On January 22, 2021, the Ministry of Finance in Ontario, Canada, released the final report of the "Capital Markets Modernization Taskforce" (the "Taskforce"). The Taskforce, set up by the Ontario Government in February 2020, had been tasked with the project of conducting a comprehensive review of Ontario's capital markets regulatory framework in order to provide advice and recommendations to the Minister of Finance for further action.
Of particular importance were the recommendations made by the Taskforce with respect to the regulation of climate change related issuer disclosure matters. Following the lead of securities regulators, market regulatory commentators and leading financial fund managers around the world, the Taskforce acknowledged the need to standardize public company disclosure requirements pertaining to climate change related risk. Ontario public companies are currently required to exercise their own judgement in determining the nature and extent of climate related disclosure that may need to be included in their disclosure documents. As climate change, and the public policy responses to climate change, disrupt business strategies and cause significant write-downs across historically carbon-intensive industries, the need for a clear, consistent regulatory approach toward prescribed issuer disclosure requirements has become increasingly important and an essential part of any modern securities regulatory system.
The final report of the Taskforce followed shortly after the publication of a discussion paper at the federal level in Canada published by the Office of the Superintendent of Financial Institutions ("OSFI"), entitled Managing Uncertainty in Climate Change: Promoting Preparedness and Resiliency to Climate-Related Risk. Like the Taskforce report, the OSFI discussion paper is a clear signal that Canadian publicly-traded corporations should expect regulatory requirements regarding the disclosure of climate-related risk to evolve in the near future. To the extent not already done, Canadian publicly-traded companies should be paying attention to these regulatory requirements and considering how they might need to change in order to adapt to the changing regulatory environment.
What might climate disclosure look like?
Past policy pieces, such as Ontario's "Made-In-Ontario Environmental Plan", have acknowledged the need for consistent climate disclosure requirements but stopped short of specifying what ought to be included in such disclosure. In contrast, the Taskforce's report now recommends adopting the internationally-recognized metrics published by another taskforce – one comprised of 31 members from across the G20, representing accounting professionals and securities industry stakeholders – the Taskforce on Climate-related Financial Disclosures (the "TCFD"). These TCFD metrics, while far from comprehensive, are significantly more detailed than past proposals tabled in Ontario and include the following elements, which in our view, give a good preview of what might be expected:
Sample Disclosure Questions[1]
Describe the board's oversight of climate-related risks and opportunities.
Describe management's role in assessing and managing climate-related risks and opportunities.
Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.
Describe the impact of climate-related risks and the opportunities on the organization's business, strategy, and financial planning.
Disclose … greenhouse gas (GHG) emissions and the related risks.
When will this disclosure affect your business?
Currently, the Taskforce's recommendation is just that – a policy recommendation. Until this proposal is adopted and made law, there are no new statutory requirements for Ontario public companies that would affect their on-going public disclosure requirements. Ontario publicly-traded entities already have a duty to report all material risks to their business which would include material climate-related risks. What is currently missing from our framework are the prescribed reporting standards and norms. Many public company boards and management teams are already wrestling with these issues and what this new and rapidly evolving realm of disclosure will mean for them.
If the Taskforce's recommendations were implemented as proposed in the report, the transitional phase for Ontario public companies would be between two and five years with compliance obligations arising over a phase-in period dependant upon the market capitalization of the specific companies.
The intersection of business, climate change and the capital markets
This most recent recommendation for increased and standardized climate-related disclosure by the Taskforce is noticeably more comprehensive and detailed than past recommendations. As such, the Taskforce's proposal would seem to have a reasonable chance of eventually becoming law. Indeed, the need for Ontario to stay up-to-date, internationally competitive, relevant and aligned with securities regulation in other major markets world-wide makes the adoption of coherent and consistent climate-related disclosure requirements essential.
As such, it would be prudent for all issuers to begin thinking about how evolving climate-related securities disclosure obligations will fit within their business strategy.
[1] Final Report by the Recommendations of the Task Force on Climate-related Financial Disclosure, June 2017 at page 19.