A bank or a company says it’s serious about climate transition. But, how do we know that’s true?
This is the crux of a shareholder proposal we’ve re-filed this season alongside other investors, requesting TD put more meat on the bone of its transition plans. The bank had the largest jump in financing for fossil fuels in the world in 2022, and ranked dead last out of 100 banks assessed for their low carbon vs. fossil fuel financing ratio by Bloomberg NEF (December 2023), so you can see why we are skeptical about their transition activities.
At the same time, why do we need to pursue this issue via shareholder proposals at all? Why aren’t regulators stepping in to require all major companies follow through on their climate commitments with credible transition plans? After all, the system itself is at risk if companies aren’t doing what they say they are doing, and also letting climate risk build.
It turns out that regulators are starting to fill this gap, just not as much in Canada.
As many of Canada’s large banks and companies are cross-listed on international stock exchanges, they would be wise to meet the most stringent of these jurisdictions’ transition plan disclosure standards. Similarly, Canada’s financial regulators need to play catch up.
US SEC Climate Disclosure Rule & transition strategy disclosure
Earlier this month, the US Securities Exchange Commission (SEC) adopted the Climate Disclosure Rule. Among other things, it requires companies that are listed on US stock exchanges to disclose key details of any climate plans they promote to shareholders (at 132).
To be clear, the Rule does not require companies to develop a climate plan, but that if they adopt one, they must disclose key information regarding the plan. This is the case because:
[…] information regarding the plan is important to help investors evaluate a [company]’s management of its identified climate-related risks and assess the potential impacts of a [company]’s strategy to achieve its short-or long-term climate-related targets or goals on its business, results of operations,and/or its financial condition. Moreover, a [company]’s transition plan may have a significant impact on its overall business strategy, for example, where companies operate in jurisdictions with laws or regulations in place designed to move them away from high emissions products and services. Because the steps a [company] plans to take pursuant to its transition plan may have a material impact on its business, results of operations, or financial condition, investors have sought more detailed disclosure […]. (at 132)
The SEC considers key details of a company’s climate plan to be the “strategy and implementation plan to reduce climate-related risks, which may include a plan to reduce its GHG emissions in line with its own commitments.” (at 125) This includes any targets designed to help the company achieve its plans, and the reasonably likely material impact of any target or goal, and reporting progress towards these targets. In addition, the company must also provide “quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the transition plan disclosed.” (at 855)
The final rule will become effective 60 days after publication in the Federal Register, and compliance will be phased in from 2025 to 2033 (see SEC Fact Sheet).
EU Due Diligence Directive & transition plan disclosure
The EU Corporate Sustainability Due Diligence Directive is now set to become law following the decision by the EU Council to approve the legislation on March 15, 2024. As a result, among other things, large EU companies will have to adopt and put into effect a transition plan making their business model compatible with a 1.5-degree future. The transition plan should include the company’s time-bound climate change targets, key actions on how to reach them and an explanation, including figures, of what investments are necessary to implement the plan.
The Directive applies to companies with at least 1,000 employees and €450 million turnover, but will be phased in over time, with complete coverage within 5 years.
The European Parliament is expected to pass the revised Directive on 24 April 2024, completing the formal legislative process. After that, implementing regulations will need to be passed in the 27 member states.
This adds to the EU’s pre-existing Corporate Sustainability Reporting Directive, which sets the framework for sustainability reporting, including for transition plans. As with the Due Diligence Directive, some implementing legislation needs to be adopted by member states. France was the first Member State to transpose it into national law in January of this year, followed by Finland, Hungary, Romania, and Norway earlier this month.
UK Transition Plan Taskforce & related regulation
The UK Transition Plan Taskforce is considered to have created the gold standard in transition plan disclosure frameworks. Though its framework is not itself regulation, it informs pre-existing UK climate-related disclosure requirements for publicly listed companies to align with the TCFD’s recommendations. These TCFD recommendations include disclosing plans for transitioning to a low carbon economy.
The TPT Framework will also inform the forthcoming UK transition plan disclosure-specific regulation and the UK Sustainability Disclosure Standards (based on those developed by the International Sustainability Standards Board), both expected later this year.
IFRS S2 is the climate-related disclosures aspect of the ISSB standards. It includes several provisions relevant to transition planning, including the requirement that an entity disclose information about any climate-related transition plan it has.
The Canadian situation: OSFI B-15 & draft CSSB
In Canada, we are further behind.
The federal regulator of banks and insurance companies – the Office of the Superintendent of Financial Institutions (OSFI) – has published B-15, which requires these institutions to have a “climate transition plan,” but unfortunately, does not flesh out what that means or note when this provision will come into effect.
Right now, several federally-regulated institutions claim to have such a plan, but like TD are missing key details, and without more guidance from OSFI will likely choose to be as vague as possible in order to preserve their ability to maintain business as usual.
Canada’s own version of the ISSB climate-related disclosures are in development, but are looking to have delayed compliance periods. Once they are finalized – hopefully later this year – they will need to be adopted by provincial and territorial security regulators.
Meanwhile, we are left with inadequate tools like shareholder proposals to try to drive greater accountability in transition planning. Let’s hope Canada’s regulators move more quickly to catch up.
