, such as risks resulting from increased extreme weather, and chronic risks resulting from longer-term shifts in climate patterns, such as shifts in climate patterns.
- Transition risks, such as:
- reputational risks arising from changing internal and external stakeholder perceptions;
- market risks arising from shifts in market conditions for certain commodities, products and services;
- regulatory risks arising from altered regulation and enhanced disclosure requirements;
- policy risks arising from policy actions that attempt to constrain actions that contribute to climate change or policy actions that seek to promote adaptation to climate change;
- legal risks arising from legal actions resulting from a failure to address climate change-related risks and insufficient disclosure; and
- technology risks arising from introduction of new technology which displaces and disrupts old systems.
In addition to disclosure regarding the risks associated with climate change, issuers should consider disclosure regarding the related opportunities and financial impacts, and governance processes relating to climate change. Besides compliance with regulatory requirements, the Notice encourages issuers to inform investors about the sustainability of their business model and to provide insights into how they are mitigating and adapting to these risks.
While some disclosure may not rise to the level of materiality, an issuer may choose to voluntarily disclose climate change-related risks. The Notice cautions that any voluntary disclosure should comply with securities law requirements, meaning that any voluntary disclosure should be prepared with the same care as the issuer's required disclosure, should contain no misrepresentation, and should not obscure material information. Similarly, to the extent an issuer includes any forward-looking information relating to climate change, such disclosure must also comply with securities law requirements.
As climate change-related risks becomes increasingly important globally, investors will search for information regarding its impact on their investments, collectively in the short-, medium- and long-term, and issuers are encouraged to review their disclosure in such context. Notwithstanding the significant challenges associated with identifying and disclosing climate change-related risks, issuers are encouraged to evaluate their governance, risk assessment and disclosure processes in light of the guidance provided by the Notice. As there remains significant uncertainty around the likelihood, timing, affect of climate trends and events and materiality of climate change-related risks, it is likely that climate change-related disclosure will receive increased attention and scrutiny. Issuers, particularly smaller issuers, should consider, the manner in which climate change-related risks are identified, assessed and disclosed (internally and externally). Where climate change-related disclosure is required under applicable securities laws, issuers should ensure such disclosure is appropriately qualified, the limitations thereon are identified, and the material factors or assumptions used to develop such disclosure are effectively communicated to investors.
Please note that this publication presents an overview of notable legal trends and related updates. It is intended for informational purposes and not as a replacement for detailed legal advice. If you need guidance tailored to your specific circumstances, please contact one of the authors to explore how we can help you navigate your legal needs.
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