Climate Disclosures: How they will affect your business

As the world accelerates its efforts to address climate change, businesses are being increasingly asked to demonstrate their role in supporting sustainable practices.

In Canada, the federal government has recently moved to make climate-related financial disclosures mandatory for large, federally incorporated private companies. This is part of a broader strategy to align with global sustainability goals and ensure businesses are transparent about their climate risks and opportunities.

Here’s a look at what these climate disclosures mean for your business and how to prepare for the changes ahead.

What exactly is a climate financial disclosure?

Climate-related financial disclosures are reports that detail a company’s exposure to climate risks and how it is managing these risks. These disclosures also cover a company’s strategies for reducing its carbon footprint and adapting to potential climate-related disruptions.

Under the proposed regulations, large federally incorporated private companies in Canada will need to provide this type of transparency, offering insights into how their operations are being impacted by climate change and how they are contributing to global sustainability efforts.

The Government of Canada has been working toward this initiative for several years, signalling a shift towards mandatory reporting on climate issues. These disclosures align with global efforts led by organizations such as the International Sustainability Standards Board (ISSB), which has developed frameworks for such reporting.

The intention is to provide investors, stakeholders, and consumers with the information needed to evaluate a company’s commitment to sustainability and assess the associated risks.

Why climate disclosures are considered necessary

Climate disclosures are intended to help a company consider the financial implications of climate risks. The Canadian government hopes that these disclosures will provide more transparency to stakeholders, and create a level playing field by making climate disclosures mandatory. The idea is that investors will have clearer insights into how companies are managing environmental risks, which will enable them to make more informed investment decisions.

Furthermore, these disclosures will help businesses align with Canada’s broader net-zero emissions target by 2050, contributing to a sustainable and resilient economy.

What is the state of climate disclosures in Canada?

On October 9, 2024, Canada announced the intention to implement mandatory climate-related financial disclosures for large, private companies by amending the federal Canada Business Corporations Act (CBCA).

This announcement builds on earlier commitments, including regulations that require climate disclosures for federally regulated financial institutions. The Government of Canada has also been supportive of the ISSB and has worked toward aligning Canadian standards with global frameworks.

This move follows similar initiatives in jurisdictions such as California, the EU, the UK, and New Zealand, all of which have introduced or are planning mandatory climate disclosure requirements.

The Canadian climate disclosure requirements will likely align with the Canadian Sustainability Standards Board (CSSB) standards, which were released for public comment in March 2024. These standards will guide companies on how to assess and report their climate-related risks and opportunities, fostering transparency and accountability.

What can businesses do to prepare?

With the impending changes to the CBCA, businesses need to be proactive in preparing for the new reporting requirements. And while small and medium-sized businesses are not directly impacted by these regulations, larger companies will be required to comply.

Here’s how businesses can start preparing:

Understand the new standards

Any action must be informed by knowledge. Companies will need to familiarize themselves with the laws and especially the CSSB standards, which will provide guidance on what information needs to be disclosed. This includes information on how climate risks are being assessed and managed, and what strategies are in place for reducing emissions.

Evaluate your climate risks

Companies should begin by evaluating their climate-related risks. This includes considering how climate change could affect their operations, supply chains and market demand. For example, companies in industries such as agriculture, construction, and energy may face greater risks from climate change than those in less affected sectors.

Implement sustainability measures

As part of the disclosure process, businesses will need to show how they are addressing these risks through sustainability efforts. This could involve adopting green technologies, transitioning to renewable energy or investing in carbon offset programs. Developing a clear sustainability strategy will not only help companies comply with disclosure regulations but also improve their reputation with consumers and investors.

Communicate your efforts

Transparency is key when it comes to climate disclosures. Businesses should ensure that they have systems in place to accurately measure and report their emissions, energy use and other climate-related activities. This might involve working with third-party auditors or consultants who can verify the accuracy of these disclosures.

Prepare for regulatory changes

The regulations surrounding climate disclosures are still evolving, and businesses should stay informed about upcoming changes. This may involve tracking updates from the Canadian government and other relevant bodies. Being proactive in adapting to these regulatory shifts will give businesses a competitive edge and ensure compliance with future requirements.

What insurance do I need for these changes?

As climate-related financial disclosures become mandatory, businesses may find themselves exposed to new risks. Companies that fail to meet the disclosure requirements could face regulatory penalties or reputational damage.

As climate change impacts become more pronounced, companies may need to reassess their insurance coverage to account for increased risks, including the following:

Environmental liability insurance: This covers the costs associated with environmental damage caused by a business’s operations, such as pollution or contamination.
Directors and officers (D&O) insurance: As companies are held accountable for their climate-related disclosures, D&O insurance can protect executives from legal claims related to their governance of sustainability practices.

It’s important for businesses to work with an insurance broker to ensure they have the right coverage in place.

Contact Axxima for specialist insurance advice

Given the evolving landscape of climate-related financial disclosures, it’s essential to work with an experienced insurance consultant to ensure your business is adequately protected. While these changes may require businesses to invest time and resources in compliance, they also offer an opportunity to demonstrate a commitment to sustainability and gain the trust of investors and consumers. Preparing for these disclosures now will help your business stay ahead of the curve and thrive in an increasingly green economy.

Axxima can offer specialist advice tailored to assisting the needs of businesses navigate the complexities of climate-related regulations.