b'CLIMATE CHANGEin Canada could substantially affect theTwo recent announcements THE ROLE OF INSOLVENCY valuation of assets of many companies.provide examples. PRACTITIONERSPension funds are major holders of long- The Office of the Superintendent ofThe role of Canadian trustees in respect term assets; they are now stress testingFinancial Institutions (OSFI) reportsof climate change will be important. their existing asset portfolios to quantifythat climate-related catastrophes andWhile, to my knowledge, no insolvency the potential impact of changes in carbon- weather-related losses are now a keyhas been attributed directly to climate based asset prices, in order to guide theirsolvency risk to the insurance sector.change in Canada yet, many factors are investment decisions (OSFI 2019). For property and casualty insurers,placing tremendous pressure on the fossil Depending on the nature, speed and focusunderwriting risk is growing as climatefuel, mining, forestry and transportation of these changes, transition risks may posechange is increasing the frequency andsectors. For companies that file insolvency varying levels of financial and reputationalmagnitude of catastrophic claims, withproceedings, trustees will be critically risk. While some aspect of climate risk isthe Canadian P&C industry sufferingimportant to assisting with interim faced by most companies, the materialitya 67 per cent decline of net income inand transition financing, in advising of different types of risk will vary between2016, mainly as a result of such losses.companies on director and officer liability companies and industries. While lawsuitsOSFI notes that while most insurersclaims, and to finding ways to manage have not yet really appeared in Canada, ashad geographically diversified portfoliosmyriad claims arising out of acute events of November 2018, 1,690 climate changeand adequate reinsurance to cover theseor chronic solvency issues. There is also a cases had been filed in 25 countrieslosses, that cushion is likely to change.role for insolvency practitioners in early against companies for failing to disclose orFor life insurers, as different approachesintervention, prior to insolvency, to help manage climate-related risks. are developed to address climate change,with financing, forbearance and a strategy investment decisions must be made withfor the business going forward where it Climate-related risk may be minor oran eye to fluctuations in carbon-linkedis viable.While restructuring is a public highly significant to a firms economicasset prices. OSFI has told all insurancepolicy goal, liquidation is becoming activities. The fiduciary duties of directorscompanies to immediately analyze andcommon, and trustees will need to and officers requires that they havequantify their exposure to carbon-basedeffectively wind up businesses and address undertaken efforts to identify materialasset repricing and develop strategicthe range of stranded assets, employee, risks to their business from climate changeapproaches for making the transitionsupply chain and other claims arising in the same way that they must assessto fewer carbon-linked assets, key toout of these failures. Just as with the other financial risks. They shouldhavemanaging solvency risk. In the longer2008 global financial crisis, there could appropriate strategies in place to manageterm, OSFI expects companies to includebe a domino effect of small business and these risks where they are material to thestress analyses and their responses inconsumer insolvencies as communities companys solvency, and have effectivetheir own Risk and Solvency Assessmentdependent on insolvent larger companies oversight and monitoring of the actions of(OSFI, 2019). experience financial distress.individuals charged with managing theseOn a more positive note, climate change risks (Sarra, Fiduciary Obligation 2018). On the consumer side, in April 2019,represents opportunities as well as risks, In the United States, bankruptcies directlythe Office of the Superintendent ofand insolvency practitioners could attributable to climate change haveBankruptcy issued guidance on thecontribute meaningfully to positive commenced. For example, in early 2019,Climate Action Incentive payments,transition by identifying new capital and PG&E filed Chapter 11 US Bankruptcywhich is the Federal carbon tax rebatenew product markets for businesses in Code proceedings, one of the largestprogram that will be administered in thea climate-smart economy. For example, utility bankruptcies in history.Listingform of tax credits effective the 2018 taxCanadian clean technology producers $51.69 US billion in debts, $30 USyear. It applies to the provinces that havewill benefit from increased investments in billion are claims related to the Campopted out of the federal carbon pricingelectricity systems. Green bondFire that killed 85 people and destroyedsystem (Manitoba, New Brunswick,proceeds allow companies to fund 18,800 buildings. PG&E reported thatOntario, and Saskatchewan). Any Climateenvironmentally beneficial economic it is probable that investigators willAction Incentive payment received by aactivities in a manner that diversifies determine that its equipment ignitedbankrupt for the calendar year in whichand expands their investor base, and given worsening drought conditions duehe/she became a bankrupt is considerednew infrastructure partnerships funds to climate change. Fire victims suingproperty of the bankrupt divisible amongare available to enhance the transition. PG&E claim the company did not adapthis/her creditors under s. 67(1)(c) ofThese many initiatives could mitigate the quickly enough to the increased risksthe Bankruptcy and Insolvency Act (BIA).solvency risk of businesses significantly created. One could expect to see similarAlthough the amount paid is based onand trustees can be at the forefront with filings in Canada in the next few years. the number of members in the familytheir professional advice. RSunit, the whole amount vests with the CANADIAN INSOLVENCYtrustee as property of the bankrupt. ForDr. Janis Sarra, Presidential Distinguished REGULATORS AREany subsequent year income tax refundsProfessor and Professor of Law, University RESPONDING that include Climate Action Incentiveof British Columbia, is currently writing an Trustees will have to be current onpayments, they are to be used in thein-depth paper on climate and insolvency regulatory changes related to solvency andcalculation of surplus income paymentsrisk for the next Annual Review of climate-risk as well as the business risks.under s. 68 of the BIA. Insolvency Law. Stay tuned.Volume 19 Issue 2 Rebuilding Success 25'