The Emerging Climate Consciousness – Public Company Disclosure and Beyond


Recently, I ran across an excellent article in the Spring 2009 issue of Corporate Governance Quarterly called “Climate Change Disclosure Heats Up”. The authors, Patricia Koval, Tyson Dyck and Michael Pickersgill of Torys LLP, discuss public companies’ disclosures pertaining to the companies’ exposure to “climate risks”. This broad risk category includes matters such as: how climate change affects the company’s profitability, what opportunities / challenges climate change presents to the company, and what actions the company is taking in anticipation of the various climate change related regulations coming down the pipe (e.g. the anticipated mandatory cap-and-trade system on greenhouse gas emissions).

The article contains a good review of Canadian disclosure requirements, and in particular the challenges created by the general requirement contained in National Instrument -51-102 Continuous Disclosure Obligations that requires issuers to disclose in their Management Discussion and Analysis filings (to borrow the paraphrasing from the article) “any known trends, demands, commitments, events or uncertainties that are reasonably likely to affect the issuer’s business or that management reasonably believes will materially affect the issuer’s future performance”. This obligation would likely impose a need to discuss the financial and operational impacts of environmental protection and climate change legislation on the issuer’s business, which may include such things as the recent legislation and proposed legislation in B.C. (see a summary of climate change legislation here), Ontario (see, for example the proposed Environmental Protection Amendment Act) and in the U.S. (see, for example the draft American Clean Energy and Security Act colloquially known as Waxman-Markey) all, therefore, need to be taken to account.

Of course, many of these “climate risks” are highly speculative: the precise impact of climate change on any one geographic area or even one country is unknown. Such speculation could likely include not just an analysis of the environmental changes, but their impact on local regulations and the worldwide geopolitical scene (i.e. political risks, international conflicts, the continued free flow of goods, etc.).

In this light, one may try to dismiss this concern about “climate risks” as nothing more than a bunch of hot air, since statements about “climate risks” are necessarily forward looking statements, and under the National Instrument forward looking statements must have “a reasonable basis”. How reasonable is it to take into consideration a worldwide phenomenon who’s impact is very difficult to quantify not only in time but also in geographical location?

Nonetheless, insofar as securities law disclosure requirements are concerned, it is clear that there is a reasonable basis to conclude that this newfound “climate consciousness” (for lack of a better phrase) is likely to affect an issuer’s future performance in many ways. As just one simple example, if a business is a significant greenhouse gas emitter, under cap and trade, it will be beneficial to reduce emissions. Any plan to reduce emissions by, say, 5% will (a) require concerted action from the management of the company to establish the company’s baseline emissions, (b) require an outlay up front to finance initiatives and new technologies that will reduce emissions and (c) will likely result in greater efficiencies and therefore impact future operating expenses. In addition, taking concerted action in response to climate change will likely achieve a certain degree of brand lift and will help establish the green bona fides that are becoming increasingly necessary in certain industries to maintain clients and win new business.

In the end, while some still argue over the potential impact (and even the very existence) of climate change, what is clear is that governments, investors and customers have become engaged and are taking action. If for no other reason, therefore, all manner of enterprises must be responsive and plan for the inevitable changes in the marketplace and in government regulation.

Requirements aside, in my view, issuers will benefit not only from taking action but also publicizing what they are doing in response to “climate risks” relevant to their business: ultimately these risks are front of mind not only for governments and their investors but also for their current and potential customers. So while the impact of climate change on any one business may be uncertain, what is certain is that businesses should be concerned about the challenges posed by the reaction of governments and the marketplace to climate risks.

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