Drilling for disclosure: reducing the over-capitalization risk in Canada's oil and gas sector

Climate change has left Canadian investors exposed to significant risk from the market over-capitalization of the oil and gas sector. One of the identified sources of this over-capitalization is the information asymmetry that exists between firm managers and investors. Without access to business specific climate change information, investors cannot distinguish between “good” and “bad” investments; resulting in an incorrect valuation of firms. A content analysis approach is applied to the public disclosure documents issued by 30 Canadian oil and gas companies to identify limitations in Canada’s existing regulatory system. The conclusions are that climate change disclosures are of low information value and inadequate for investors to incorporate climate change considerations into their investment decision making processes. Furthermore, the materiality standard governing disclosure requirements is identified as the primary barrier to increased disclosure quality. A hybrid disclosure framework that links greenhouse gas emissions information to financial reporting obligations is presented as the best of four policy options.