The COVID-19 pandemic is anticipated to trim global economic growth by 3–6 per cent in 2020, result in levels of unemployment not experienced since the Great Depression of the 1930s, and curtail global trade by 13–32 per cent.^[1] Virtually all of the governments of the more than 200 countries affected by the pandemic have enacted fiscal and/or monetary policies that are intended to facilitate economic recovery from the pandemic. Many of those policy responses and economic stimuli have “green strings” in the form of enhanced climate change and environmental, social, and governance (ESG) disclosure obligations. Canada is no exception.

On May 11, 2020, the federal Government released the Large Employer Emergency Financing Facility (LEEFF), to provide Canada’s largest employers^[2] that are impacted by the COVID-19 pandemic with liquidity relief. Companies are required to demonstrate a long-term commitment to addressing climate change and commit to publishing annual climate-related financial reports in accordance with the Task Force on Climate-related Financial Disclosures (TCFD). The government’s stated intent of mandating TCFD was to ensure that recipient corporations are (i) thinking about the challenges that climate change will pose to the company’s future and have a response for it, and (ii) disclosing their climate footprint, and the related challenges that they may face to their shareholders. While there is no reported uptake of the LEEFF to date, its existence and its climate-related disclosure obligations are consistent with recovery programs in other jurisdictions.

The EU has also tied its economic recovery programs to stronger climate-related financial disclosure and support for the goals of the Paris Agreement. On May 27, 2020 the EU released its Next Generation EU Plan, which basis the EU economic recovery largely on the EU New Green Deal and includes climate disclosure obligations.^[3] It includes a €750 billion recovery plan that relies heavily on sustainable and digital transitions to COVID-19 economic recovery and climate resilience. The spending will be guided by a sustainable finance taxonomy (the “Taxonomy”) aimed to channel private investments into technologies and solutions that contribute to at least one of six pre-defined environmental objectives: (i) climate change mitigation, (ii) climate change adaptation, (iii) sustainable use and protection of water and marine resources, (iv) transition to a circular economy, (v) pollution prevention control, and (vi) protection and restoration of biodiversity and ecosystems.^[4] The taxonomy sets performance thresholds for economic activities. The standards and thresholds set are anticipated to inform the EU’s proposed carbon border adjustment mechanism (CBAM) and shape new tariffs on higher emission products imported into the EU.^[5] In Canada, the Canadian Standards association is also developing a Green Taxonomy for sustainable finance.^[6]

All of these recovery plans include climate disclosure obligations consistent with the recommendations of financial leaders including Mark Carney, the former governor of the Bank of England, who has identified the recovery from COVID-19 as a “chance to avoid returning to the status quo.”

This article outlines the existing requirements and developing trends in climate-related and ESG financial disclosure in Canada and other jurisdictions during this time of COVID-19 economic recovery. We postulate that enhanced climate related financial disclosures and standards may form the basis for sector specific GHG emission standards and potential carbon-related border measures. We expect similar requirements to emerge in this increasingly trade protectionist context that is shaping the global pandemic economic recovery and the Paris Agreement pathway to a carbon neutral world in or around 2050.

I. EXISTING REQUIREMENTS FOR CLIMATE-RELATED FINANCIAL RISK DISCLOSURE

There are a number of climate related standards and requirements,^[7] but global consensus appears to be emerging around the TCFD.^[8] Support for the TCFD has grown to include over 1,027 organizations, with a market capitalization of over $12 trillion as of the beginning of 2020.^[9] TCFD requires climate-related disclosure in four core areas^[10]:

1. Governance. Disclose the organization’s governance around climate-related risks and opportunities. The guidance affirms that the tone from the top is critical. A recent legal opinion for the Climate Law Initiative confirmed that directors are legally obligated to address climate change risk and opportunities as part of their oversight of the companies they serve.^[11] In the context of climate change risks, directors and officers that exhibit conscious disregard or wilful ignorance of the material financial risks of climate change may be liable for breach of their fiduciary duty of trust and duty of loyalty.^[12] Failure to consider climate change risks may lead to liability and actions against the corporation, and in some cases, personal liability for directors and officers.^[13] Accordingly, securities disclosure requirements necessitate that material risks associated with climate change be disclosed. Stakeholders, broadly defined, are increasingly demanding that directors and officers understand, measure, mitigate, and report on the risks associated with climate change.
2. Strategy. Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material.
3. Risk Management. Disclose how the organization identifies, assesses, and manages climate-related risks.
4. Metrics and Targets. Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

Canadian Securities Administrators (CSA) and the Ontario Securities Commission (OSC) have each promulgated instruments supporting climate-related financial risk disclosure. The CSA issued Staff Notice 51-358 Reporting of Climate Change-related Risks (the “Notice”) in August 2019, which expressly cites the TCFD recommendations and provides guidance on preparing disclosure of material climate-related risks.^[14] The Notice follows and expands upon CSA Staff Notice 51-333 Environmental Reporting Guidance, issued in 2010.^[15]

The Notice was motivated by (i) increased investor interest, (ii) room for improvement in disclosure, and (iii) domestic and global developments, including the recommendations of the TCFD and domestic voluntary disclosure frameworks. It organizes climate-related risks into two categories:

1. Physical risks which are acute (event-driven), and chronic (longer-term shifts in climate patterns).
2. Transition risks which include reputational, market, regulatory, policy, legal, and technological risks.

The Notice recognizes that climate risks are difficult to quantify but encourages: (i) issuers to carefully consider if they have any material exposure to climate risks; and (ii) boards and management to adopt relevant, clear, and understandable entity-specific disclosure of how the business is specifically affected by all material risks resulting from climate change.

The OSC has emphasized that “companies already have an obligation to disclose material environmental and governance information,” and has committed to “continue to monitor the appropriateness of disclosure being provided” and “determine the need for a regulatory response” to the TCFD.^[16]

II. DEVELOPING TRENDS IN CLIMATE CHANGE RELATED OVERSIGHT AND DISCLOSURE

Over 1,010 companies have committed to taking science-based targets toward achieving a maximum of 1.5 degrees of global warming in accordance with the Science Based Targets initiative and guidance documents for various sectors, including the financial sector.^[17] A number of large multinationals including Unilever, Microsoft, Mars, Maple Leaf Foods, Google, Nike, HSBC, Swiss Re have committed to making their business operations carbon neutral. And any number of entities are purchasing carbon offsets in the voluntary carbon market in order to achieve those targets. These developments herald a new age of climate commitment veracity that are certain to require additional climate-related financial disclosures to both shareholders, investors, and ultimately, end-use customers.

While standards do exist for the voluntary carbon markets,^[18] a number of new initiatives are pushing toward enhanced standardization, harmonization and transparency. These initiatives address some but not all potential customer confusion around net zero, carbon neutrality, carbon offsets and include:

• The Mark Carney lead Task Force on Scaling Voluntary Carbon Markets;^[19]
• The Environmental Defence Fund and ENGIE initiatives around the voluntary market;^[20] and
• The International Organization for Standardization (ISO) 14030 initiatives around green finance.^[21]

There are a breadth of issues, terminologies, and a corresponding increase in demand for corporate entities to achieve the goals of the Paris Agreement, even in the face of a member state’s failure to do so. As a result, we do not see the demand for increased standardization and climate related disclosure diminishing. In fact, it is our view that it is only a matter a time before the TCFD requirements and related carbon consumer protection standards become mandatory. The increasing interest of consumer protection agencies and competition/anti-trust bodies also signals the growing trend.

We expect this trend to follow a hockey stick increase in importance should the Taxonomy and/or the related ISO standards be used to support border measures including the CBAM set out in EU New Green Deal and/or carbon border related measures in other jurisdictions. In conclusion, the “carbon writing on the wall” is clear: enhanced climate related disclosures are here to stay and will increasingly become a part of stakeholder expectations and integrated financial disclosures.

*Elisabeth DeMarco,Senior Partner, DeMarco Allan LLP.

Jonathan McGillivray, Senior Associate, DeMarco Allan LLP.

Daniel Vollmer, Student-at-law, DeMarco Allan LLP.

1. Congressional Research Service, “Global Economic Effects of  COVID-19” (21 September 2020), online (pdf): <fas.org/sgp/crs/row/R46270.pdf> (“CRS COVID Report”).
2. The LEEFF program will be open to large for-profit businesses – with the exception of those in the financial sector – as well as certain not-for-profit businesses, such as airports, with annual revenues generally in the order of $300 million or higher. To qualify for LEEFF support, eligible businesses must be seeking financing of about $60 million or more, have significant operations or workforce in Canada, and not be involved in active insolvency proceedings; See Prime Minister of Canada, News Release, “Prime Minister announces additional support for businesses to help save Canadian jobs” (11 May 2020), online: <pm.gc.ca/en/news/news-releases/2020/05/11/prime-minister-announces-additional-support-businesses-help-save>.
3. See European Commission, Press Release, “Europe’s moment: Repair and prepare for the next generation” (27 May 2020), online: <ec.europa.eu/commission/presscorner/detail/en/ip_20_940>.
4. See EU Technical Expert Group on Sustainable Finance, “Taxonomy” (2020), online (pdf ): <ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy_en.pdf>.
5. See European Commission, “Commission launches public consultations on energy taxation and a carbon border adjustment mechanism” (23 July 2020), online: <ec.europa.eu/taxation_customs/news/commission-launches-public-consultations-energy-taxation-and-carbon-border-adjustment-mechanism_en>.
6. See Canadian Standards association, “Sustainable Finance-Defining Green Taxonomy for Canada” (24 April 2019), online: Standards Council of Canada <www.scc.ca/en/standards/notices-of-intent/csa/sustainable-finance-defining-green-taxonomy-for-canada>.
7. The Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD), the Sustainability Accounting Standards Board (SASB), the United Nations Sustainable Development Goals (SDGs), Canada’s Expert Panel on Sustainable Finance (Expert Panel), the World Bank’s Principles of Responsible Investment (PRI), the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the Global Real Estate Sustainability Benchmark (GRESB)/Green Building Certification Institute (GBCI), the Global Reporting Initiative (GRI), the Science Based Targets Initiative (SBT), and Renewable Energy 100 (RE 100).
8. Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board to develop voluntary, consistent climate-related financial risk disclosures for companies to use when providing information to investors, lenders, insurers and other stakeholders. Sustainability Accounting Standards Board (SASB) is an independent, non-profit private sector standards-setting organization dedicated to enhancing the efficiency of capital markets by fostering high-quality disclosure of industry-specific sustainability information. United Nations Sustainable Development Goals (SDGs) are a collection of 17 goals set by the United Nations General Assembly to be a blueprint to achieve a better and more sustainable future for all by addressing the global challenges we face, including those related to climate change, poverty, inequality, environmental degradation, peace and justice.
9. Task Force on Climate-Related Financial Disclosures, “TCFD Supporters” (September 2020), online: <www.fsb-tcfd.org/tcfd-supporters>.
10. Task Force on Climate-related Financial Disclosures, “Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures” (June 2017) at 18, online (pdf): <assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf>.
11. Canada Climate Law Initiative & Hansell LLP, “Putting Climate Change Risk on the Boardroom Table” (25 June 2020), online (pdf): <law-ccli-2019.sites.olt.ubc.ca/files/2020/06/Hansell-Climate-Change-Opinion-1.pdf>.
12. See BCE Inc. v 1976 Debentureholders, 2008 SCC 69; See also Peoples Department Stores Inc. (Trustee of) v Wise, 2004 SCC 68.
13. Janis Sarra & Cynthia Williams, “Directors’ Liability and Climate Risk: Canada – Country Paper” (April 2019) at 13, online (pdf): Commonwealth Climate and Law Initiative <www.smithschool.ox.ac.uk/research/sustainable-finance/publications/CCLI-Canada-Paper-Final.pdf>.
14. Canadian Securities Administrators, “Staff Notice 51-358: Reporting on Climate Change-related Risks” (1 August2019), online (pdf ): Ontario Securities Commission <www.osc.gov.on.ca/documents/en/Securities-Category5/csa_20190801_51-358_reporting-of-climate-change-related-risks.pdf>.
15. Canadian Securities Administrators, “Staff Notice 51-333: Environmental Reporting Guidance” (27 October 2010), online (pdf ): Ontario Securities Commission <www.osc.gov.on.ca/documents/en/Securities-Category5/csa_20101027_51-333_environmental-reporting.pdf>.
16. Ontario Securities Commission, “Notice 11-781: Notice of Statement on Priorities for Financial Year to End of March 31, 2019” (5 July 2018), online (pdf ): <www.osc.gov.on.ca/documents/en/Securities-Category1/sn_20180705_11-781_rfc-sop-end-2019.pdf>.
17. See Science Based Targets, “Meet the companies already setting their emissions reduction targets in line with climate science” (2020), online: <sciencebasedtargets.org/companies-taking-action>.
18. See e.g. International Carbon Reduction & Offset Alliance (ICROA), online: <www.icroa.org>; Verified Carbon Standard (Verra), online: <verra.org/project/vcs-program>; American Carbon Registry (ACR), online: <americancarbonregistry.org>; Climate Action Reserve (CAR), online: <www.climateactionreserve.org>.
19. Taskforce on Scaling Voluntary Carbon Markets, “Private Sector Voluntary Carbon Markets Taskforce Established to Help Meet Climate Goals” (2 September 2020), online: Institute of International Finance <www.iif.com/tsvcm/Main-Page/Publications/ID/4061/Private-Sector-Voluntary-Carbon-Markets-Taskforce-Established-to-Help-Meet-Climate-Goals>.
20. Environmental Defense Fund, “Committed to Net Zero? Navigating the Post-Paris Voluntary Carbon Market with Your Sanity Still Intact” (21 September 2020), online (pdf): <www.edf.org/sites/default/files/content/MVCM%20Climate%20Week%20NYC%20Event%20Brochure.pdf>.
21. International Organization for Standardization, “Climate Change Mitigation” (October 2020), online (pdf): <www.iso.org/files/live/sites/isoorg/files/store/en/PUB100271.pdf>.