A Climate of Disclosure

Gibson Energy is a fairly low-profile oilfield service company based in Calgary, mostly operating pipelines, oil storage facilities and a refinery in Moose Jaw, Sask. It’s been happy to exist in the shadow of the big energy producers that tend to make headlines. But in April, Gibson turned heads when it ventured where no other public firm in the North American energy industry dared go. It agreed to a sustainability-linked credit facility with its bank, BMO Financial Group, that ties its borrowing costs to ambitious ESG (environment, social and governance) targets.

The tangible goals, all pegged to 2025, include reducing greenhouse gas emissions by 15 per cent; increasing the number of women in its workforce to 40 to 42 per cent and of racial and ethnic minorities to 21 to 23 per cent; increasing the representation of women on its board to at least 40 per cent; and having at least one board member who is Indigenous or from a racial or ethnic minority. 

Optimists would draw two conclusions from this news: One, we are finally seeing the dawn of sustainability-linked lending in Canada. And two, if an energy company is willing to tie its fortunes to ESG—a company that released its first sustainability report only one year ago—surely this signals a shift in thinking about sustainability and corporate accountability across the board. Alas, reality has not quite caught up with aspirations. 

Where’s the plan?

If any country needs a kick in the rear it’s Canada—the only Group of Seven nation whose emissions have risen since the Paris climate agreement was signed in 2015. Unfortunately, when it comes to firms disclosing their emissions, developing mitigation plans or setting sustainability targets, Canadian companies are, at best, middle of the pack against global competitors.

That’s the conclusion of a report recently released by the Institute for Sustainable Finance (ISF), based at Smith School of Business. The ISF report assessed the climate target and disclosure performance of more than 200 of the largest TSX-listed companies included in the S&P/TSX Composite Index. It found that only 27 per cent of these Canadian companies have set climate targets, compared to 53 per cent of companies in the S&P 500 Index in the U.S. and 67 per cent in the FTSE 100 Index in the U.K. And only two-thirds of these Canadian firms disclose greenhouse gas emissions. That’s on par with the U.S. but well below public firms in the European Union and U.K. In fact, the disclosure rate is 30 per cent higher in the U.K., which is farther along the path of de-carbonization than resource-intensive Canada. 

These figures are bound to improve in the coming years, either through force of competitive pressure or government regulation. Big investors are demanding more and better climate-related information from companies seeking to raise capital. If investors cannot get the information they need to make capital allocation decisions and assess risk, they will avoid these firms, says Sean Cleary, ISF chair and BMO Professor of Finance at Smith, who co-authored the report with Andrew Hakes, an ISF research associate.

The ISF report does offer hope for those who prefer to see the glass half full. It doesn’t take many firms to make a difference on climate issues. While only 60 companies in the TSX main index set climate targets, these companies account for half of the index’s emissions. According to the report, achieving those targets could lower the index’s carbon profile by close to 20 per cent by 2030. And of those 60 firms with stated targets, 15 tie executive compensation directly to those targets. Another 28 have incentives loosely related to climate-related issues. That’s a sign of serious intent.

“The bad news is we are clearly behind our peers—particularly in Europe and the U.K.,” says Cleary. “The good news is those Canadian companies that are disclosing greenhouse gas emissions and setting climate targets are among our largest emitters. If the big emitting firms on the TSX that have climate targets successfully achieve them, that is going to have a significant impact.” 

Getting firms to sign on to ESG

What might convince more Canadian firms to set targets and disclose climate-related impacts from their operations? For one, greater clarity on the disclosure framework, standards and metrics that investors and governments require.

Companies now have to wade through a thicket of acronyms that define international and industry-specific disclosure regimes. Convergence of standards has been slow in coming. Stakeholders in Canada seem to gravitate to the frameworks from the Sustainability Accounting Standards Board and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

What might also motivate Canadian firms would be fierce conversations with their bankers and investors. Big pension plan investment managers have been quite vocal in calling for companies to measure and disclose their performance on material, industry-relevant ESG factors (though they have also recently increased their holdings in the oil sands). But this doesn’t necessarily reflect the priorities of the greater investment community in Canada. 

A recent report from the Canadian chapter of the UN Principles for Responsible Investment (PRI) provides a countervailing view of how aggressive Canadian asset owners are in pushing the ESG agenda with public companies in their portfolios. PRI is a global network of investors that commit to making business decisions through an ESG lens; it has 189 Canadian signatories. The report found that while most Canadian signatories consider ESG in their proxy voting, few engage with company executives to push for change.

As reported by the online publication The Logic, more than 20 per cent of Canadian signatories scored zero on how their own firms engage directly with companies in their portfolio, and almost 25 per cent scored zero on collaborating with other firms to press for change in any of their holdings. By contrast, in the U.K., under 10 per cent of PRI signatories scored zero on collaborative and individual engagement, and 20 per cent scored zero on engagement with service providers.

Clearly, sustainability reporting in Canada and elsewhere is a work in progress or, as Cleary sees it, a journey. “That journey starts with measuring and disclosing emissions, setting targets and establishing plans to achieve those targets, and then going down that path and seeing how successful you can be,” he says. “Some haven’t begun that journey and some are in the middle with loose plans, and others are well along the way. We need to get all these firms a road map on how to move forward.”