On August 1, 2019 the Canadian Securities Administrators ("CSA") published Staff Notice 51-358 Reporting of Climate Change-related Risks (the "Notice") to highlight the responsibilities, risks and materiality considerations that board members and key personnel should consider in light of climate change-related issues as they relate to the issuer's Management's Discussion and Analysis ("MD&A") and Annual Information Form ("AIF"). No new legal obligations were created or modified as a result of the issuance of this Notice. Instead, its purpose was to clarify expectations and elaborate on CSA Staff Notice 51-333 — Environmental Reporting Guidance.
Unless otherwise stated, this article focuses only on an issuer's disclosure obligations as they relate to its MD&A and AIF. Different tests of materiality may arise depending on the particular context.
Climate change-related risks can impact the financial health of an issuer.
Climate change-related risks are becoming more of a mainstream business issue than in the past. Particularly, issuers and investors alike are recognizing that climate change-related matters can impact a company in many ways, and that such risks can provide insight into the sustainability of a business model. Notably, climate change-related matters can interrupt an issuer's operations, present unplanned costs or capital expenditures, impact the issuer's reputation, and limit its business opportunities. In turn, investors are devoting more time and attention to environmental risks and are generally seeking improved disclosure on risks, opportunities, financial impacts and governance related to climate change-related risks.
What factors should an issuer consider when determining a "material" climate-related risk?
The regulators recognize that materiality assessments in relation to climatechange related risks may be more difficult to identify than other risks. This is largely due to our evolving understanding of climate change-related risks and the duration of time for crystallization climate-related risks. Although the materiality test varies depending on specific contexts, information is generally considered "material" for purposes of a MD&A or an AIF if a reasonable investor's decision whether or not to buy, sell or hold securities in an issuer would likely be influenced or changed if the information in question was omitted or misstated (the "Materiality Test"). Management and board members (including the audit committee in some instances) have a role in strategic planning, risk oversight, as well as the review and approval of particular regulatory filings.
Omitting or misstating "material" information in an issuer's MD&A or AIF can lead to potential risks including litigation, enforcement or other regulatory action against the issuer or its personnel. An issuer's leadership should therefore consider the effects of climate change-related matters and any other "material" risks that can be posed to the issuer when preparing documents in order to meet its continuous disclosure obligations.
How can I determine if information relating to a climate-related risk is "material" (for purposes of a MD&A or an AIF)?
It is important for issuers to remember that there is no bright-line test. Instead, materiality may vary between different issuers even amongst those in the same industry, and an issuer should consider both qualitative and quantitative factors in its determination. Additionally, issuers should consider materiality in light of the context as a whole, rather than an isolated fact (although some facts can be "material" on their own). The following are a few considerations that issuers and their management should consider when determining whether or not a climate change-related matter is "material":
(i) What is the timing of the potential risk? Issuers are cautioned against limiting its materiality assessment to near-term risks, and instead should disclose risks in its MD&A and AIF even if the matter may only crystallize over the medium or long term, whether certain or not, if the Materiality Test has been met. Additionally, management is encouraged to consider the magnitude of the effect and whether the environmental risk is likely to increase over time.
(ii) What type of risk is it? Physical risks can be acute or chronic. A physical, acute risk is generally event-driven, such as by extreme weather conditions like a hurricane or flood. This may in turn pose financial implications to an issuer due to physical damage to its assets or a disruption in a supply chain or its operations. A physical, chronic risk is generally a longer-term shift in climate patterns, such as consequences arising from higher temperatures, that may cause sea levels to rise or heat waves.
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