Thread by @Jon_M_Arnold

The new US #climate law could unleash capital markets, with massive implications for Canada. More than ever before, Canada needs to align its climate-related #disclosure rules with the elephant next door: here’s how. A🧵

bit.ly/3JYcrrE

Some background: disclosure is a dry corner of climate policy, but it's an important one. Regulators (@SECGov & @CSA_News) set rules on what types of info companies must disclose to the public. It provides critical info so markets can accurately price risks and opportunities

Unlike other types of risk, disclosing climate risks has been voluntary—a massive gap. Companies both affect the climate (their GHGs) and are affected by it through extreme weather events (physical risk) and rapid shifts in tech, policy, and markets (transition risk).

All dimensions of climate risk will intensify over time, making these impacts INCREASINGLY material to company profitability. The new US climate law will accelerate transition risks & opportunities, & investors need to know how. Better disclosures can do this.

Cdn regulators (Canadian Securities Administrators @CSA_News) were among the first movers in this space and have been working on new disclosure rules to better reflect climate change. Earlier this year, they released their proposed approach. bit.ly/3PvNWmV

But it quickly became obvious that these rules would be weaker than int'l and US plans—& do a poorer job at pricing climate risk. This clear summary by @esgadvisory shows how the US and Can approaches compare. bit.ly/3Pu1a3q

These inconsistencies led the CSA to hit the pause button, presumably to bring regs into alignment. This is a very good thing. But it's worth looking at a few areas where the two plans diverged just to ensure that Canada's disclosure plan 2.0 is better. bit.ly/3SZ3nqz

Example 1: The US proposes to make it mandatory to disclose scope 1, 2, and (sometimes) 3 emissions. Canada would have either a) left it up to companies to decide and explain, or b) made scope 1 mandatory and left the rest up to the company.

Example 2: The US will require companies to integrate climate impacts into their audited financial statements where expected CC impacts cause >1% change to any line item. Canada's draft approach would not do this.

To me, this last one is a HUGE deal. For too long, ESG and sustainability say one thing, and financial statements (which actually matter) say another. Connecting financial statements with climate impacts is one of the clearest ways to price climate risk, IMO.

Example 3: while neither proposal makes scenario analysis mandatory, the US requires details on key assumptions, parameters, etc. for when companies *do* use it. Canada has so far shied away from any type of rules for scenario analysis.

Sidenote: Doing scenario analysis isn't easy and it's difficult to standardize, but it's a potent tool to understanding how CC can affect company profitability. @ClimateInstit used it in our Sink or Swim report to understand how the global transition will affect Cdn companies.

So, where does this leave Canada? It's smart to have paused the Cdn process. US rules have yet to come into force and the recent @EPA decision could yet weaken them. But even if the US rules are delayed or watered down…

bit.ly/3QtdfHr

Int'l disclosure regs are coming, one way or another, and Canada's draft approach is out of step with where they're headed. The @IFRSFoundation is moving quick to standardize disclosures (scope 1, 2, and 3 GHGs + requirements for scenario analysis). bit.ly/3w6mlly

Ultimately, Canada should follow these int'l best practices. We are a small economy that depends on access to global capital markets. We also have lots of companies cross-listed on exchanges that will need to meet a higher standard anyway.

The US climate law will generate huge new opportunities in climate/clean tech markets and accelerate the transition. Understanding how this new world will affect Cdn companies and capital is critical. Mandatory and high-quality disclosures can help.

Your move, @CSA_News!