Blogs & Comment

Canada’s corporate boards aren’t prepared to guard against climate risk

Canada’s regulatory environment on carbon emissions is changing. Corporate directors need new expertise to help them navigate this new landscape

Business people meeting against a natural backdrop

(Hero Images/Getty)

Last year marked a landmark for the Canadian government on climate action. In December 2016, one year on from the Paris Agreement, Canada released a national climate plan that suggests, despite a looming U.S. Trump presidency, that the federal government will continue to forge ahead towards its 2030 target of a 30% reduction below 2005 greenhouse gas emission levels.

As climate action continues to gather momentum across the country, Canadian companies should make it their New Year’s resolution to ensure they are up to speed.

Under the pan-Canadian climate plan, Canada’s greenhouse gas-intensive sectors will be required to make substantial changes as we transition to a cleaner economy. Priority areas for action include reducing methane emissions in the oil and gas sector and phasing out reliance on coal generated power. These changes represent a major challenge for Canadian companies. It’s clear that how Canadian companies manage climate-related risks and opportunities now will impact their success in the future, and in turn that of their shareholders.

Canadian boardrooms need to sit up and pay attention. Because of the complex nature of the climate challenge we are confronting, boards need new skills and experience to navigate these waters. Companies in the energy and utilities sectors are faced, now more than ever, with climate-related changes in government regulation, market demand, weather patterns, availability and access to natural resources such as water, and consumer or other stakeholder expectations, all of which can affect long-term corporate strategy, risk assessment, capital expenditures decisions, physical operations, trade, financial performance and asset valuation.

So, are corporate boards “climate competent”? Do they have an understanding of climate risk and are equipping themselves to address it? And how well are they communicating that understanding to their investors?

A new report from the Shareholder Association for Research and Education reveals that Canada’s most carbon-intensive sectors are not disclosing “climate competency” in the boardroom. The study reviewed 52 companies in Canada’s energy and utilities sectors to determine how well boards are disclosing and overseeing risks related to climate change. The results paint a sparse landscape of climate competency disclosure.

Climate change knowledge is not being mentioned in any lists or matrices of desired board skills or expertise. Similarly, climate change is not being mentioned in board governance documents or in board committee mandates. In fact, a quarter of the companies sampled have no board committee or mandate that specifically assigns oversight for either climate risk, environmental risk or even risk more generally.

While almost all companies sampled are disclosing some type of climate related risk in annual filings or other reports, those risk discussions tend to stick within a narrow definition of climate risk that looks primarily at regulatory, and to a lesser-extent reputational risk, posing the question: do boards fully comprehend the range of risks they face?

This lack of information leaves investors with unanswered questions. Without proper disclosure of board climate competency, it is difficult for shareholders to know whether the board has the appropriate skills and experience to plan for a carbon-constrained future.

As investors become increasingly concerned about the impacts of climate change on their portfolios, companies need to be clear about how they are incorporating one of the biggest challenges of our time into business planning. Boards that develop a comprehensive understanding of all the risks and opportunities associated with climate change will be better positioned to make the transition to a low-carbon world.

Laura Gosset is an engagement analyst with the Shareholder Association for Research & Education. SHARE today released a new report on the topic of corporate governance and “climate competency”.