Canadian Mining Journal

Feature

Measuring and disclosing the financial impact of climate-related risks

How to report these important risks



Attitude shifts from institutional investors and activist shareholders are putting pressure on mining and metals companies to effectively evaluate and communicate where they stand as it relates to environmental, social and governance risks. Climate change concerns, in particular, are growing.

No sector is immune to climate-related risks. The Canadian mining and metals sector has already experienced challenges from increasingly intense and frequent weather events, higher precipitation and warmer temperatures. Heavy rains have flooded access roads, warmer weather has impacted the efficiency of workers and equipment and lower water levels have led to fewer shipping loads. Our environment will only continue to shift unpredictably, which is why companies need to address the financial impact these scenarios will have on their business.

Recommendations outlined by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) are becoming the global standard to drive these conversations.

The increasing level of shareholder activism is also pushing companies operating in high-risk sectors, like mining and metals, to pay closer attention to their disclosures and familiarize themselves with the TCFD recommendations.

Miners have started to disclose climate-related risks, but there’s still room for improvement. EY analysis finds that reporting Scope 1 and 2 GHG emissions, and targets aimed at reducing these emissions, are the most commonly disclosed climate metrics.

Although metrics and targets relating to these emissions provide insights into the direct contribution a company is making to mitigate climate change, they do not allow investors to understand whether these are the most material climate impacts associated with their value chain. Put simply, there’s still a disconnect between disclosing the approach to climate- related risks and materializing the greater financial risks posed by them.

The challenge is that effectively translating climate risks into quality, quantified financial impacts isn’t easy. Attempts at climate scenario analysis to inform the quantification of the potential financial impacts are challenged by a lack of localized climate impact data. Plus, there are few agreed upon methods and tools to aggregate impacts at the corporate and/or investment portfolio level.

Where to start?

Organizations need to start by taking a step back and developing a clear understanding of the range and magnitude of climate- related financial impacts by conducting scenario analysis that reflects both physical (changes in the physical climate that may impact future business activities) and transitional (changes in the economy, including growth impacts, sector re-weighting and other macroeconomic factors) risks. That spans everything from energy costs and carbon regulation to temperature rise and flooding. And make sure to implement cross-function engagement with finance, risks, sustainability and environmental departments in the process.

Where should disclosures go?

Given these are forward-looking and not historical disclosures, the TCFD recommends these sit within the Operating and Financial Review — where companies set out business strategies and prospects for future analysis, or in separate sustainability reports. Disclosing this information not only addresses the TCFD recommendations, but also provides companies with the new inputs into business strategy and planning, which enhances internal capability and processes.

Although not mandatory yet, Canadian mining and metals companies should treat the recommendations as so. We’re two years into the process and it will likely take several more before organizations are in the position to generate valuable data for investors. However, the earlier companies embark on this journey, the better positioned they will be to engage with investors and shareholders on the impacts and opportunities climate change presents.

MEGHAN HARRIS-NGAE is the EY Western Canada Climate Change and Sustainability Services Leader. She is based in Calgary. For more information on TCFD, visit ey.com/ca/ sustainability.


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