Margot Hurlbert
© Provided by Leader Post Justin Trudeau, Canada's prime minister, right, speaks during the virtual Leaders Summit on Climate in a video screenshot on Thursday, April 22, 2021.
While a ‘black swan’ is a term for an event that no one imagined or anticipated, COVID-19 and approaching climate change risk is a Gray Rhino, something that people foresaw, but may or may not have planned for.
As the availability of vaccines increases and the existential threat of COVID-19 reduces, the omnipresent crisis of climate change is top of mind for many as we think about a sustainable financial recovery. However, building back better not only applies to our infrastructure and businesses, but our practices and rules around climate change risk management.
What better time, after the eye-opening COVID-19 risk management experience?
The re-entry of the United States into the Paris Agreement not only strengthens global climate change response, but provides incentive for Saskatchewan and Canada to harmonize and standardize management of business climate risk with other jurisdictions in order to create a level playing field and certainty, a requirement for attracting and retaining capital investment in Canada.
Former Bank of England and Bank of Canada governor Mark Carney refers to the climate crisis as the ‘tragedy of the horizon’ as the effects of climate change will be felt well beyond most government and businesses’ traditional horizons and impose a cost on future generations that we in the current generation have little incentive to fix.
However, this state of affairs is changing. Corporate, legal and reputational responsibility is increasing.
Directors and advisors of corporations have a duty to act honestly and in good faith in the best interest of their enterprises, exercising care, diligence and skill. Legal opinions in Canada and elsewhere have made it clear management of climate risk is a core part of their duties.
Climate risk includes failure of businesses to take action to adapt to climate change impacts (drought, flood, extreme events), financial losses surrounding infrastructure, failure to incorporate climate risks in corporate investments (such as infrastructure that is carbon intensive and assets that may be ‘stranded’ in the future), and failure to report climate risks and for issuing disclosure that is misleading, weak or lacking in rigour.
For example, three lawsuits have been brought by shareholders against ExxonMobil alleging executives and board members misled investors about how much risk climate change poses to the company’s assets, resulting in faulty asset valuation.
The 2017 Report of the Task Force on Climate-related Financial Disclosures (TCFD) has buttressed the call for disclosures in existing financial filing requirements. Organizations are required to disclose governance around climate-related risks, a strategy identifying climate-related risk, the resilience of the organization’s strategy taking into consideration different climate related scenarios including a 2 C or lower scenario, and processes for managing these risks.
Included is the impact of climate change on their businesses and strategy in areas of products, services, supply or value chain, adaptation and mitigation activities, investment in research and development, and operations.
Canada’s Expert Panel on Sustainable Finance recommended adopting the TCFD’s recommendations, beginning with large companies and Crown corporations, and eventually being phased in for smaller enterprises. Canada’s 2021 budget includes requirements for climate disclosures from Crown corporations in line with TCFD, while in the United States the SEC announced the creation of an Enforcement Task Force focused on climate and ESG issues.
Arguably, based on legal standards of reasonableness, these requirements apply to Saskatchewan businesses, pension funds, Crown corporations and credit unions. However, Saskatchewan should be taking proactive action clarifying this through legislation. Not to do so risks first uncertainty in respect to director and management responsibility giving rise to costly and time-consuming litigation, but secondly, and most importantly, business and financial losses for Saskatchewan investors, citizens, and taxpayers.
The transition to a net-zero economy requires that businesses realign their strategy to prepare for risks or take advantage of opportunities associated with climate change. Taking meaningful action also requires that a business set measurable goals and targets related to carbon emissions and other environmental indicators.
These types of changes to a business’s strategy and direction require the board of directors (or trustees) to provide oversight, engagement and leadership and to understand their evolving fiduciary obligations as they relate to climate change.
Margot Hurlbert is a Johnson Shoyama Graduate School professor and Canada Research Chair in climate change, energy and sustainability policy.
While a ‘black swan’ is a term for an event that no one imagined or anticipated, COVID-19 and approaching climate change risk is a Gray Rhino, something that people foresaw, but may or may not have planned for.
As the availability of vaccines increases and the existential threat of COVID-19 reduces, the omnipresent crisis of climate change is top of mind for many as we think about a sustainable financial recovery. However, building back better not only applies to our infrastructure and businesses, but our practices and rules around climate change risk management.
What better time, after the eye-opening COVID-19 risk management experience?
The re-entry of the United States into the Paris Agreement not only strengthens global climate change response, but provides incentive for Saskatchewan and Canada to harmonize and standardize management of business climate risk with other jurisdictions in order to create a level playing field and certainty, a requirement for attracting and retaining capital investment in Canada.
Former Bank of England and Bank of Canada governor Mark Carney refers to the climate crisis as the ‘tragedy of the horizon’ as the effects of climate change will be felt well beyond most government and businesses’ traditional horizons and impose a cost on future generations that we in the current generation have little incentive to fix.
However, this state of affairs is changing. Corporate, legal and reputational responsibility is increasing.
Directors and advisors of corporations have a duty to act honestly and in good faith in the best interest of their enterprises, exercising care, diligence and skill. Legal opinions in Canada and elsewhere have made it clear management of climate risk is a core part of their duties.
Climate risk includes failure of businesses to take action to adapt to climate change impacts (drought, flood, extreme events), financial losses surrounding infrastructure, failure to incorporate climate risks in corporate investments (such as infrastructure that is carbon intensive and assets that may be ‘stranded’ in the future), and failure to report climate risks and for issuing disclosure that is misleading, weak or lacking in rigour.
For example, three lawsuits have been brought by shareholders against ExxonMobil alleging executives and board members misled investors about how much risk climate change poses to the company’s assets, resulting in faulty asset valuation.
The 2017 Report of the Task Force on Climate-related Financial Disclosures (TCFD) has buttressed the call for disclosures in existing financial filing requirements. Organizations are required to disclose governance around climate-related risks, a strategy identifying climate-related risk, the resilience of the organization’s strategy taking into consideration different climate related scenarios including a 2 C or lower scenario, and processes for managing these risks.
Included is the impact of climate change on their businesses and strategy in areas of products, services, supply or value chain, adaptation and mitigation activities, investment in research and development, and operations.
Canada’s Expert Panel on Sustainable Finance recommended adopting the TCFD’s recommendations, beginning with large companies and Crown corporations, and eventually being phased in for smaller enterprises. Canada’s 2021 budget includes requirements for climate disclosures from Crown corporations in line with TCFD, while in the United States the SEC announced the creation of an Enforcement Task Force focused on climate and ESG issues.
Arguably, based on legal standards of reasonableness, these requirements apply to Saskatchewan businesses, pension funds, Crown corporations and credit unions. However, Saskatchewan should be taking proactive action clarifying this through legislation. Not to do so risks first uncertainty in respect to director and management responsibility giving rise to costly and time-consuming litigation, but secondly, and most importantly, business and financial losses for Saskatchewan investors, citizens, and taxpayers.
The transition to a net-zero economy requires that businesses realign their strategy to prepare for risks or take advantage of opportunities associated with climate change. Taking meaningful action also requires that a business set measurable goals and targets related to carbon emissions and other environmental indicators.
These types of changes to a business’s strategy and direction require the board of directors (or trustees) to provide oversight, engagement and leadership and to understand their evolving fiduciary obligations as they relate to climate change.
Margot Hurlbert is a Johnson Shoyama Graduate School professor and Canada Research Chair in climate change, energy and sustainability policy.
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