In March 2009 on the Green Business website, we posed the question, “Is carbon disclosure still relevant in a volatile economy?” The answer was a firm “yes.” At the time, environmental concerns may have been muted by more pressing issues, but legislators were continuing to push for regulations to reduce our carbon footprint. 

Only a few months later, signs of economic recovery suggest that the transition to clean and green will proceed at a faster rate than ever. Businesses—particularly those in the power, oil and gas, cement, chemicals, mining, smelting and refining, steel, and pulp and paper sectors—are anticipating mandatory climate change disclosure requirements, and many are getting ahead of the curve with voluntary reports. In Canada, an important deadline is quickly approaching. According to the federal government’s latest plans, the first reporting period starts in 2010 and the first trial compliance period starts in January 2011. 

The Canadian government’s new regulations will specify what reduction targets reporting companies will be required to achieve. As a direct result, all compliance and financial risks will need to be reflected in the Management Disclosure and Analysis (MD&A) and in financial statements on a quarterly basis where material. These statements will in turn require audit and/or disclosure committee sign-off and have implications for corporate governance. 

The good news is that best practices are quickly developing, and the opportunity to make proactive climate change management a competitive advantage is gaining ground. In this article, we’ll discuss the companies most likely to be impacted, the general reporting requirements, and the specific activities that organizations in the targeted sectors should now be undertaking.

Complex reporting requirements
If you operate in one of the above-mentioned sectors, you may be aware of the future reporting requirements, but unsure whether your company qualifies. The Canadian government announced on July 15, 2009 that the minimum threshold for greenhouse gas (GHG) reporting under the National Pollutant Release Inventory program in 2010 will be lowered from 100,000 to 50,000 tonnes. For industrial operations, there is a direct link between production data and the vast majority of emissions. It is broadly anticipated that the threshold will be eventually lowered to 25,000 tonnes annual emissions to align with the U.S. standard, which will include virtually all commercial scale facilities.  To complicate matters further, regulations exist at a variety of levels: federal, provincial/territorial, bi-national as in North American agreements, and multi-national as in COP15 Copenhagen.

The issue of carbon regulation is not going away—in fact, the opposite is true. Compliance is looming, and it will likely be a complex exercise impacting data collection, information systems, and verification procedures. To prepare for this new reality, companies in the currently identified sectors should have a strategy in place. They should be examining their carbon footprint, reviewing their disclosure policies, and assessing their information management systems. As the various regulatory regimes have the potential to conflict, overlap, harmonize—or even disappear, they need to understand the full range of possibilities and which options are critical to their operations. It may seem like a daunting to-do list, but the roadmap has been written and help is available. 

A comprehensive approach to climate change disclosure
Assuming the Canadian government stays on track with its timetable, companies will need to quantify carbon risk in their fiscal 2011 MD&A—just over a year away. Their approach to disclosure should be supported by a robust (ideally automated) climate change management and measurement regime that extends across the business, integrates with existing reporting systems, and covers other partner organizations in the supply chain.

They should also look for opportunities to tie carbon data into existing business intelligence and enterprise resource planning systems, given the likelihood that regulatory information will need to be integrated with financial statements. Systems that allow organizations to aggregate their carbon positions and prepare consolidated reports will be invaluable, particularly if they are required to report on a quarterly basis.

The disclosure requirements now facing large industrial emitters may quickly become a reality for other Canadian companies. While the extent of these changes is still unclear, preparing in advance is prudent. To do so, companies should adopt the following elements of an effective disclosure regime:

• CEO leadership commitment to carbon disclosure and transparency: The tone from the top is critical to communicating the importance of full and accurate information disclosure across the organization and to key stakeholders.
• Disclosure committee: All climate change related issues and associated plans for disclosure should be discussed with and presented to the disclosure committee. Where such a committee doesn’t exist, someone in a position of authority needs to be held accountable for approving the disclosure.
• Carbon governance: In order to ensure accuracy, consistency and integrity for disclosure purposes, there must be a clear understanding of roles and responsibilities. All staff with a role to play in carbon emissions information tracking, collection, measurement, and reporting can then be held accountable for achieving related goals and objectives within their control.
• Carbon information management system: Over time, leading organizations may want to implement a carbon information management system that produces timely reports and forecasts on demand. In addition to vastly simplifying disclosures, the existence of a robust carbon information management system can help companies meet their financial audit and/or emissions assurance requirements, as well as support management reporting needs.
• Disclosure controls and internal controls: Effective climate change disclosure requires the development of internal and disclosure controls to assure the integrity, accuracy, and verifiability of performance information. If companies are using spreadsheets to report actual emissions, additional focus on internal controls will be required. To promote efficiency, such controls should be integrated into an organization’s existing governance framework.
• Third-party verification: External audit of reported information and the carbon data management process as a whole is important to assure companies, regulators, investors, and other stakeholders of disclosure credibility. In some jurisdictions, external verification of emissions reduction will be required to participate in cap-and-trade markets.

Challenges and risks of disclosure
Sufficient standards and interpretative guidance—including forthcoming information from the Canadian Institute of Chartered Accountants (CICA)—exist today for companies to properly disclose on material climate change risks, carbon assets and liabilities, and climate change risk management practices. These can address the challenges of getting started by:

• Determining the ‘materiality’ of climate change
• Deciding how to account for carbon assets and liabilities
• Assessing the aggregate impact of climate change
• Developing and describing climate change and carbon strategy

The variety of channels available for organizations to disclose information adds to the confusion—what must we do, and what should we do? Best practices suggest that more is better than less: key stakeholders such as investors and business partners want a full sense of a company’s risk exposure and positioning on this issue. As the linkage between environmental management and overall management becomes better correlated through indices such as the Dow Jones Sustainability Index (DJSI), effective participation in initiatives such as the Carbon Disclosure Project will become more important.

However, disclosure does introduce new risks, such as inconsistent information being released through various channels and the potential for its misuse. Additionally, the Canadian regulations as currently proposed will be part of the Canadian Environmental Protection Act (1999), which has sanctions for non-compliance under the Criminal Code.  If penalties are not covered by Director and Office insurance, individuals may be personally liable.

We are entering a carbon-constrained world where the targets will get progressively tighter. Mitigation and adaption, not inaction, are the only options. All companies can benefit from a comprehensive scenario analysis to help make the build-or-buy decisions that will form their strategic response. Those approaching the issue proactively will find themselves in a good position to navigate the changes—and seize the opportunities that lie ahead.

Valerie Chort is the National Leader of Deloitte’s Sustainability & Climate Change group. Skip Willis is a senior advisor to Deloitte on climate change, and the Principal of Willis Climate Group. Contact Valerie at vchort@deloitte.ca and Skip at erwillis@deloitte.ca.

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