Institutional investors recently had a perplexing time analyzing impacts of the US-Canada tariff wars and watching the federal government’s acquisition of Trans Mountain pipeline. However, of potentially equal impact, during the same period, yet drawing much less attention, was the Canadian Securities Administrators (CSA) April release of CSA Staff Notice 51-354: Report on Climate Change-Related Disclosure Project that highlighted understanding – or more precisely – misunderstanding of materiality of climate change and extreme weather risk by issuers.
Notably, CSA found that Canadian issuers are most concerned with climate change as a regulatory risk, often related to a carbon tax, and not as a physical impact that may create stranded assets, or otherwise impact the continuity of business operations. It is this later area where material climate and extreme weather risk resides (Figure 1).
Figure 1: The types of climate change-related risk disclosure provided by Canadian issuers (2018)
Source: CSA Staff Notice 51-354: Report on Climate Change-Related Disclosure Project
The CSA report noted “other [than regulatory] climate change-related information is either not material, or is currently so uncertain or remote that its ultimate materiality and financial impact cannot be assessed or quantified at the present time.”
This perception is ill-informed, considering that floods, wildfires and other natural disasters continue to dominate the news from coast to coast in Canada.
More specifically, the costs of extreme weather events in Canada, measured in catastrophic insurable losses for property and casualty insurance sector from January to May 2018, have already exceeded $800 million (as per Insurance Bureau of Canada). In addition to insurable losses, extreme weather events caused supply chain and business disruptions, and forced a series of emergencies and evacuations. Research from the Intact Centre on Climate Adaptation finds that basement flooding can cause impacted homeowners to miss an average of 7 days off work.
The cost of this can add up – in two weeks following June 2013 Southern Alberta floods, approximately 5.1 million hours of work were lost, which also resulted in $485 million of lost economic output by the private sector.
Since the impacts of extreme weather bear economic significance, issuers, who fail to manage and disclose this risk, are passing it on to their investors. But why is this happening?
One explanation is that climate risk management is complex and relies on the coordinated use of at least three skill sets – climate science, industry-specific operational expertise, and financial acumen (Figure 2), which to date have not been integrated.
Figure 2: Necessary combination skill sets for issuers to assess climate change risk
Source: Intact Centre on Climate Adaptation, June 2018
The first skill set is that of climate science, which enables organizations to assess present-day and projected climate conditions, such as changes in average and extreme temperature and precipitation. Off-the-shelf and custom technology solutions are available to assess the possible physical impact of changing climate and extreme weather events on single assets or entire portfolios. This type of assessment is routinely performed by insurance and reinsurance providers on a range of perils.
industry-specific operational expertise
The second skillset is that of industry-specific operational expertise, which would enable organizations to relate climate science to operational impacts (i.e., identify best practices to manage climate risk and uncover emerging opportunities). Some industry associations in Canada are leading this role – for example, the Canadian Electricity Association, amongst others, is working with the Canadian Standards Association (Canada’s largest standards development organization) to develop a climate change and extreme weather adaptation standard for Canada’s electricity transmission and distribution sector. Other industry associations can develop similar guidance for their members, as well as identify business opportunities that change climate may convey (e.g., extended growing seasons for certain crops may be an opportunity for the agricultural sector in Canada – but what are the enabling technologies and processes to unlock these opportunities?)
Strategic decisions and financial analysis
Lastly, climate science and industry-specific operational expertise must be incorporated into strategic decisions and financial analysis, requiring board-level engagement on the file. In 2017, CPA Canada published a report that outlined 20 questions for boards of directors to ask in overseeing organizational risk management, business strategy and performance in the context of climate change. However, many directors think that environmental, social and governance (ESG) issues may not be material to their companies. Indeed, PwC’s 2017 Annual Corporate Directors Survey found that 40% of directors don’t think climate change should play a role in informing company strategy. More climate-informed expertise at the board level may help to address this gap – especially in a time when institutional investors are focusing on ESG as a long-term governance issue.
The reason climate change and extreme weather challenges are still not incorporated on scale into business operations and financial reporting is simple – historically, extreme weather has not been a challenge. However, the weather of the past is not a predictor of the weather of the future. As a result, business needs to adapt to this new stress, with the same level of commitment that is allotted to, for example, assessing the impact of tariff disputes or cyber-security vulnerability.
Natalia Moudrak is director of the Infrastructure Adaptation Program at the Intact Centre on Climate Adaptation.