Climate Change Disclosure Can Do More—and Mean More
There is no strict numerical definition of materiality. Assessing materiality is a two-part process requiring an evaluation of:
1) whether an event is reasonably likely to occur; and
2) whether the event is reasonably likely to have a material effect on the company’s financial condition or operations.
Materiality assessments should include both quantitative and qualitative information. It is also important to consider the time horizon over which impacts are anticipated to determine the probability of the impact occurring.
Taking It to the Next Level: Understanding Performance From Top to Bottom
The disclosure bar has been raised. Moving forward, companies should evaluate whether and to what extent disclosure encompasses material climate change impacts (both actual and prospective/speculative) and how to relate these impacts to their financial, strategic, and operational performance. Historical performance information will need to appear alongside leading indicators (e.g., value drivers and strategy) and analysis to provide investors with a better sense of future cash flows and business potential. An integrated view of corporate climate performance can help investors and other interested stakeholders assess the company’s progress toward a similarly integrated management approach—one that positions it for future success.
The effective execution of a broader, integrated approach to climate change disclosure requires companies to present relevant, high-quality information
in a format appropriate to investor decision-making needs. Internally, the following core building blocks must be in place:
• Strategy: Companies must manage material climate change issues as matters of core business strategy, governance, and risk management, not as peripheral issues.
• Systems and processes: Companies must put processes in place to assess and proactively manage financial impacts, risks, and opportunities associated with carbon performance and climate change adaptation.
• Data: Companies must establish robust and audit-ready data and information management systems that are supported by internal controls designed to track, capture, and report climate management information.
The direction of initiatives such as the International Integrated Reporting Committee,29
Standards Board,30 Sustainability31
suggest that pressure
for integrated disclosure (including both climate and broader sustainability issues) will intensify. In addition to the issues that companies face, auditors may find it challenging to assess whether integrated climate-financial disclosures present a fair and balanced view of corporate performance. As disclosure credibility is founded on independent assurance, companies must work with their auditors to adopt relevant, audit- proof processes. In the longer term, such evolution is likely as investors, regulators, and other stakeholders push for disclosures that provide a more meaningful and complete picture of the health of the corporation.
the Climate Disclosure and Accounting for
The Final Analysis
Climate change presents potentially material financial impacts for some publicly traded companies. To properly assess risk and opportunity and differentiate companies based on climate change risk and exposure, investors are demanding a wider ESG disclosure lens. Regulators in the U.S. and Canada have confirmed that existing disclosure frameworks do not restrict such disclosure. With the CDP as a platform for initial efforts at climate change disclosure, the next step is to adopt a disclosure model that connects climate change and financial information. This model must help managers and investors understand the full range of implications for future financial growth and profitability. Companies that adopt a “top-to-bottom” approach to disclosure will find that, while challenges remain significant, the opportunities and benefits outweigh them.
This chapter was contributed by Deloitte, a sponsor of the CDP 2010 Canada Report. It was written by David Greenall and Maureen Johnson. David is the Practice Leader for Deloitte’s Sustainability & Climate Change group in Ottawa and founder and former coordinator of the CDP Canada initiative. Maureen is a Senior Consultant in Deloitte’s Sustainability & Climate Change Toronto office. The authors can be contacted at
dgreenall@deloitte.ca and
maurjohnson@deloitte.ca.
29
www.integratedreporting.org. 30
www.cdsb-global.org. 31
www.accountingforsustainability.org.
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