The Materiality of Climate Change and the Role of Voluntary Disclosure

Investor groups in both Canada and the U.S. have petitioned the Ontario Securities Commission and the Securities and Exchange Commission to issue statements clarifying the application of existing disclosure requirements to climate change-related risks. Even if issuers are meeting their current obligations with respect to disclosure of climate change risks, however, the “materiality” threshold for disclosure would likely leave a gap between what issuers are required to disclose under the law and what interested investors would like to know about how issuers are responding to the challenges posed by climate change. This is due to the fact that if an issuer has determined that climate change will not have a material impact on its financial results, it is under no obligation to disclose its reasons for reaching this conclusion. Investors interested in environmentally-responsible investing, however, may want to know these reasons. It may be relevant to their investment decisions, for example, whether the reason is because the issuer has already reduced its greenhouse gas (GHG) emissions, rather than because it has purchased carbon credits on the futures market which it can use to meet any regulatory limits on emissions the government may seek to impose. But it does not necessarily follow that mandatory disclosure under securities regulation should provide this information. A preferable approach is for voluntary disclosure regimes, such as the Global Reporting Initiative (GRI), to fill this gap. Although take-up by corporations of the GRI standard for disclosure has been slow, environmental reporting in compliance with the standard can provide interested investors with credible and comparable information