- Since the proposed National Instrument 51-107 Disclosure of Climate-related Matters and its Companion Policy 51-107CP Disclosure of Climate-related Matters (collectively, the "Proposed Instrument") was released by the Canadian Securities Administrators (the "CSA") on October 18, 2021, participants from the mining sector have noted that the Proposed Instrument, as currently drafted, could introduce burdensome reporting obligations on junior mining issuers.
- The Proposed Instrument is yet to be finalized, however the CSA has noted that it considers international consistency between reporting obligations to be key in order for Canadian issuers to compete effectively in domestic and global capital markets alike. The CSA also appears to be mindful of the differential impact of a disclosure regime on issuers of varying sizes and financial resources.
- In order to best prepare themselves to meet the reporting obligations under the Proposed Instrument, junior mining issuers should be mindful of "greenwashing," particularly when meeting their existing continuous disclosure requirements, and should consider implementing certain climate change governance mechanisms.
As we discussed in our March 2022 article, Canadian Securities Administrators Propose Climate-Related and ESG Disclosure Requirements, on October 18, 2021, the Canadian Securities Administrators (the "CSA") released the proposed National Instrument 51-107 Disclosure of Climate-related Matters ("NI 51-107") and its Companion Policy 51-107CP Disclosure of Climate-related Matters (collectively with NI 51-107, the "Proposed Instrument"). In accordance with the disclosure standards prescribed by the Task Force on Climate-related Financial Disclosures (the "TCFD Framework"), the Proposed Instrument introduces disclosure requirements regarding climate-related matters for reporting issuers.1
If the Proposed Instrument is adopted in its current form, publicly listed mining companies would be required to disclose their climate-related governance and risk management procedures and, if material, their climate-related strategy and reduction metrics and targets, which includes disclosure on greenhouse gas ("GHG") emissions.
When the Proposed Instrument was released, the CSA commenced a comment period that expired on February 16, 2022. In total, 131 comment letters were received, four of which were submitted by participants in the mining sector, including one mining issuer and three mining industry associations. The feedback received during the comment period from these mining sector participants is summarized below, including relevant CSA updates since the expiration of the comment period. The Proposed Instrument was expected to come into force as early as December 31, 2022, but adoption has been delayed, possibly in light of some of the factors discussed under the heading "CSA Comment Letter on International Climate-Related Disclosure Developments" below, as well as other comments received from stakeholders during the comment period.
II. Climate Change and ESG in the Mining Sector – Background and Implications for Junior Mining Issuers
Various international and domestic stakeholders have identified a growing need for businesses to plan for and respond to the impacts of climate change, including participants in the mining industry.
Most recently, it was announced at COP15: The UN Biodiversity Conference held in Montréal ("COP15") that Canada, Australia, France, Germany, Japan, the United Kingdom and the United States launched the Sustainable Critical Minerals Alliance (the "Alliance") to further the development and promotion of sustainable and inclusive mining practices. Among other commitments, members of the Alliance have committed to assisting in the fight against climate change by reducing GHG emissions and working towards achieving net-zero GHG emissions by no later than 2050 through the promotion of mining, processing and recycling processes that advance sustainability through environmental, social and governance ("ESG") standards. Furthermore, on December 9, 2022, the Honourable Jonathan Wilkinson, the Canadian Minister of Natural Resources announced the launch of the Canadian Critical Minerals Strategy (the "Strategy") at COP15 which, in part, maps out a route by which Canada may promote climate action and strong environmental management in the mining industry. As summarized in our January 2023 article entitled Federal Government Unveils Canadian Critical Minerals Strategy, the Strategy places a particular emphasis on advancing exemplary ESG standards and the reduction of GHG emissions through the deployment of clean technologies and low-GHG emission industrial processes, among other related practices. Given the pressure on the mining industry to play an active role in the fight against climate change, it can be reasonably expected that the disclosures mandated by the Proposed Instrument will face a high degree of scrutiny from the CSA and other regulatory bodies, investors and other stakeholders.
While mining issuers of all sizes would be required to comply with the Proposed Instrument, unlike larger or more established mining issuers, the disclosure requirements may be particularly challenging for junior mining issuers who may not have engaged in the type of reporting contemplated in the Proposed Instrument, or implemented the infrastructure necessary to identify climate-related risks and spot climate-related opportunities.
This article aims to assist junior mining issuers in preparing for the depth and breadth of climate and ESG-related reporting that would be required under the Proposed Instrument, including some initial, practical steps that such issuers may take to ensure such disclosures, if required as currently drafted in the Proposed Instrument, are factual, balanced and transparent.
A. Proposed Instrument – Summary of Mining Sector Commentary2
The general consensus among the commentators from the mining sector was that the reporting obligations under the Proposed Instrument would be overly burdensome for junior mining issuers. It was noted that it is more feasible for larger mining issuers, whose GHG emissions will likely exceed the 10,000 tonne/year CO2eq legal threshold for reporting, to comply with the Proposed Instrument, as currently drafted. By contrast, the GHG emissions for junior mining issuers are largely generated from travel and program mobilization, and not activities that are representative of the wider mining industry, such as hauling and milling. Accordingly, the mining sector commentators argued that to require junior mining issuers that engage in exploration activities to disclose their Scope 1 GHG emissions – and even their Scope 2 and Scope 3 GHG emissions – under the Proposed Instrument would be unnecessarily comprehensive. Furthermore, it was noted that junior mining issuers may not be professionally trained in climate change disclosure, and those with early-stage mineral exploration activities do not typically engage in long-term planning. As a result, it was suggested that such issuers would likely not have a long-term climate strategy in place and the implementation of a GHG emissions monitoring scheme would be overly complicated for such issuers. One commentatoralso suggested that junior mining issuers would benefit from additional guidance from the CSA in terms of how smaller emitters can prepare themselves for this proposed disclosure regime, and that the CSA should consider adopting a less complex disclosure scheme for such companies.
It was also suggested that compliance by junior mining exploration companies with the disclosure requirements in the Proposed Instrument would be prohibitive from a cost perspective given that financing made available to such companies is largely earmarked for the exploration and evaluation of potential minerals. On a similar note, certain commentators from inside and outside of the mining sector were more supportive of the CSA's suggested approach in requiring climate-related disclosures in an issuer's annual information form or management's discussion and analysis in order to reduce costs.
Certain mining sector commentators also recommended that any new climate-related disclosure scheme should lead to increased recognition of Canadian issuers by prominent ESG rating agencies, to ensure that the Proposed Instrument does not simply represent additional reporting burdens with few benefits for issuers.
Some commentators noted that the Proposed Instrument does not provide sufficient guidance on the impacts of certain natural events, such as wildfires and flooding, that may or may not be caused by climate change, and may be more difficult to include in a climate change risk analysis. There was a general consensus among the commentators from the mining sector that the decision to exclude the TCFD Framework scenario analysis from the Proposed Instrument was a suitable choice, although other commentators, including those from outside the mining sector, noted that scenario analysis forms an important part of a company's ability to assess its climate-related impacts. Finally, some mining sector commentators recommended delaying the implementation of the Proposed Instrument by requiring that issuers disclose their Scope 1 and Scope 2 GHG emissions in approximately two years from the date the Proposed Instrument is implemented, and adopting a phased-in approach for disclosing Scope 3 GHG emissions to allow issuers to co-ordinate information sharing, preparation and filing of such disclosures, especially in the case of joint ventures.
As the Proposed Instrument has not yet been finalized, it is difficult to anticipate the precise extent to which the CSA will incorporate the commentary received from mining sector participants into any revised or finalized version of the Proposed Instrument.
B. CSA Comment Letter on International Climate-Related Disclosure Developments
On October 12, 2022, the CSA provided an update on the status of the Proposed Instrument, and noted that it was "actively considering international developments," which, at the time, included the proposed set of rules on climate-related disclosure published by the SEC (the "Proposed SEC Rules"), as well as IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Informationand IFRS S2 – Climate-related Disclosures (collectively, the "Proposed ISSB Standards").
The Proposed SEC Rules apply only to domestic issuers in the United States and foreign private issuers that do not report through the multijurisdictional disclosure system. The Proposed ISSB Standards are intended to serve as international guideposts for a variety of jurisdictions. The CSA had commented specifically on the Proposed ISSB Standards in a letter published on July 25, 2022 (the "Comment Letter"), noting that the Proposed ISSB Standards should focus first on developing a global set of reporting standards for climate-related activities before developing broader sustainability disclosure requirements. The CSA also recommended that scenario analyses, disclosure of Scope 3 GHG emissions and industry-specific disclosure requirements included in the Proposed ISSB Standards ought to be phased in or introduced initially on a non-mandatory basis in order to accommodate the needs of issuers of varying sizes and financial resources. Finally, while the CSA noted "substantive differences" between the Proposed Instrument, the Proposed SEC Rules and the Proposed ISSB Standards, the CSA expressed that international co-operation and homogeneity were paramount, particularly to ensure that Canadian issuers are able to compete effectively in domestic and global capital markets alike.
Despite the CSA's expressed preference for climate-focused, phased-in and internationally coherent climate-related disclosures, it is difficult to anticipate the precise extent to which the Proposed Instrument, once finalized, will align with the Proposed SEC Rules and the Proposed ISSB Standards. Nevertheless, the Comment Letter provides helpful guidance regarding the extent to which the CSA will consider international instruments when developing the Proposed Instrument. Accordingly, such international instruments may provide further guidance as to the ultimate approach the CSA will take in the finalized NI 51-107. From a mining sector perspective in particular, the CSA appears to be mindful of the differential impact of the disclosure regime on issuers of varying sizes and financial resources.
III. Preparing for Disclosure Under the Proposed Instrument – Climate Change Governance and Best Practices to Avoid "Greenwashing"
The CSA has released clear guidance on the type of ESG-related disclosure that will not generally be considered acceptable in its CSA Staff Notice 51-364 – Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2022 and March 31, 2021 published on November 3, 2022 ("CSA Notice 51-364"). While CSA Notice 51-364 does not reference the Proposed Instrument specifically, it does speak to the manner in which the type of information set out under the Proposed Instrument ought to be disclosed. A more detailed discussion of CSA Notice 51-364 is set out in our February 2023 article entitled CSA Publishes Guidance on Greenwashing and ESG Disclosures.
In CSA Notice 51-364, the CSA recognized the rapid increase in various issuers disclosing their ESG performance. The CSA also noted that the number of issuers making "potentially misleading, unsubstantiated or otherwise incomplete claims about business operations or the sustainability of a product or service being offered," through a practice known as "greenwashing," had also increased. Greenwashing had been observed by Canadian securities regulators in various issuers' continuous disclosure documents, voluntary ESG or sustainability reports and public surveys.
The CSA noted that all statements setting out current and proposed ESG-related activities, whether made voluntarily or otherwise, must be factual and balanced. Specifically, all claims about an issuer's objectives, and all promotional language regarding the sustainability of an issuer's operations, products or services, must be supported by facts and information about the issuer's current activities. Statements about an issuer's ESG-related objectives will also constitute forward-looking information, and in accordance with existing securities laws, issuers must identify the material risk factors that would cause the actual results to differ materially, state the material facts or assumptions used to develop the forward-looking information, describe the policies for updating the information and generally comply with the forward-looking information disclosure rules in National Instrument 51-102 Continuous Disclosure Obligations and its companion policy.
The CSA provided other examples of ESG-related claims that must be substantiated, such as any claims regarding relationships formed with other organizations to increase the issuer's social impact. Here, the particular aspects of sustainability being pursued, and the manner in which the purported social impacts are being evaluated and monitored, must be disclosed. The CSA also noted that any claims made regarding ESG ratings achieved by an issuer must be substantiated by disclosures setting out the issuer's precise ESG rating, the specific criteria used to determine the rating and the third party that certified the rating, if applicable.
Given the emphasis placed on factual and substantiated ESG disclosure, it is evident that the foundation of strong disclosure is strong performance. The Proposed Instrument, as currently drafted, requires issuers to speak to climate-related risks and opportunities identified by the issuer, the impact of such risks and opportunities, and the metrics and targets used to assess and manage climate-related risks and opportunities, if such information is not material. However, issuers will be required to disclose: the organization's governance around climate-related risks and opportunities; the processes by which climate-related risks are identified, managed and assessed; and the manner in which these processes are integrated into the issuer's overall risk management (collectively, "Climate Change Governance").
Until the Proposed Instrument is finalized, the obligation and extent to which issuers must disclose their Climate Change Governance practices can only be considered to be tentative. Nonetheless, governance is largely regarded as the "spine" of ESG, in that it serves as the framework through which issuers can improve their ESG performance overall. While the Proposed Instrument is yet to be finalized, the CSA has noted that certain continuous disclosure obligations may require issuers to disclose certain climate-related information. For instance, material risk factors which may influence an investor's decision to purchase the issuer's securities must be disclosed in the issuer's management's discussion and analysis and annual information form (if any), which may include climate-related information and climate-related risks. Additionally, National Policy 58-201 Corporate Governance Guidelines, National Instrument 52-110 Audit Committees and National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings contain guidance and disclosure requirements related to corporate governance practices and internal controls implemented by the issuer to identify and manage principal risks and opportunities, which may include climate-related risks and opportunities.
Accordingly, implementing Climate Change Governance mechanisms, such as board-level sustainability committees, cross-functional internal climate teams and other means by which issuers can engage with key suppliers, manufacturers, local and Indigenous groups and organizations and other stakeholders, would help to prepare issuers to meet a wider range of disclosure obligations under existing continuous disclosure obligations and the Proposed Instrument. Given the time and resources required to properly develop appropriate governance mechanisms, and implement, monitor and test compliance with these mechanisms, implementing Climate Change Governance before the Proposed Instrument comes into force may be a best practice for issuers. Furthermore, in accordance with CSA Notice 51-364, implementation of Climate Change Governance will require a steady commitment to maintaining these processes and plans.
The Capital Markets Group at Aird & Berlis will continue to monitor developments in ESG and climate-related disclosure and can assist issuers in all sectors in preparing relevant disclosure, including preparing climate change reports, implementing Climate Change Governance initiatives and complying with CSA Staff Notice 51-364. Please contact a member of our Group if you have questions or require assistance.
1. The disclosure requirements would not apply to investment funds, issuers of asset-based securities, designated foreign issuers, Securities Exchange Commission ("SEC") foreign issuers, exchangeable security issuers that are exempt under section 13.3 of National Instrument 51-102 Continuous Disclosure Obligations and certain subsidiary issuers.
2. Additional commentators outside of the mining industry were generally supportive of the alignment of the Proposed Instrument with the TCFD Framework, and some even suggested that the Proposed Instrument should require the disclosure of an issuer's transition plans towards net-zero GHG emissions, particularly in light of the commitments expressed by 130 countries at the 2021 United Nations Climate Change Conference (COP26) to achieve net-zero emissions by 2050. Several commentators also suggested that the disclosure of an issuer's Scope 1 and Scope 2 GHG emissions should be mandatory, and the finalized NI 51-107 should not allow issuers to explain why they have chosen not to disclose these emissions. Most commentators agreed that the requirement to disclose climate-related governance and risk management should not be subject to a materiality assessment, and that the Greenhouse Gas Protocol, or a comparable reporting standard, should be used to disclose GHG emissions under the finalized NI 51-107. While the CSA noted in the Proposed Instrument that disclosure of information regarding current metrics and methodologies for measuring emissions may constitute forward-looking information ("FLI"), some commentators noted that an additional "safe harbour" for such disclosure other than FLI ought to be introduced to protect directors and officers from liability and encourage climate-related disclosure. One commentator proposed that such a "safe harbour" would be based on the issuer's board of directors attesting that they have reasonable basis for the methodologies used, and would report on any material change in the market as soon as practicable, or at least within 10 days of the date on which the change occurs, in accordance with existing securities law requirements. Finally, some commentators noted that the Proposed Instrument ought to require disclosure of broader sustainability and ESG topics, and a majority of the commentators noted that the gaps in the Proposed Instrument should be addressed and NI 51-107 should be finalized as swiftly as possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.