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On Canada's boards, climate takes top billing
As companies grapple with how to measure, mitigate and disclose potential liabilities, inconsistency in policy poses a looming issue

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Wednesday, November 22, 2017 – Page B6

Michael Sabia has a message for Canada's corporate directors as he weighs how to deploy one of the biggest pools of investment capital in the country: Climate change is top of mind.

Mr. Sabia - the chief executive officer of the Caisse de dépôt et placement du Québec - wants climaterelated factors to be at the core of how the country's secondlargest pension fund approaches all of its investment decisions, regardless of asset class.

"That's what I think is going to be required for investors like us to benefit from the opportunities and protect ourselves from the risks that are obvious here," Mr. Sabia says.

Last month, the pension fund announced plans to slash the carbon footprint of its investment portfolio by 25 per cent by 2025. It also aims to boost its low-carbon investments by 50 per cent - to the tune of more than $8-billion - by 2020.

The term "carbon footprint" refers to the amount of greenhouse gases produced by a particular company or person. As part of its commitment, the Caisse says it will be reducing its exposure to the most carbon-intensive assets in its portfolio, such as activities related to coal. The pension fund will also begin disclosing data on the portfolio's greenhouse gas emissions in its annual report.

The Quebec-based pension fund is part of a growing tide of institutional investors - which includes giants such as Vanguard and BlackRock Inc. - pressing companies for more information on how they will manage the transition to a low-carbon economy. Companies in carbon-heavy industries such as energy and mining face the highest pressure, as investors fear being stuck holding stranded assets: companies who fail to plan for the future and whose valuations will likely plummet as a result.

"It's a risk that we could be left holding the bag in a Minsky Moment and it could be quite costly," says Toby Heaps, chief executive and co-founder of Corporate Knights Inc., a Toronto-based organization focused on corporate social responsibility. "I wouldn't say we need to sound the fire alarm, but certainly it's time to pause and take a serious look at how we can accelerate our transition to a lowcarbon economy."

The pressure has catapulted climate risk to the top of the agenda in many of Canada's boardrooms as companies grapple with how to measure, mitigate and disclose potential liabilities. Last year, the board at Suncor Energy Inc. recommended that shareholders approve a proposal put forward by NEI Investments to enhance the company's climate-related disclosures.

Shareholders voted overwhelmingly in favour of the resolution.

Suncor president, CEO and director Steve Williams says the company has made efforts to bolster its sustainability efforts, including by elevating carbon risk to one of its principal risks.

"Although we have had a climate action plan since 1997, 2017 was the first year that we released a report outlining the long-term resilience of our strategy," Mr. Williams said in an e-mail. "We also have better discussions with shareholders and include a 10-year forward-looking impact of carbon pricing on our costs and net asset value."

But even as directors train their sights on this growing liability, experts caution that a lack of consistency between how various companies measure and disclose climate-related risks leaves much work to be done.

"There aren't defined standards on exactly what companies should be measuring and how to measure it and how to report on it," says Andrew MacDougall, a partner at Osler, Hoskin & Harcourt LLP who specializes in corporate governance.

"The practices tend to vary between issuers, not only in terms of the amount of disclosure that is available, but also the elements that are disclosed."

There is a dizzying number of best-practice guidelines for climate disclosures, including the recommendations put out recently by a task force struck up by the Financial Stability Board, the international body established in 2009 to monitor financial risk. The lack of consistency between how companies measure and disclose climate risk often leaves investors comparing apples with oranges.

Some companies, such as Barrick Gold Corp., have opted to combine the "hodgepodge" of guidelines into their own internal best-practice standards. "We look at the best ones, the ones that are most applicable," said Peter Sinclair, Barrick's chief sustainability officer.

Climate change has taken on an increased sense of urgency in corporate boardrooms since the signing of the Paris climate accord in 2015. Nearly 200 countries have signed on to the global agreement that aims to tackle climate change.

Canada's resource-heavy stock markets may be particularly vulnerable to a potential "carbon bubble" in the valuations of fossil-fuel-dependent companies. Combined, energy and mining companies make up 20 per cent of the issuers on the Toronto Stock Exchange, compared with only 2 per cent for clean technology and renewableenergy companies. The disparity is even wider on the TSX Venture Exchange, where mining and oil and gas companies account for 68 per cent of the index, compared with 4 per cent for renewables.

Additionally, Mr. Heaps says Canada lags its global peers in terms of the amount of disclosure provided to investors. He points to the fact that Canadian companies aren't legally required to report their direct and indirect greenhouse gas emissions, although a number of them do so voluntarily.

"We have leading companies, and institutions that are leaders globally, but in aggregate, we are big laggards," Mr. Heaps said.

There are a myriad of ways in which climate change can impact a business. Severe weather events such as floods, hurricanes and forest fires can prompt oil producers to shut down some of their sites, as was seen during the forest fires that ravaged Fort McMurray last year.

But extreme-weather events can have a financial impact on businesses outside the resource sector, as well. For instance, a company may have a major supplier or vendor located in Fort McMurray or other disaster-affected regions.

In September, Quebec-based Alimentation Couche-Tard Inc. reported that its convenience-store chain was hurt by Hurricane Harvey. The TSX-listed company said that 123 of its Texas stores were affected to various degrees and had to close for a period of time. The financial toll of the closings, which occurred just after the company's first quarter, has yet to be reported.

"I think virtually every company is exposed to some degree," says Jennifer Longhurst, a partner at Davies Ward Phillips & Vineberg LLP. "The job is to figure out how much."

For mining companies, paying close attention to their environmental footprint - including their carbon emissions and how they manage their tailings ponds - is of the utmost importance. That's why the resource sector is typically more sophisticated than others when it comes to measuring and disclosing climate-related risk, Ms. Longhurst says.

Barrick Gold director Nancy Lockhart says the company's adherence to environmental policy is key to maintaining the co-operation of the local communities where the mining giant operates.

"Our license to operate depends on us having strong environmental policies, making sure our people go home safe every day, paying attention to human rights and just general corporate social-responsibility issues," said Ms. Lockhart, who also chairs Barrick's corporate responsibility committee.

Beverley Briscoe, vice-chair of the Goldcorp Inc. board, echoes the sentiment, calling the board's role in the oversight of environmental risk "critically important." In recent years, the company's board and other stakeholders have placed increased emphasis on its published sustainability reports, Ms. Briscoe said in an e-mail.

"These public reports have improved the transparency and accountability of the company's stewardship of the environment," Ms. Briscoe said. "I expect that this increase in transparency and accountability will continue as the understanding of climate change and environmental risk evolves."

Another financial risk associated with climate change is the regulatory burden. Companies may see their costs rise in the future as a result of carbon-pricing programs and other regulatory changes - including if securities regulators mandate a higher level of disclosure.

Earlier this year, the Canadian Securities Administrators launched a review of the current state of climate-change disclosure in Canada.

The report is expected to be published next year.

"Currently, reporting issuers in Canada are required to disclose material risks, which may include risks associated with climate change, among other environmental matters, in their periodic disclosure," a spokesperson for the Ontario Securities Commission said in an e-mail.

Although much of the conversation about climate change is focused on risk, Mr. Sabia notes that there are positives, as well.

"There are going to be huge investment opportunities created here - smart grids, solar power, wind power, battery technology, urban transit, environmentallly friendly real estate," he says. "This coin has two sides."


Average Board Games score 2017: 73 2012: 68

Percentage scoring below 50 2017: 7 2012: 16

Percentage scoring 80 or higher 2017: 38 2012: 29

Percentage with a majority of related* directors 2017: 2 2012: 5

Percentage that do not split roles of chair and CEO 2017: 13 2012: 16

Percentage with dual-class shares or unequal voting rights 2017: 14 2012: 14

Percentage with "say on pay" votes 2017: 63 2012: 33

Percentage with no women on their boards 2017: 11 2012: 41

Percentage with at least one quarter of board members who are women 2017: 39 2012: 12

Percentage of female directors on S&P/TSX index boards 2017: 21 2014: 15

*Related as defined by Board Games criteria, available online at

Associated Graphic

Michael Sabia, CEO of the Caisse de dépôt et placement du Québec, is taking steps to place climate-related factors at the core of the pension fund's strategy.


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