Mac Van Wielingen submitted his viewpoints to the Canadian Sustainability Standards Board (CSSB) consultation on the two proposed Canadian Sustainability Disclosure Standards. General Requirements for Disclosure of Sustainability-related Financial Information and, Climate-related Disclosures.
I certainly appreciate the value of more consistency in sustainability standards. I’m also well aware that there is a lot of water under the bridge with respect to this process. Nevertheless, I will say openly and bluntly, Canada should not simply follow Europe’s lead in governance. More specifically, Canada should not follow Europe and the ISSB in E.S.G. and climate disclosure. Canada can show leadership in this process through more original thinking that would benefit the Canadian public, and also, quite frankly, all people impacted in all jurisdictions. My points below are in the direction of attempting to show how Canada can better serve its own interests and create more value for others in this process.
In my experience, there is an understandable tendency to lose sight of the big picture of our economic and societal system, and the functioning of pieces within our total societal system. Specifically, most of us, including most business leaders, tend to lose sight of the fundamental role of business in society. This is to manage the allocation of a significant portion of society’s accumulated savings, revenues less costs of workers and businesses, that are intermediated within the financial services sector, and invested under the authority and responsibility of corporate boards (including asset managers). The business sector is responsible for managing society’s accumulated savings and redirecting these savings towards societal needs. The corporate board of directors are the standard bearers of preserving and responsibly growing society’s accumulated savings.
Within this responsibility, the board of directors must also ensure that the company is satisfying all laws and regulations appropriately. Specifically, for example the board of directors must approve all public disclosure materials. Generally, this falls within what most observers would call compliance based governance. It is an essential function, but totally incomplete with respect to the broader role of the board of directors and the corporation in society. There is a tendency, that seems to ebb and flow, to view the Board of Directors as an extension of the regulatory system. Even corporate directors seem to succumb to this mentality and think if they can satisfy these requirements, they have fulfilled their role and responsibilities.
These broad points enable me to say specifically that there is serious risk that the proposed sustainability standards are regressive to what could be considered good governance. The proposed standards are pushing corporate directors back into more of a regulatory and compliance based role, and away from “value beyond compliance”.
Governance is about “authorities, structures, and processes that direct and control the material fundamentals of a business, all within the context of uncertainty”. Directing and controlling material fundamentals requires foresight and holistic thinking. This is arguably the opposite, or at least a counterbalance, to compliance based process, which by definition is historical, focused on what has already happened. I see these new standards representing simply more compliance and more hindsight based reporting. Worse, they will serve to distract from what is most material to a business enterprise. Lastly, the information generated at best is “nice to have” but not material to the decisions made by boards of directors and most investors.
Risk associated with climate change needs to be considered as part of enterprise wide risk management. Most successful businesses are already immersed in this risk mindset. Climate is one risk. Covid and pandemics is another. Global financial market meltdowns are another risk ie the 2008-09 global financial crisis. Depending on your jurisdiction, war is another risk. Political volatility is another major risk. As the world attempts the journey to net zero 2050 it will have to go through 6 new presidential elections in the US which will create a great deal of uncertainty for the policy driven energy transition for Canada and all countries of the world. Policy risk has to be a concern for boards of directors. This list goes on and on, but my point is each risk needs to be considered in the context of enterprise wide risk. Climate risk, in the sense of adverse climate impacting a business, is very real and has to be considered. Disclosure and discussion on the management of this risk is appropriate.
Specific to the question of disclosure of emissions, it must be appreciated that requirements for emissions disclosure for most businesses, including scope 3, will not directly impact the level of climate risk a business may face. This should not be construed as an argument against decarbonization. It is an argument against excessive regulatory burden where there is no or very little materiality. The risk of climate can impact businesses locally, and this needs to be assessed as a risk, but individual businesses themselves do not create global climatic conditions. Maybe the proposed new standards need to have a materiality test on emissions that calculates a specific business’s share of total global emissions for which it was responsible. It could in a sense be set very low to be accommodating towards the broad concern of emissions, but if we went through the calculations, you would see there’s that there’s probably no single business in Canada that has a material impact on global climate, and in turn Canada’s climate.
In fact, the entirety of Canada, with about 1.5% of global emissions, is immaterial in the context of total global emissions. China, United States and India together represent over 50% of global emissions. Canada’s direct impact on the problem is one of “form or image, versus substance”. If climate leadership is defined on the basis of emissions alone, our contribution, arguably, is a moral responsibility as a cooperative partner, versus a climate leader.
This understanding of materiality is starting to work through the awareness and politics of climate policy globally. The idea of being a global climate leader, ie Germany or the United Kingdom, and Canada, as it often references itself, is going through a rethink. Without getting into this in depth, I will just say that the fundamental importance of policy proportionality is resurfacing. What are the gains and losses for any group of people in any jurisdiction relative to the problem of trying to reduce global emissions? This is not somehow an argument to go for a free ride. It is an argument for clarity as to how we can all contribute appropriately to reduce climate risk. It is also an argument to be very careful about what we might sacrifice to achieve something that may not be material to the problem we’re trying to solve.
The best example of this conundrum is Germany itself, which is arguably the worlds foremost, historic climate leader, although this is now changing as they backslide and regress in their commitments. Germany is now realizing that they have truly hurt themselves in pursuing their climate and green aspirations. I reference the recent comments in a speech by Theodore Weimer, CEO of the German Stock exchange where he refers to the German economic model as “sheer catastrophe”. “Our reputation in the world has never been as bad as it is now”. He speaks at length about how “institutional investors are asking where Germany’s economic sense has gone”. He reported that investors are now demanding a risk premium when they invest in Germany. This is a far cry from the view that climate leaders will be able to attract capital more easily.
The view that the proposed Canadian sustainability standards will help us attract more capital needs to be thought through very carefully. As an investor I can tell you that what does attract capital is first and foremost, a business and investment friendly environment. The new sustainability standards may actually discourage new investment or at least discourage new public company listings in Canada. Other fundamentals for attracting capital are low cost reliable and, yes, ideally clean energy (ie hydro in BC and Quebec), responsible development where social and governance factors are part of strategy, the availability of skilled labour, market access, relative ease in permitting, reasonable tax levels etc. Consistency in sustainability standards could be a positive but not if they are excessively burdensome or if based off a model drawn from other jurisdictions that are underperforming, if not actually failing.
My main point is that Canada must be very careful in following the German or the European model of governance. I’m emphasizing this because my fear is that Canada may get stuck with guidelines and compliance based process that have serious adverse impacts on our competitiveness, with minimal real world benefits. The issue of materiality and policy proportionality must be front and centre. My last point is that if Canada is going to follow or harmonize with any other international jurisdiction, it should be the United States. They are our major trading partner and our greatest competitor in many ways. Whatever we may do, we should not get ahead of the US in these standards and process.