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Climate change is changing more than just the climate

Climate change is changing more than just the climate

The growing consumer, investor and regulator pressure is sending a clear message to Canada's businesses: Get on board or be left behind.

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Bill Murphy is the national leader of KPMG in Canada's Sustainability Services practice based in Toronto. Roopa Davé is a partner with KPMG in Canada's Sustainability Services practice based in Vancouver

Updated May 2020

By now we can all agree that climate change is changing more than just the climate. It is increasingly forcing companies to assess, measure and disclose potential risks to their operations, reputations and, ultimately, their business strategies. In fact, for the past four consecutive years, the World Economic Forum has identified climate risk as the top threat facing businesses, and recently observed that “climate change is striking harder and more rapidly than many expected”. The current pandemic has magnified this risk by highlighting how natural processes can create previously unimaginable economic and social disruption, whether abruptly or cumulatively.

The growing consumer, investor and regulator pressure is sending a clear message to Canada's businesses: Get on board or be left behind.

The cost of inertia is now too great to ignore. For years, there have been signs of a growing 'stakeholder capitalism,' accelerated during the current crisis, where many no longer want to work for, invest in, or buy from companies that underestimate their role and impacts beyond maximizing returns. In his 2020 annual letter to CEOs and investors, BlackRock's Larry Fink said his firm will immediately stop investing in companies that "present a high sustainability-related risk." Activist investor Sir Christopher Hohn of UK hedge fund TCI just the previous month had called out major asset managers, including BlackRock – the world's largest asset manager with nearly US$7 trillion in investments – criticizing their voting record for climate-relevant resolutions.

Increasingly, big institutional investors, and now governments, are demanding to know how boards are making their businesses climate-wise, and are far more willing than ever to adjust their investment decisions to suit. Take for example, the recent move by Norway’s sovereign wealth fund to divest from four Canadian oilsands producers, or the Bank of Canada’s decision to tie emergency funding relief to climate disclosure requirements for Canada’s largest companies.

For an economy like Canada's that relies heavily on developing and exporting natural resources, these pressures and expectations cannot be ignored. While many Canadian companies are reacting and operating in a more environmentally responsible manner, effectively demonstrating and communicating that message has proven challenging. This is due, in part, to the fact that corporate reporting requirements for climate and environmental-related information remain fragmented and inconsistent.

Following on the 2020 World Economic Forum in Davos, there is no doubt that momentum is building for a common, core set of social and environmental metrics and recommended disclosures. Increasingly, institutional investors are expecting companies to follow best practices and industry specific guidelines set out by organizations like the Sustainability Accounting Standards Board (SASB) and report under the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

Pressures are emerging for securities and financial regulators to require mandatory adoption of these initially voluntary disclosure frameworks. Companies that take steps now to prepare will likely have an edge on their competition from a strategic and reputational perspective.

Are Canada's businesses ready?

Climate change was the No. 1 business risk cited by global CEOs in KPMG's 2019 Global CEO Outlook, topping all other risks including disruptive technology, territorialism, and cyber security. According to the TCFD, the percentage of companies disclosing voluntary climate-related financial risks and opportunities is up nearly 15 per cent over the last two years.

Yet, of the 78 TSX-listed companies sampled by the Canadian Securities Administrators in their research prior to issuing updated climate disclosure guidance in 2019, 22 per cent provided boilerplate climate risk disclosures and another 22 per cent provided no disclosure at all. The disclosures generally weren't comparable, and often omitted information necessary to provide sufficient context.

As stated by Mark Carney, who began his term as UN special envoy on climate action and finance in March 2020, "Everyone recognizes that disclosures must go beyond the static to the strategic." Directors have an opportunity right now to champion climate change disclosure best practices, including those recommended and monitored by the TCFD.

Where to start?

First, establish ownership of addressing climate-related risks and opportunities in your organization both at the management and board levels. Climate awareness and cross-functional engagement will be key in supporting those who are made accountable to ensure climate-related risks are properly understood. Given the complexity of climate impacts, an organization should engage Finance, Business Planning and Risk in addition to sustainability experts, to ensure the issue and its business implications are more broadly considered.

Second, enhance your climate opportunity and risk identification and assessment processes by integrating climate into broader strategic planning processes, corporate goals and decision making. Similar to the unprecedented health crisis we find ourselves in now, consider the use of scenario analysis to augment your risk processes and stress test your business model's resilience to the climate crisis – including reputational impacts, and make plans now to adapt. This step can begin with a qualitative analysis and will lead to having to plan over a longer time horizon than you're typically used to. Why? Because the issue is constantly evolving. This is the new normal.

Third, consider how you are responding to stakeholder demand for climate information by including key climate-related disclosures in annual fillings and Sustainability Reports and examining compliance with the TCFD recommendations.

Finally, recognize that the degree of uncertainty around climate risks complicates the ability to make fully informed decisions. Collaborating with experts and industry peers outside of your business will therefore be critical in developing scenario plans that will constantly need to be updated.

The days of treating sustainability issues and disclosures as peripheral to business strategy and mainstream reporting are over.

© 2020 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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