Across Canada, public and private companies are scrambling to understand the implications of upcoming environmental, social and corporate governance (ESG) disclosure requirements. In this article, we'll break down where the ESG disclosure mandates for Canadian companies are coming from, when they will be in effect and the legal risks they'll present.
Current State: Voluntary ESG Reporting
To date, climate-related disclosure in the form of ESG or sustainability reports has been voluntary for Canadian companies. Although current securities regulation generally requires companies to disclose certain climate-related information if it is deemed material1, at the moment there are no Canadian regulations or requirements that specifically mandate a company to publicly disclose ESG information (e.g. greenhouse gas [GHG] emissions) in accordance with a formal ESG reporting standard such as the Global Reporting Initiative (GRI). However, this will soon change.
Mandatory ESG Reporting for Canadian Public Companies
The Canadian Securities Administrators (CSA) are working to establish requirements for Canadian publicly traded companies to make climate-related disclosures in response to demands from investors and other stakeholders for "complete, consistent and comparable" reporting.
In late 2021, the CSA issued Proposed National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107), which heavily references the recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD). The CSA proposal has been criticized for being less rigorous and comprehensive than the mandatory ESG disclosure proposals currently in flight in the U.S. and other countries.
The CSA proposed a phased approach to climate disclosure that would not require companies to conduct a scenario analysis. Reporting of Scope 1, 2 and 3 GHG emissions would be done on a "comply or explain" basis, which means a company may not be required to disclose all of its GHG emissions if it can provide a sufficient rationale for the omission.
The CSA received 131 comment letters on its proposal. Regulatory burden and the administrative cost of climate-related disclosures - especially in relation to scenario planning and Scope 3 emissions - were raised in the majority of comment letters from companies in the oil and gas, agriculture and mining sectors.
Should NI 51-107 become effective on December 31, 2022, non-venture issuers would be required to start making ESG disclosures starting in March 2024 and venture issuers would be required to start in April 2026. Both groups would begin by reporting data from the previous financial year.
The requirements proposed by the CSA are arguably less onerous than what's being proposed in other countries. Does this mean that Canadian companies won't be required to collect or report on as much ESG data as their international peers? That is unlikely to be the case, particularly for Canadian companies that do business with banks or insurers, or companies that are within the value/supply chain of a U.S. public company.
Mandatory ESG Reporting for Canadian Financial Institutions
As discussed in our previous article, the Canadian government plans to bring mandatory climate-related reporting requirements to federally regulated financial institutions (FRFIs) such as banks and insurance companies beginning in 2024. (See here for a list of organizations subject to these incoming requirements.)
In May 2022, the Office of the Superintendent of Financial Institutions (OSFI) issued Draft Guideline B-15 Climate Risk Management with a public comment period now extending until September 2022. This draft guideline includes expectations around climate-related financial disclosures closely aligned with the TCFD recommendations and the International Sustainability Standards Board (ISSB) Exposure Draft on Climate-Related Disclosures (IFRS S2) currently out for public comment.
Starting in 2024, it is expected that FRFIs will begin reporting GHG emissions, climate-related risk, strategy and management plans as well as climate transition plans and net-zero commitments, with full implementation proposed by 2027.
The Canadian government has not made any clear statements about expanding these requirements to other sectors, such as the oil and gas, agriculture and mining sectors. However, it is expected that financial institutions will increasingly require their customers in those sectors and others to provide climate-related information. This will be done to facilitate financial institutions' own ESG reporting requirements, and to assess when and on what terms financing and insurance products will be provided.
Mandatory ESG Reporting for U.S. Public Companies (and Maybe Canadian Companies Listed on a U.S. Exchange?)
South of the border, the Securities and Exchange Commission (SEC) recently completed its public comment period for a proposed rule on climate-related disclosures, again closely aligned with TCFD recommendations.
Similar to the CSA, the SEC received comments from extractive sectors such as oil and gas expressing concerns related to Scope 3 emissions reporting, implementation timelines, liability management and compliance costs. The SEC itself has acknowledged that compliance costs will be significant, with average costs estimated at US$677,000 per year.2
The SEC's proposed rule will apply to all U.S. issuers as well as foreign private issuers. Currently, Canadian issuers reporting under the multijurisdictional disclosure system (MJDS) would not be subject to the proposed rule. However, the SEC has asked for comments on whether foreign companies reporting pursuant to MJDS should be exempt, leaving open the possibility that Canadian companies listed on a U.S. exchange may ultimately be subject to the proposed SEC rule.
If the proposed rule is adopted by the end of 2022, it would require large accelerated filers to begin making climate-related disclosures in annual reports in 2024. Accelerated and non-accelerated filers would begin making disclosures in 2025, and smaller reporting companies would begin in 2026. Each group would begin by reporting data from the previous fiscal year.
It should be noted that the SEC's proposed rule is substantially more onerous than CSA NI 51-107, specifically in relation to topics such as scenario analysis, internal carbon pricing, assurance and financial statement impacts. The SEC has also made some efforts to balance the potentially burdensome nature of the proposed rule with exemptions from reporting on Scope 3 emissions by smaller reporting companies, creating safe harbor from certain forms of liability related to Scope 3 emissions disclosure and phased implementation for Scope 3 reporting and assurance attestation.
Whether or not Canadian companies are directly impacted by the proposed SEC rule by virtue of being listed on a U.S. stock exchange, they will likely be indirectly impacted. Similar to how Canadian banks and insurance companies will require ESG information from customers to support their OSFI ESG reporting, Canadian companies that are within the supply or value chains of U.S. listed companies will similarly be required to provide ESG information to those companies subject to the proposed SEC rule.
Global ESG Reporting Baseline
As regulators in Canada and the U.S. move to enact mandatory climate-related disclosure, substantial work is underway globally to harmonize and standardize all ESG reporting frameworks.
The ISSB was created by the International Financial Reporting Standards (IFRS) Foundation to "deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies' sustainability-related risks and opportunities to help them make informed decisions."
The ISSB has issued two exposure drafts that are open for public comment until July 29, 2022, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (General Requirements Exposure Draft) and IFRS S2 Climate-related Disclosures (Climate Exposure Draft).
At the moment, it does not appear that the ISSB requirements will apply directly to Canadian companies. That said, both the CSA and SEC have indicated interest and support for the ISSB, so either or both agencies could eventually adopt, integrate and/or mandate adherence to the ISSB standards in the future.
What Are the Legal Risks?
Public disclosure of any corporate information comes with legal risks, including potential litigation from corporate stakeholders such as investors or activist groups. Globally, cases of climate change litigation have more than doubled since 2015 with potential legal action extending to individuals on companies' boards of directors. Largely, the litigation to date has involved the corporations' voluntary climate-related disclosures. When climate-related disclosures become mandatory, legal risks - particularly those relating to regulatory compliance and enforcement - have the potential to become more significant.
In our June 2022 article, we highlighted the recent wave of enforcement relating to ESG disclosure, including the SEC's crackdown on false or misleading ESG claims and terminology. As the mandatory reporting requirements proposed by the CSA, OSFI and SEC come into effect, we expect similar enforcement and litigation to follow.
1. E.g. National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102); National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (NI 52-109); National Instrument 52-110 Audit Committees (NI 52-110); and National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101)
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