While Canadian energy company disclosures are becoming more assertive, what needs improvement is future-focused risk analysis as these companies’ progress.
When it comes to risks, we found that most energy companies focus on capital infrastructure and carbon pricing risks, leaving others poorly defined. While companies recognize climate change as a threat, they don’t explore the related risks in detail, and few can quantify their impact on the company. This means that, as the world transitions to net zero, Canada’s energy companies face climate-change-related risk exposure and risk being underprepared for opportunities that arise.
In addition to transition risks, companies also need to consider physical risks that can be material and highly unpredictable, such as climate-related heatwaves and flooding. The recently released report from the UN’s Intergovernmental Panel on Climate Change (IPCC) Working Group I Contribution to the Sixth Assessment Report clearly presents evidence of worsening risks. These occurrences affect the energy sector and other sectors of the economy and can no longer be overlooked.
Climate scenario analysis is critical to robust risk assessment
As we examined Canadian energy company disclosures, the missing element was clear: identified risks and opportunities are not tied to scenario analysis.
Within the TCFD framework, scenario analysis is the critical planning stage that turns theory into tangible, actionable strategies. Scenario analysis is vital for leading-class reporting because climate change risks are inherently longer, longer-term, and more complex than traditional business risks.
As reporting becomes commonplace, regulators and capital markets will increasingly look to see whether companies have performed robust risk assessments that include scenario analysis.
So far, only 41% of companies globally conduct scenario analysis, and only 15% feature potential implications of climate change in their financial statements.
Then there are various forms of scenario analysis that help companies see the path forward and update their business models accordingly. Examples include detailing what becoming net-zero looks like for different economic sectors and compensation plans and offsetting. By assessing and managing various scenarios — from most likely to worst-case — companies can enhance their preparedness and satisfy stakeholders.
Moving to a net-zero future
As the scientific evidence grows, more compelling and climate change projections come to life, the requirement for immediate and more robust action is clear.
Canada’s energy companies have heeded the warnings, which has become clear as their decarbonization strategies have begun to take shape. While climate change may be their biggest long-term challenge, it also brings economic opportunity.
Energy companies that are openly sharing their progress have an opportunity to attract investors and green financing. What’s more, the sector is demonstrating a willingness to adapt and innovate, supported by technological developments in carbon capture, utilization, and storage or CCUS, hydrogen, grid modernization and small modular nuclear reactors.
Canada is working hard to position itself as a leader among global economies, but we must consider that we’re also among those with the farthest to go. Our hard-to-abate sectors are still essential to the global economy, at least short to medium term. Enhanced disclosures from energy companies mean we’re headed in the right direction. Still, to move the needle in any meaningful way, those disclosures need to lead to concerted action involving multiple players in the value chain.
As the transition to net-zero continues to gather pace, climate-related risks and opportunities should be front and centre for all Canadian organizations as they plan their futures.