While our attention is primarily on health issues during this global pandemic, climate change remains at the forefront of issues being addressed by governments, courts and businesses. This bulletin summarizes some of the recent developments in Canada and abroad.
FEDERAL GOVERNMENT INITIATIVES
In November 2020, the Canadian federal government introduced Bill C-12, the Canadian Net-Zero Emissions Accountability Act. The bill proposes to legally bind the government to achieve net-zero emissions by 2050 and require the Minister of Finance to report annually on key measures that the federal government has taken to manage climate-related financial risks and opportunities. Hot on the heels of that, the government released A Healthy Environment and a Healthy Economy (Climate Plan) as its roadmap to get there. The centrepiece of the plan is to increase the price on carbon to C$170 per tonne by 2030. As the plan is still at a high level, we will have to wait for more details to know its precise effects. It is also noteworthy that this plan remains hypothetical until the Supreme Court of Canada rules on the climate references before it.
The current federal backstop carbon pricing scheme under the Greenhouse Gas Pollution Pricing Act (GGPA) (and maintained under the Climate Plan) increases the federal carbon tax by C$10 per tonne per year to C$50 per tonne in 2022. Under the Climate Plan, the price will increase by C$15 per tonne per year as of 2023 rising to C$170 per tonne by 2030. The carbon tax is advertised as “revenue neutral” with federal rebates paid to offset the carbon tax.
The Climate Plan seeks to encourage the use of clean energy sources and carbon capture. It also purports to support decarbonization projects through such initiatives such as the Strategic Innovation Fund – Net Zero Accelerator, which will provide C$3-billion of funding over three years.
The government has promised to help eligible oil and gas companies fund methane emission reductions through a C$750-million Emissions Reduction Fund, with up to 50 per cent loan forgiveness if companies achieve certain emission reductions. The government will set new targets for reducing methane emissions by 2030 and 2035 (in addition to the targets set for 2025) and phase out certain fossil fuel subsidies by 2025. The government also promises a strategy for carbon capture, use and storage.
The Climate Plan further commits to new regulations to encourage the development of clean fuel and spending to promote clean energy, energy-efficient buildings and lower-emission vehicles.
CLIMATE CHANGE ACTIONS AGAINST GOVERNMENTS
Actions against various levels of government to compel action to fight climate change have been attempted in various jurisdictions (most notably, the 2019 case of Urguenda v. Netherlands, where the Supreme Court of the Netherlands ordered the government to cut emissions by 25 per cent from 1990 levels by the end of 2020).
However, such lawsuits in Canada have met with less success, most recently in the November 2020 decision in Misdzi Yikh v. Canada. In that case, the Federal Court of Canada struck a claim by an Indigenous group on the basis that it was not justiciable and did not disclose a cause of action.
The plaintiffs claimed to have experienced significant impacts on their territories caused by warming and expect to experience negative health effects due to climate change and alleged that the Canadian government's approach to climate change had violated their constitutional and human rights. They further asserted that Canada's historical treatment of Indigenous leaders and ongoing racial discrimination exacerbate the psychological and social trauma caused by climate change. The plaintiffs based their claims primarily on section 91 (authority to make laws for the peace, order and good government) of the Constitution Act, 1867 and section 7 (right to life, liberty and security) and section 15(1) (equality before the law) of the Canadian Charter of Rights and Freedoms.
In striking the claim, the court noted that “the issue of climate change, while undoubtedly important, is inherently political, not legal, and is the realm of the executive and legislative branches of government.”
The Misdzi Yikh decision came on the heels of another Federal Court decision, Larose et al. v. Her Majesty the Queen, in which 15 children and youth from across Canada sued the Crown, alleging that greenhouse-gas emissions violated their Charter rights and breached the Crown’s obligations under what they called a “public trust” doctrine. This claim, too, was struck at the pleadings stage in an October 2020 decision. Similar to Misdzi Yikh, the court found that the Charter claims were not justiciable (though the public trust claim could be) and that the claims disclosed no reasonable cause of action. This decision has been appealed.
After the 2019 decision of the Quebec Superior Court in ENvironnement JEUnesse v. Attorney General of Canada, (in which the court dismissed a motion to certify a class action by a group of citizens claiming that the Canadian government’s failure to set a target for reducing greenhouse-gas-emissions to avoid climate change impacts was a violation of Charter rights), it is clear that plaintiffs have not yet found a way in Canada to shift climate policy from the legislative sphere to the judicial.
CLIMATE CHANGE ACTIONS AGAINST THE PRIVATE SECTOR
As the requirements of climate change disclosure evolve, legal actions have also been brought against companies for failing to adequately assess and/or disclose the risk of climate change when it comes to investing in these companies. Litigation, to date, in Canada has been mainly focused on the public sector, but there is a growing number of cases brought against corporations in other jurisdictions, including the U.S. and Australia, that may preview how such issues could land in front of Canadian courts in the coming years.
Canadian public companies can be held liable by investors who purchased securities directly from the issuer and investors who purchased or sold securities on the secondary market. This applies when a prospectus or other document contains an untrue statement of material fact or omits to state a material fact that is required to be stated or is necessary to make a statement not misleading in the light of the circumstances in which it was made. As climate change risks increase, public companies will want to ensure their public disclosure is regularly reviewed and updated to reflect the material impacts and risks that climate change poses for their business, operations and results.
In Australia, a recent 11th-hour settlement may signal what to expect in Canada, where large institutional investors such as pension funds wield considerable power over the optional disclosure made by Canadian public companies. In the Australian case, a member of a superannuation fund (equivalent to a Canadian pension fund) sued the fund for failing to provide him, as a member, with information on how the fund was managing climate change risks in its investments. Although the court did not deliver a decision because the matter settled during the trial, the fund did agree that it has a duty to manage the financial risks of climate change to its investment portfolio.
We can expect to see more proceedings in Canada related to disclosure on climate change, whether in the form of regulatory investigations or civil actions. It is essential, therefore, that public companies know and fulfill their disclosure obligations. Although a company may, ultimately, be successful in defending such a claim, litigation can be onerous, costly and harmful to a company’s reputation.
In addition, as the salience of climate change and associated risks increases, we can expect that not only regulators and investors but also potential purchasers, strategic partners, securities underwriters and lenders will pay more attention to a company’s approach to climate change disclosure and the associated impacts, risks and opportunities.
CLIMATE DISCLOSURE OBLIGATIONS AND TRENDS FOR PUBLIC COMPANIES
In the coming years, Canadian public companies may see increasingly specific disclosure requirements on environmental, social and governance (ESG) matters, including climate change. Up until now, the Canadian Securities Administrators (CSA) has issued a series of guidance documents on climate-related disclosure for issuers. Although the CSA has, to date, declined to impose specific climate change disclosure obligations beyond an issuer’s obligation to include discussion of material risks, factors and developments, it has noted in increasingly definitive terms that climate change risks are likely material for issuers in many different industries.
The most recent CSA guidance on climate change, CSA Staff Notice 51-358 – Reporting of Climate Change-related Risks (Staff Notice 51-358), was released in 2019 and expands on the guidance provided in the 2017 CSA Staff Notice 51-333 – Environmental Reporting Guidance and the 2018 CSA Staff Notice 51-354 – Report on Climate Change-Related Disclosure Project).
Staff Notice 51-358 acknowledges that issuers may face difficulty in assessing the materiality and impact of climate change-related risks. Reflecting, in part, the Task Force on Climate-Related Disclosure (TCFD) framework, this staff notice indicates that when assessing climate change-related risks, issuers should consider both physical and transitional risks in both the short and long term.
More recently, the Capital Markets Modernization Taskforce established by the provincial government in Ontario recommended in its consultation report that consideration be given to requiring specific ESG disclosure consistent with the TCFD and/or the Sustainability Accounting Standards Board principles.
As securities regulators continue to focus on climate change disclosure and consider imposing additional disclosure requirements, issuers will want to revisit their climate disclosure regularly. In addition, large institutional investors (including major Canadian pension funds) may start to push for Canadian public companies in which they are invested to provide greater detail in the assessment of risks and plans related to climate change.
INCREASING FEDERAL INVOLVEMENT ON CLIMATE CHANGE DISCLOSURE
In addition to attention from securities regulators at the provincial level, federal bodies have been increasingly active in the conversation on climate change disclosure during 2020. Earlier this year, the Bank of Canada published a discussion paper advocating for improved corporate climate risk disclosure through climate scenario analysis also consistent with the TCFD framework. Central banks are increasingly focused on the risks for the economy and financial system related to climate change. Physical risks from more frequent and severe weather events and risks posed by a transition toward a lower-carbon economy are of particular concern.
Scenario analysis considers a range of plausible future scenarios (e.g., status quo, global warming is reduced to the levels committed to by states party to the Paris Agreement, states act to limit global warming to two degrees Celsius by 2100) rather than predicting actual outcomes. In order to generate scenarios that could help ensure that the full range of climate risks is being considered, the Bank of Canada, working with the Office of the Superintendent of Financial Institutions, has announced plans to develop a set of climate change scenarios relevant for Canada that should be made public in late 2021.
Given the federal government’s goal to decarbonize by 2050 and the recent introduction of specific legislation now tabled in this regard, assessing transition risks will likely be an increasing priority for issuers in a variety of industries.
The federal government is also playing an increasingly active role in mandating climate disclosure. In May 2020, as part of its response to the coronavirus pandemic, the federal government announced the Large Employer Emergency Financing Facility (LEEFF) emergency loan program. One of the conditions of participation in LEEFF is that borrowers report annually on climate risks and carbon mitigation plans. A borrower’s climate‑related disclosure report is required to highlight how corporate governance strategies, policies and practices will help manage climate-related risks and opportunities and contribute to achieving Canada’s commitments under the Paris Agreement and goal of net zero by 2050. While few companies to date have sought access to financial assistance under LEEFF, the broad scope of the required climate reporting under this program could be an indication of where reporting expectations are heading. The requirement to report on how a company will help achieve Canada’s Paris Agreement targets and the goal of reaching net-zero emissions by 2050 underscores a generalized recognition that achieving such goals will require massive efforts by both the public and private sectors.
As part of the federal government’s November 29, 2020, budget update, the government announced an initiative of the Department of Finance Canada and Environment and Climate Change Canada to create a public-private Sustainable Finance Action Council aimed at developing a well-functioning sustainable finance market in Canada. The Action Council, which will be launched in early 2021, will be asked to make recommendations on critical market infrastructure needed to attract and scale sustainable finance in Canada, including enhancing climate disclosures.
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