The evolution of climate accounting

Canadian companies jockey to stay ahead of evolving landscape for sustainability reporting requirements

Arc’teryx chief of staff Drummond Lawson was part of the team that started to shift Arc’teryx toward reducing greenhouse gas emissions | Chung Chow

This article was originally published in BIV Magazine's Climate Change issue.

Fast-growing Vancouver outdoor-gear maker Arc’teryx’s executives have long been aware that increasing sales translate into a greater burden on the environment.

Drummond Lawson, chief of staff at Arc’teryx and executive responsible for sustainability, remembers the company having an epiphany about five years ago that set it on its current course as a corporate leader in reducing its environmental impact.

“There was this penny-drop moment,” he says. “We started saying, ‘Actually, our success is part of what’s creating these increased impacts on the environment.’”

Arc’teryx is one of countless companies taking action to reduce corporate contributions to climate change.

What is fueling corporate ambition to lead change is the likelihood that governments, or securities exchanges, will require entities to take action, and to alert stakeholders about the environmental risks companies face. 

Lobbying efforts are afoot to have Minister of the Environment and Climate Change Jonathan Wilkinson require federally regulated companies, publicly accountable enterprises and Crown corporations to disclose climate-related financial risks. 

Specifically, the aim of some climate change activists is to require those organizations to adhere to a global framework recommended by the Task Force on Climate-related Financial Disclosures (TCFD).

The TCFD is a voluntary organization, but Canadian Climate Law Initiative (CCLI) principal co-investigator Carol Liao says she believes that regulations mandating that companies and other organizations adhere to the TCFD framework, and its recommendations, are around the corner. 

Governments in New Zealand and the U.K. have already started to require that companies disclose climate-related financial risks, she says, adding that she believes that it is just a matter of time before this requirement becomes law in Canada. 

The international Financial Stability Board, based in Switzerland, created the TCFD in late 2015 to develop voluntary, consistent, climate-related, financial-risk disclosures for companies to use when providing information to investors, lenders, insurers and other stakeholders. 

The TCFD then released its final recommendations in June 2017, after consulting global stakeholders.

Its recommendations aim to make markets more transparent and spur capital investment into a lower-carbon economy, as envisaged by the Paris Agreement on climate change.

To help executives stickhandle the legalities of the TCFD framework, the CCLI provides free advice, Liao says.

She equates that advice to being “like a sourdough starter for their climate journey.”

Corporate directors and officers already have an obligation to be proactive, and to critically evaluate and address financial and other risks – as well as opportunities – associated with an evolving climate, she says.

“Canadian courts have given judicial notice that climate change is real,” says Liao. “Not many people know that, but judicial notice is when a fact is so well known, and proven, that it cannot be reasonably doubted. So you don’t need to prove to Canadian courts that climate change exists. The courts have already accepted that fact as evidence.”

Court acceptance that climate change is real means that executives could be sued if they do not provide a duty of care to their companies by being open about climate-related financial risks.

Shareholders, for example, could sue if they suffer losses after corporate fortunes tank when executives should have given the public a heads-up.

Liao says some major risks for executives to contemplate, and reveal publicly, include ones that relate to regulatory policies changing. Supply chains could be disrupted, causing shortages and possibly a lack of water, she says.

Warnings to investors should also consider the potential for extreme temperature changes and sea level rises, as well as what those phenomena might mean for employee safety or employees’ abilities to commute. 

Companies face the risk of litigation, as well as reputational damage, if they do not take action to navigate the changing climate, she adds. 

As for Arc’teryx, its journey to being leader in reducing its impact on global climate change was hastened by the World Resources Institute (WRI) announcing that it planned to create a set of rules for how apparel brands could set sustainability targets based on climate science.

The WRI started working with the Sustainable Apparel Coalition (SAC) – the apparel, footwear and textile industry’s advocate for sustainable production – as the two organizations sought to build guidance for the industry as a whole.

“We thought that this was such a good idea that we came on as one of the early partners,” Lawson says. 

He adds that the SAC was an effective partner to help the WRI transform the apparel sector because SAC has representation from global giants, such as Nike, Adidas and H&M.

The sector guidelines created by the WRI-SAC partnership were based on science-based targets, which was important because companies could trust that suggested actions would genuinely do some good.

“The science-based targets are very clear rules to say, ‘Are these climate actions by a given company sufficient for them to be on a stable climate trajectory?’” Lawson explains.

That ideal trajectory would be for a company to cause greenhouse gas emissions that will not contribute to global warming greater than 1.5 degrees Celsius of temperature change by 2030, which is the basis of the Paris Agreement.

Arc’teryx’s commitments as part of the science-based targets are to reduce Scope 1 and Scope 2 greenhouse gas emissions by 65% by 2030, compared with what it produced in 2018.

Scope 1 emissions are direct emissions, such as those from a chimney on a factory, while Scope 2 emissions are ones that may take place elsewhere but result from corporate activity. For example, using electricity at an owned or controlled factory would be a Scope 2 emission. 

Arc’teryx’s other commitment is to reduce Scope 3 greenhouse gas emissions by 65% per unit of value added by 2030, from what it produced in 2018.

Scope 3 emissions are indirect emissions, such as those produced by a company that supplies zippers or down.

The key with the Scope 3 target is that Arc’teryx can still increase sales and grow its business – it just aims to reduce emissions by 65% on each subsequent sale.

So far, Arc’teryx has made some concrete steps to meet these targets. 

One thing the company has done is buy 100% renewable energy credits. Those are different from buying carbon offsets, because the purchases actually finance renewable energy that is pumped into energy grids, Lawson explains.

Another initiative Arc’teryx has embarked on is the use of lower-impact materials. For example, the company is increasingly buying materials that have dye incorporated directly into the polymer. This differs from buying products that have a neutral colour and have to be dyed. 

Energy efficiency is another prong in the company’s emission-reduction plan, and includes next-generation air conditioners and lower-emission lighting. 

Finally, Arc’teryx has started a program that Lawson calls its “circular economy.”

The retailer allows customers to sell items back to the company at its stores, at a discounted rate. The items are then sold via a partner online in the U.S.

There is a goal to have these sales be offered to customers in B.C. but so far, the company’s partner, Trove, does not have operations in Canada.

“We build our products to a very high standard of durability, and oftentimes they will outlast the first users’ interest in them,” Lawson says. “In our books, that’s a great thing because there’s another user waiting and we want to build an easy marketplace to get the product on to its next use.” 

Read more: Unique ESG law group launches in Vancouver

This article was originally published in the April 2021 issue of BIV Magazine under the title 'Climate accounting.' The digital magazine can be read in full here.

gkorstrom@biv.com

@GlenKorstrom