Climate change reporting is topping headlines and board agendas as global climate efforts continue. In this article we examine the latest developments and how public companies can prepare and future-proof their strategies to adapt to this fast-evolving area of disclosure.
Where are we now?
Four major climate change disclosure proposals, listed below, have been published and are at varying stages of advancement. Although the proposals are each based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and cover similar topics—including climate-related governance, strategy, risk management, and metrics and targets—the scope of each proposal differs in important respects:
- the Canadian Securities Administrators' (CSA) proposal, National Instrument 51-107 - Disclosure of Climate-related Matters, released in October 2021;
- the U.S. Securities and Exchange Commission's (SEC) proposal, The Enhancement and Standardization of Climate-Related Disclosures for Investors, released in March 2022;
- the International Sustainability Standards Board's (ISSB) proposal, Exposure Draft IFRS S2 Climate-related Disclosures, released in March 2022, which aims to create a global baseline for climate-related disclosure standards; and
- the Office of the Superintendent of Financial Institutions (OSFI) Guideline B-15 Climate Risk Management, finalized on March 7, 2023, which sets out expectations for federally regulated financial institutions' management and disclosure of climate-related risks.
Additionally, a new Canadian Sustainability Standards Board (CSSB) has recently been established by Canadian accounting and auditing standard-setting bodies. The CSSB has been designed to work in tandem with the ISSB to develop and support the adoption of IFRS sustainability disclosure standards, to ensure that any standards adopted in Canada are relevant, responsive and fit-for-purpose domestically.
"Issuers should expect stakeholders to demand accountability to targets and greater scrutiny of climate disclosures both from regulators and potential litigants focused on greenwashing claims."
Consistent among market commentary is a desire to see greater alignment between the proposals in order to promote consistent and comparable reporting. Many companies who have set net zero targets and are reporting, or intending to report, on Scope 3 emissions are also seeking standardized rules for greenhouse gas (GHG) emissions reporting in their value chain.
Where are things headed and when?
- ISSB: working towards issuing final standards at the end of Q2 2023, with the first sustainability-related disclosures to be reported in 2025 in respect of annual reporting periods beginning on or after January 1, 2024. Although the UK government has confirmed its intention to adopt climate-related reporting standards in alignment with the final ISSB standards, Canadian and U.S. securities regulators have not made similar announcements to date.
- CSA: analyzing the key differences between the proposals and continuing to monitor their evolution, as well as taking into account 131 comments on the proposed rule. While finalizing climate change disclosure rules continues to be a priority for Canadian securities regulators, we expect that the CSA will be monitoring the release of the final ISSB standards, and their endorsement by the CSSB, before releasing a further proposal.
- SEC: taking into account nearly 15,000 comments on the proposed rule and working towards issuing the final rule. Although initially targeted for publication in April 2023, the proposal has become highly politicized, attracting debate in the House of Representatives, and is expected to be delayed.
- OSFI: Although last to publish its draft guideline, OSFI was the first, and so far the only, regulator to have finalized its climate proposal. OSFI has indicated that it intends to review and amend its guideline as practices evolve and standards harmonize, including to take account of the final ISSB standards.
While the initial CSA and SEC proposals contemplated reporting to commence as early as 2024 (in respect of 2023), given the delays, we expect securities regulators may instead adopt the current ISSB timeline. If they do so, and subject to finalization of the rules, reporting would likely be required in 2025 at the earliest and would be phased in over time. OSFI's guideline staggers implementation, with disclosure requirements beginning no earlier than in respect of the fiscal period ending on or after October 1, 2024.
What can you do to prepare?
While final rules are pending, issuers are encouraged to take the following steps to prepare for implementation:
- Develop and strengthen internal governance structures for overseeing climate-change related strategy, risks and opportunities. Who will have oversight of the organization's climate strategy and be the key decision makers for its implementation, and what processes will be established to ensure adequate board oversight? Consider board orientation and training tools to build climate competency.
- Establish a data collection process that is "assurance-ready" that can be reviewed and verified by a third party to obtain reliable GHG emissions data. Each of the proposals requires some version of GHG emissions reporting and it is likely that Scope 1 and 2 emissions reporting will become mandatory over time1. While it is widely expected that Scope 3 emissions reporting will not be mandatory initially, market pressure might lead issuers over time to disclose at least some Scope 3 emissions related to a company's value chain, especially to the extent the company covers those Scope 3 emissions in a GHG reduction target2. According to a May 2022 report from the Institute for Sustainable Finance, 70.6% of S&P/TSX Composite Index constituents provided GHG emissions disclosure information for 2020, and 41.6% provided partial Scope 3 disclosures.
- Obtain internal alignment on targets, including how those targets are defined, how they align to science-based emissions reduction trajectories, how they are measured, what steps will be required to achieve them, and, in cases where there is discretion in how to apply reporting metrics, the rationale for reporting decisions. Consider the internal controls and procedures you will need to have in place to ensure that your CEO and CFO can comfortably certify these disclosures. Issuers should expect stakeholders to demand accountability to targets and greater scrutiny of these disclosures both from regulators and potential litigants focused on greenwashing claims. Targets, metrics and related practices should be well-defined and reasonable before reporting obligations begin.
- Review your previous and upcoming voluntary disclosure on climate related matters and consider how it can be improved or may need to be revised. If you are not already preparing TCFD-aligned disclosures, consider preparing a "dry run" report for internal purposes to familiarize management and the board with the disclosure that will be required under the new rules when implemented. According to Millani's 6th Annual ESG Disclosure Study: A Canadian Perspective, of S&P/TSX Composite Indexissuerswho published a 2021 ESG report, only 55% adopted the TCFD recommendations for their climate disclosures.
- Consider whether to seek external validation of GHG emissions data. Even if not required by the final rules, third-party attestation gives investors, issuers and their boards a degree of comfort that these disclosures are reasonable, verifiable and have been subject to independent review. In its 2023 Canadian ESG Reporting Insights report, PwC reports that of Canada's top 250 publicly-traded companies (measured by revenue and market capitalization), 73% are not obtaining reasonable or limited external assurance of their ESG reports.
- Determine the applicability of other climate disclosure regimes. For example, the European Sustainability Reporting Standards would apply to certain European Union (EU) subsidiaries of non-EU parent companies and non-EU parent companies with a combined group turnover in the EU of more than EUR 150 million. See "EU Sustainability Rules: ESG disclosure and supply chain due diligence regulations affecting non-EU companies" for more details on these rules.
1. Under the Greenhouse Gas Protocol, the leading corporate GHG reporting protocol, Scope 1 emissions are direct GHG emissions from sources that are owned or controlled by a company; Scope 2 emissions are GHG emissions resulting from the generation of purchased electricity consumed by the company; and Scope 3 emissions are all other indirect emissions that occur as a consequence of the company's activities, a very broad category that may include the emissions of a company's investments and supply chain.
2. Currently, the SEC would require disclosure of Scope 3 emissions if a) such emissions are material to the company or b) the company includes Scope 3 emissions as part of a public GHG emissions reduction target or goal. The ISSB will require disclosure of Scope 3 emissions, but will develop relief provisions to help companies apply the Scope 3 requirements.
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