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Lack of Climate Disclosure Puts Canadian Pensioners, Investment Funds at Risk

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Canada needs a three-year plan to mandate better disclosure of climate-related risks in corporations’ annual reports, Ottawa-based cleantech analyst Céline Bak concludes in a study released last week by the International Institute for Sustainable Development (IISD).

“Disclosure on energy transition plans is what global investors are looking for,” said [1] Bak, a senior associate with the Winnipeg-based institute. “Otherwise, investors will assume that targets are just that and that capital is not being allocated to meet those targets. This is a risk to Canada’s financial sector—particularly given how much capital is invested in Canada’s energy sector.”

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Current climate risk disclosure practices on the part of financial institutions and other corporations are “viewed as relatively weak by global investors — and Canada is no exception,” Investment Executive reports, citing Bak. “This means that climate risk, be it regarding adapting to the physical risks of climate change or addressing the transition risks to business models from a shift to a low-carbon global economy, is not fully accounted for in corporate planning or disclosed to investors,” she wrote. “The result is an accumulation of climate risk in capital markets.”

In its coverage of the release, National Observer points to the impact on pensioners if their retirement fund managers are “caught off guard in a world that has no more room for planet-warming carbon emissions”. Shares in fossil companies “form a major part of retirement savings for many Canadians, and equity and debt issued by global fossil fuel firms also constitute a portion of Canadian pension funds,” Observer writes [3], citing Bak’s report. “Addressing this risk will require orderly ‘transition strategies’ to help markets flow capital to assist oil and gas companies transition away from high-carbon fuels.”

“Should any of these companies fail, Canada would be faced with pension defaults reminiscent of those of Nortel and Sears Canada,” Bak wrote. “This would have a potentially devastating impact on pension beneficiaries, and particularly on women, who by virtue of salary gaps are less able to save privately for retirement.”

She added that “once the implications of the Paris Agreement are fully priced into the market, oil and gas asset valuations will shift. If this change is sufficiently large, debt covenants may be triggered in companies. This will in turn impact financial institutions, including banks, insurance companies, and pension funds. Debt downgrading could ensue, and bank capitalization thresholds could be impacted.”