The need for climate risk disclosure
Opinion contributed to the Globe and Mail / Published October 13, 2019
Canadian securities regulators struggled this summer when they decided to issue new guidance on climate change-related disclosures for issuers. The regulators were clearly searching for a way to provide investors with useful information on an unprecedented systemic risk while still working within our existing continuous disclosure framework.
Sadly, the results of that struggle came up short, largely because regulators shied away from actually regulating. Instead, they chose to merely “clarify” existing regulatory requirements, trapping themselves (and all of us) in a framework for disclosure that is simply not fit for purpose.
Securities regulation is the product of a simpler world, in which the role of encouraging investment while protecting investors was limited by fairly consistent technologies and a more predictable economic system and environment. Within that world, the concept of “materiality,” which underpins our current system of corporate disclosure requirements, made sense for both investors and corporate issuers. Simply put, if a reasonable investor’s decision on whether to buy, sell or hold securities in a particular issuer would likely be influenced by the corporate information, it should be reported in a timely manner.
Over time, the concept of materiality has become more complex. New technologies and investment vehicles, a multitude of means for providing information to investors, and a growing appreciation for the significance of system-wide risks and externalities undermine the value of corporate disclosure focused solely on the financially material risks borne by any single corporation.