The Large Employer Emergency Financing Facility (LEEFF) program had some notable strings attached: to access $60 million or more in loans, companies would have to agree to restrictions on executive pay and contentious share buybacks. One of the most forward-looking conditions included a requirement that in exchange for financing, companies would have to deliver annual reports on the financial risks and opportunities they face related to the climate crisis, including how the company plans to align with the government’s net-zero greenhouse gas emissions target for 2050.

Why does this matter? Since LEEFF was launched, we’ve seen a number of major announcements related to climate, particularly in Canada’s energy sector. In late July, Deutsche Bank became the latest bank to announce it will not finance any more oil sands projects. France’s Total took a US$8 billion write-down largely on its carbon-heavy Canadian oil sands assets and announced it would stop investing in capacity expansion projects in the oil sands.

Pressure on Canada’s energy sector to decarbonize and chart a credible path into a low-carbon future is only going to grow. COVID-19 has not slowed this down; if anything, it has ratcheted it up.

The federal government’s push for climate disclosure is critical because global investors are increasingly calling for climate-related financial information. Transparency on climate risk is vital for making sound business decisions in light of the climate crisis. Doing so can set companies and sectors up for success in a climate-adjusted future. However, there are still too many companies that don’t recognize the opportunity it presents.

The LEEFF requirement for climate disclosure has faced pushback from some parts of the oil and gas sector, with organizations like the Canadian Association of Petroleum Producers calling the LEEFF climate requirement “exceptionally onerous” and claiming its members won’t use it “due to the nature of the restrictions.” Pundits like John Ivison at the National Post dismissed it as “airing grievances over the oil and gas sector.”

That’s unfortunate, because the idea that climate disclosure is an unnecessary or onerous exercise demonstrates a lack of understanding of what a credible climate risk disclosure is, what global investors and regulators are looking for, and how it can usefully inform business strategy in the coming carbon-constrained economy.

At a time when Canada’s energy sector is under growing investor scrutiny for its climate impact, Canadian companies should be embracing, not attacking, climate disclosure.

Last year, the Bank of Canada warned of the lack of climate risk disclosure in Canada and urged widespread adoption of a framework developed by the Task Force on Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg. The TCFD framework sets out a path for companies to disclose the financial implications of climate change on their businesses, and to do so in a way that is comparable across companies. The framework has emerged as the global standard for corporate climate disclosure.

Since the launch of TCFD in 2017, more than 1,000 companies have signed on as supporters, including well-known Canadian companies like RBC, Manulife and Suncor. Momentum continues to grow. The world’s largest asset manager, BlackRock, says it now expects its portfolio companies to disclose in alignment with TCFD.

As governments around the world, including Canada, commit to net-zero greenhouse gas emission targets by 2050, it’s becoming increasingly imperative for businesses to articulate how they fit into a low-carbon future. Failure to do so puts shareholder value at risk as investors seek to mitigate climate risk and exit carbon-intensive businesses. TCFD-aligned reporting enables companies to make the case for why they are worthy of investment despite the risk of climate change. As former Bank of Canada/Bank of England Governor Mark Carney said earlier this year, “the transition to net-zero is creating the greatest commercial opportunity of our time.”

Companies are often already doing a number of actions that could be disclosed in TCFD-aligned reporting but that are not explicitly highlighted in existing reporting. Whether it’s a board committee that includes climate risk in its mandate, a management team that has responsibility for climate issues, or product development focused on “green” or low-carbon products – these are all actions that TCFD is designed to highlight.

Another opportunity presented by the LEEFF requirement is that by virtue of operating in Canada, businesses have climate advantages they may not even realize. A regulatory environment that includes carbon pricing, or access to low-carbon electricity in provinces like B.C., Ontario or Quebec, helps limit the transition risk the climate crisis presents for business in the shift to a low-carbon economy. These are made-in-Canada climate advantages that businesses should be highlighting more forcefully. TCFD reporting brings that to the forefront.

This isn’t just about the energy sector. We need far greater disclosure across all aspects of the Canadian economy. Disclosing on climate change should be seen not as a burden but as an opportunity to prepare for the future – one that companies and investors around the world are increasingly adopting.

As difficult as things may seem now, the impact and disruption that climate change will bring far outstrips anything COVID-19 can do. The climate crisis is an all-hands-on-deck challenge, and the federal government is right to use any and all opportunities to get Canadian businesses to enhance their climate disclosure. Canadian companies should get behind the push for greater climate disclosure and recognize the opportunity it presents for them.

Kevin Quinlan is a senior advisor with Mantle314, a Toronto-based consulting firm dedicated to climate change.

The post Climate disclosure is an opportunity for corporate Canada, not a burden appeared first on Corporate Knights.

Australia is the latest country to move forward with climate stress tests. It follows the lead of the Bank of England, which released a detailed discussion paper in December outlining how it intends to run its own tests on banks and insurers.

Canada’s financial industry should take notice. The Bank of Canada announced last year that it intends to run climate stress tests in the future – although when exactly, we don’t know. What could Canadian banks and insurers expect?

We can look to the UK to get an idea.

The UK’s proposed scenarios are by far the most detailed of any central bank and provide important insights into how financial regulators view climate risk. The goal of the UK climate stress test is to understand the financial exposure of banks and insurers to climate-related risks. The test covers both physical risks, such as droughts, floods and extreme weather events, and transition risks, such as sharp increases in carbon prices or changes in unemployment or corporate bond yields resulting from market or technological disruptions.

The Bank of England’s framework consists of three scenarios. The first two involve pathways whereby the world, over a 30-year period, reduces greenhouse gas emissions to limit global warming to below 2C.

The first scenario is an orderly one, where government policies move in a clear direction and firms have time to adapt and manage the transition.

The second scenario is “late policy action.” After a decade of delay, governments are compelled to act. They rapidly implement sweeping policy changes in an effort to dramatically reduce emissions. Asset prices see a sudden, sharp re-pricing.

In the third scenario, the world fails to take steps to limit warming below 2C, resulting in devastating impacts: extreme heat, droughts, floods, forest fires and storms at a level we have not seen before, all with horrific implications for the health and well-being of our economy and natural environment.

UK banks and insurers must run their balance sheets through the lens of each scenario, assess its financial impact and aggregate it across their various portfolios. Following the first phase, the Bank of England will look for areas where banks and insurers diverge in their forecasts and go back to them with adjusted information. If insurers disclose that they expect to phase out certain types of insurance, for example, banks need to revise their lending plans accordingly.

There are also qualitative aspects to the stress test. Participants need to outline what management actions they would take to mitigate risk and position their businesses to thrive in the transition to a carbon-neutral economy. The stress test recommends that companies use the Task Force on Climate-related Financial Disclosures (TCFD) framework to explain how climate change will affect them.

Climate scenarios can’t be predicted based on historical patterns; they are constantly evolving, and there is no one “right” answer. Evaluating the disclosure of climate risks is challenging because businesses often use different data sets.

The Bank of England aims to overcome this barrier by laying out scenarios with specific data points, allowing for a much closer apples-to-apples comparison. The direct nature of the stress test means firms are forced to confront – and disclose – what extreme but plausible climate scenarios could mean for their balance sheets, making it easier for the Bank of England to identify systemic risk.

As the bank’s governor, Mark Carney, said at the launch of the COP26 Private Finance Agenda this week, corporate disclosures need to move beyond the static (current emissions) to the strategic (plans to reduce emissions).

As pressure builds on businesses to disclose what they’re doing about climate change, the UK’s stress test provides a glimpse into the types of climate-risk questions Canadian banks and insurers need to be able to answer. Canada’s economy is far more carbon-intensive than most, and scrutiny from investors and regulators about climate risk is only going to grow.

Companies that can articulate how their business models will support – and thrive – in a low-carbon economy will prosper. Those that can’t coherently explain their plans for a climate-adjusted future can expect to be punished by investors.

In a research note on climate change published in November, the Bank of Canada said its first step is to evaluate the exposures of Canadian financial institutions to climate-related risks. The Bank of England is sharing its stress test findings with the Network for Greening the Financial System – of which the Bank of Canada is a member. There’s no reason Canada’s banks and insurers can’t get ahead of the curve.

It’s not a matter of if, but when: climate stress tests are coming to Canada. For banks that want to demonstrate leadership and understand what climate change could mean for them, the UK’s climate stress test is a good place to start.

Kevin Quinlan is a senior advisor with Mantle314, a Toronto-based climate change consulting firm.

The post Climate stress tests are coming to Canada. Are banks paying attention? appeared first on Corporate Knights.

When asked about institutional investors’ growing focus on climate change, Premier Kenney brushed it off. “Flavour of the day,” he told the Globe. There are more important things for investors to look at.

If the financial risk from climate change is a flavour of the day, the Premier of Alberta should prepare himself for one very long day.

The threat of climate change to the stability of the world’s financial system is increasingly a top concern for investors around the world. What was once considered a niche issue is now regularly cited by central bankers and CEOs of the world’s biggest companies as a major threat—not in the future, but today.

With national governments failing to move at the speed necessary to address the climate crisis, the financial sector is driving the shift towards a low-carbon economy. Sustainable finance is directing billions of dollars towards cleaner, greener businesses—and those who ignore or deny what’s happening will lose out on new business opportunities.

For a ‘flavour of the day,’ climate risk has made a lot of appearances amongst the most powerful banking and investment institutions around the world. Consider that in the first six months of this year:

● The Bank of Canada declared, for the first time, climate change to be one of six significant vulnerabilities to the stability of Canada’s financial system in its annual Financial System Review.

● The Bank of England announced a series of climate stress tests for insurers.

● 477 investors managing more than US $34 trillion in assets signed an open letter calling on G20 leaders to price carbon, rapidly decarbonize and end support for thermal coal.

● BlackRock, the largest asset manager in the world, released research showing investors are underpricing climate risk in US bonds, commercial real estate and utility investments.

● New York State’s Common Retirement Fund, the third-largest public pension fund in the US, will increase its contribution to a Sustainable Investment-Climate Solutions Program from $10 billion to $20 billion.

These are professional economists and money managers who, when presented with the evidence, are making the calculated decision to shift money out of industries linked to climate change. Are we to believe that Premier Kenney knows something they don’t?

Even leaders in some of the most carbon-intensive industries in the world are speaking out. Shell CEO Ben van Beurden said a ‘net zero’ target on emissions is the only way to go. BP’s head of strategy told Bloomberg News that some of its oil assets “won’t see the light of day” due to the threat of climate change and the demand from investors for lower-emission projects.

In case you think these statements are simply the musings from investors outside of Canada who don’t understand our economy or the importance of the energy sector, think again. Alberta’s very own AIMco, which is responsible for investing the pensions of Albertans and has more than $100 billion in assets, signed an open letter calling for an acceleration of investment into the low-carbon economy and scaling up efforts to meet the Paris Agreement climate targets.

There is an enormous opportunity for Alberta, and by extension Canada, in embracing sustainable finance. The move to create transition bonds, whereby investors can put their money into businesses seeking to reduce emissions in high-intensity industries, stands to be of huge benefit to Canada’s oil and gas sector. Rather than dismissing sustainable finance, Premier Kenney should be championing these types of new financial tools.

In 2019, the market signals around climate risk are undeniable, and the global shift towards low-carbon industries can’t be ignored. Climate risk is a flavour of the day? If that’s the case, Premier Kenney should brace himself for a very long 24 hours. This flavour is not going anywhere.

Kevin Quinlan is a senior advisor with Mantle314, a climate risk management consulting firm.

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