It's been a hot summer. Cities around the world have experienced record-breaking temperatures and heat waves are now being recorded all over the world. In Eastern Canada alone, there have been nearly 100 heat warnings. In Oman, the town of Quriyat registered the highest minimum temperature in the world in June this year: 42.6 degrees for nearly 51 hours. Bushfires have devastated California, reached the Arctic Circle in Sweden, and at the time of writing, are being battled in in northern Ontario.

Climate change is associated with an increased frequency of extreme weather events and the impact on business is obvious, ranging from physical damage to buildings, products, supplies and equipment to reputational risk. Extreme weather events can also halt manufacturing or prevent employees from getting to work, and businesses affected by droughts or pollution can experience water shortages or the lack of drinking water or food, or be more generally impacted by a reduction in economic activity.

There is no shortage of examples. In Europe, this summer's heatwave has already caused the shutdown of nuclear power plants in France and Sweden and plants in Switzerland, Germany and Finland have reduced the amount of power they produce, since the river, ocean or lake water used to cool them is too hot to use. Last year, Hurricane Harvey caused the shutdown of refineries and ports in Texas and Louisiana and halted most fuel exports towards Latin America. Closer to home, the Fort McMurray wildfires caused $1.4 billion in revenue loss for producers in 2016.

As a result, investors are considering climate-related risks in making investment decisions and are consequently demanding more disclosure. After all, without effective disclosure of climate-related risks, the financial impacts cannot be correctly determined. Institutional investors, such as Vanguard and BlackRock Inc. are pushing companies for information on their how their assets will fare in a low-carbon economy. The Caisse de dépôt et placement du Québec, Canada's second-largest pension fund, has taken steps to make climate-related factors central to its investment decision-making process.

Pressure is also coming from shareholders and investor rights groups. For example, NEI Investments successfully put forth a shareholder proposal to enhance Suncor Energy Inc.'s climate-related disclosures. 98% of its shareholders represented at the meeting voted in favour of the proposal.

The Task Force on Climate-related Financial Disclosures (TCFD), founded by Michael Bloomberg, consists of 32 members from across the G20's constituency, covering a broad range of economic sectors and financial markets. The TCFD seeks to develop recommendations for voluntary climate-related financial disclosures and in 2016, published a report outlining its recommendations.

Securities regulators have responded. The CSA recently undertook a review of climate change disclosure made by reporting issuers, and published its findings on April 5, 2018 in CSA Staff Notice 51-354 Report on Climate Change Related Disclosure Project. The CSA found the following:

  • Disclosure is lacking: Although disclosure of all material risks is required, only 56% of the issuers reviewed provided specific climate change-related disclosure in their MD&A or AIF, with the remaining issuers either providing boilerplate disclosure, or no disclosure at all. Only 28% of respondents to the issuer survey indicated that they provided any climate change-related disclosure at all in their regulatory filings. In addition, when climate change-related risk was disclosed, the risk most discussed was regulatory risk rather than risks specific to the issuer's business, and very few issuers disclosed their governance and risk management practices.
  • Most industries are underrepresented: The oil and gas industry was most represented in the review sample, with other industries providing significantly less disclosure or no disclosure at all.
  • Investors are dissatisfied with the disclosure: Substantially all of the users consulted, being institutional investors, investor advocates, experts, academics, credit rating agencies and analysts, were dissatisfied with the current state of climate change-related disclosure and believe that improvements are needed.

As a result of this review, the CSA has indicated that it intends to consider mandating new disclosure requirements for non-venture issuers in relation to climate change risks, and will continue to assess whether investors require additional types of information, such as disclosure of certain categories of greenhouse gas emissions, to make investment and voting decisions.

However, given the current state of the public disclosure, investors are best advised to conduct climate change-related due diligence. The TCFD 2016 report provides examples of the types of disclosure companies should provide, which could serve as the basis for engaging in this type of due diligence. For example, the due diligence could inquire into the resilience of the company to climate risks and opportunities, how climate-related issues serve as input into the company's financial planning process, and how climate change might impact the company's products and services, supply chain, operations or investments.

Ultimately, if the target company has not developed the necessary strategies, expertise and associated governance structure to manage climate change risks, and does not have a climate change risk management process in place, investors may have to rely on representations and warranties and indemnities in the transaction agreement. Such provisions should be carefully drafted and be appropriate to the target's industry and size.

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