Canada: New ISSB Standards – Is This The End Of The 'Alphabet Soup' For ESG Disclosure Requirements And How Will Canada Position Itself?
ESG and Sustainability Bulletin

Bringing clarity and uniformity to the market by setting a global baseline for ESG reporting. This is the broad objective of the International Sustainability Standards Board (ISSB) with the recent release of its new sustainability reporting standards (ISSB Standards).

But easier said than done.

With more than a dozen ESG and sustainability standards, principles and frameworks currently in the reporting landscape, excluding industry-led standards, and each local legislator and regulator having its own take on the subject, simplicity may have to wait.

Nonetheless, the release of the General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and Climate-related Disclosures (IFRS S2) represents a major development, mainly because of the international support they have received so far, including from IOSCO, an association comprised of 131 national securities commissions worldwide, the Financial Stability Board, the G20 and the G7.

Perhaps this widespread support is a sign that the business community was ready for greater law and order in ESG reporting. A new order that would enable investors to make informed decisions based on comparable data and to facilitate benchmarking, ESG ratings and third-party assurance. Indeed, the Principles for Responsible Investment (PRI), a UN-supported international network of financial institutions, is calling for all policymakers internationally to mandate ISSB disclosures by 2025.

In this bulletin, we consider the impact of the ISSB Standards on the ESG reporting landscape globally, how Canadian legislators and regulators may react to this push for standardized sustainability disclosure, and how reporting practices and related liabilities may be subject to change.

A. ESG Reporting Landscape

As it currently stands, there is a myriad of ESG-related reporting standards, principles and frameworks. However, users may find it difficult to navigate these waters. There are numerous acronyms involved, now colloquially referred to as the 'alphabet soup' of ESG - for example, Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), Taskforce on Climate-related Financial Disclosure (TCFD), the EU's European Sustainability Reporting Standards (ESRS) and the list goes on.

The ISSB's mission is to deliver a "comprehensive global baseline" of sustainability disclosures - in other words, to simplify the reporting landscape.

Has it accomplished this? We assess two distinct issues:

First - Hierarchy of Sources

IFRS S1 builds on some of the existing standards and lays out a hierarchy of current sources for entities to consider. SASB must be considered, while other standards, on the condition they do not conflict with IFRS S1, may be considered in relation to specific topics (e.g. CDSB Framework Application Guidance for Water-related Disclosures or Biodiversity-related Disclosures) or subject to conditions (e.g. GRI or ESRS may be considered where IFRS S1 is silent).

Second - Materiality

Under the ISSB Standards, to determine materiality, the question is whether the information could reasonably be expected to influence decisions of primary users (i.e., investors, creditors, shareholders). The GRI, however, adopts a different approach by providing for the concept of double-materiality, which also considers the impacts of a company on society and the environment (regardless of how this affects enterprise value). The GRI and the ISSB are currently working together to unify these distinct perspectives.

For further details on the requirements of the ISSB Standards, refer to our bulletin titled "To ISSB or To Not ISSB, That is the Question - The New ISSB Sustainability Disclosure Standards Are Not Mandatory in Canada, But They Could Soon Be".

Landscape Today

So where does this leave us?

Although the ISSB Standards bring some clarity, those that may have hoped for only one set of standards may be disappointed because many of the existing standards will remain in existence.

We list below some of the better known ESG-related reporting standards and frameworks of general applicability.

Surprisingly (or perhaps not), these various standards and frameworks are indeed used in practice. In Fasken's recent survey of the ESG disclosure by Canadian companies, we found that Canadian companies most often relied on SASB, TCFD and the GRI for their ESG reporting but also incorporated a number of other standards, principles and frameworks. Given ISSB's incorporation of other standards, they will likely continue to be featured going forward as ISSB-compliant reporting also emerges in Canadian ESG disclosures.

B. Reshaping Canadian Legislation?

Listed companies will likely be the first to be impacted by the ISSB Standards, as stock exchanges and regulators around the world are considering how the new ISSB Standards will inform their current regulations and guidance on sustainability reporting. But private companies and the public sector may soon start feeling the urge to follow course. One reason may be the pressure from investors and governments, as local laws and regulations catalyze change towards a broader adoption of the ISSB Standards. The process will be slow and arduous but no doubt it is coming.

Climate Disclosure First

At home, the Canadian Securities Regulators (CSA) have been stalled in a "hurry up and wait" situation. It began in October 2021, when Canada was first out the gate (in North America) with the CSA's proposed National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107). Shortly thereafter, the Securities and Exchange Commission and the ISSB released their own respective proposed climate-related requirements. This led the CSA in October 2022 to pause the development of NI 51-107 pending the work of the SEC and the ISSB noting that it may "further inform" the CSA's work.

In the US, threatened by lawsuits and in the midst of intense lobbying from proponents and opponents alike, the SEC has also delayed its process. It is nonetheless expected that the SEC will release the final version of its draft climate-related disclosures proposal in October 2023.

The CSA is expected to follow course, after reviewing how the SEC positioned itself in light of the new ISSB Standards. It will be a balancing act for our regulators, as they previously noted that there were "key differences" between the SEC's proposed rules and the ISSB's exposure draft. We may very soon see how Canada will manage to bridge those gaps if it has to.

Climate Positioning: North America is Feeling the Heat

Dual listed companies will be key players in this climate journey as the expectation would be to avoid disclosure under two different, and potentially conflicting, regimes. Similarly, investors in Canada and the US will expect comparable disclosure requirements among jurisdictions. Ensuring the integrity of the multijurisdictional disclosure system (MJDS) procedure will also be key in the work to be accomplished by the CSA, as the MJDS allows for easier access by Canadian issuers to the US public markets (and vice versa) through lighter requirements.

Currently, one important difference between the SEC, the CSA and the ISSB is the approach towards Scope 3 GHG emissions disclosure. Scope 3 includes emissions that occur in the value chain of an entity, such as those of its suppliers. Under the draft SEC rules and the ISSB Standards, Scope 3 GHG emissions disclosure is mandatory (subject to certain conditions and exemptions). The CSA, however, proposed a "comply or explain" approach in NI 51-107 (i.e., explain why such disclosure is absent if not included).

It remains to be seen if the CSA and SEC will align on the new ISSB Standards. Will the SEC go its own way and reject any reference to IFRS S2, just like when the US embraced US GAAP as opposed to IFRS for accounting standards? One may think that the CSA's and SEC's presence on the ISSB's Board is a sign of full alignment. In any event, the TCFD will most certainly remain the common baseline among Canada, the US and the ISSB, as all three have grounded their requirements in the TCFD framework.

Disclosure Beyond Climate: The Natural Next Step?

What about IFRS S1? Will there soon be mandatory sustainability reporting beyond climate in Canada? Perhaps not any time soon. In fact, the CSA considers that trying to apply the TCFD framework for climate disclosure to other ESG factors "may have the unintended consequence of detracting from [the] "climate-first" approach."

IFRS S1 remains however quite general and the ISSB is currently consulting with stakeholders to determine next steps for disclosures beyond climate, and the focus may soon turn to social factors such as health and safety, human rights and diversity.

In the meantime, reporting requirements in the broader sphere of ESG continue to be on the move in Canada, as we highlight below:

ESG Reporting Requirements Timeline

C. What is at Stake for Sustainability Reporting in Canada?

First, the timing and location of sustainability reporting.

• ISSB mandates the filing of sustainability disclosure at the same time as the related financial statements. It should be included in an entity's management's discussion and analysis (MD&A) or similar document that is part of an entity's general purpose financial reports, such as an annual report.
• By contrast, the CSA's NI 51-107 would only require such timely disclosure by public companies if the issuer was to provide the information in its MD&A. The proposal indicates that (i) governance related disclosure should be included in an issuer's circular (or if no circular is filed, in its Annual Information Form (AIF) or MD&A), and (ii) the climate disclosures related to strategy, risk management and metrics and targets would be included in its AIF (or if the issuer does not file an AIF, in its annual MD&A).

Second, compliance and liability.

• For Canadian listed issuers, sustainability-related disclosures such as emissions reduction targets or projections may constitute forward-looking information (FLI). When an issuer discloses FLI, it must comply with National Instrument 51-102 Continuous Disclosure Obligations (including identifying material risks that may impact actual results and updating the information on a going forward basis by disclosing material differences with actual results).
• Sustainability-related disclosures contained in an AIF, MD&A or circular will be incorporated by reference to a short form prospectus, meaning that public companies and underwriters may be held liable in the case of any misleading information or omission of a material fact.
• "Greenwashing" is also an important item to keep in mind as it can present important reputational and legal risks for companies (public or private). It can even lead to liability for directors and officers under Canada's Competition Act (subject to a due diligence defence) and under securities laws. Companies, directors and officers should be cognizant of whether and to what extent safe harbor provisions under securities laws may apply to climate disclosure with respect to historical, current and future information.

For the time being, reporting in accordance with IFRS S1 and S2 remains voluntary, until governments, regulators or stock exchanges make them a requirement. Companies that choose to follow the ISSB Standards in their public disclosure will have to do so carefully and fully if they wish to describe their disclosures as complying with such standards.

This means that starting on the second year of application a company adhering to the ISSB Standards will have to file its sustainability disclosure at the same time as its financial statements. This may result in the need for such entity to increase its capacity to compile, understand, and disclose sustainability information - including to face the challenges of collecting Scope 3 GHG emissions data.

The newly formed Canadian Sustainability Standards Board (CSSB) will be working with the ISSB and various stakeholders (including private and public companies) to factor in the uniqueness of the Canadian economy into the ISSB Standards.

D. About the Authors

Marie-Christine Valois, BAComm (Concordia University), LLB (University of Montreal), Certificate, ESG, Climate Risk & The Law (Osgoode Hall Law School, York University). Marie-Christine is a member of the Corporate/Commercial group and ESG team at Fasken and advises public and private companies on governance matters, including ESG.

Dyna Zekaoui, JD and LLM-LE (Duke University). Dyna is a member of Fasken's ESG team and advises clients regularly on ESG-related issues.

Pierre-Olivier Charlebois is the leader of the Environment, Energy and Climate Change practice group for the Quebec region and member of the ESG team.

Sabrina Spencer is a member of the Environment, Energy and Climate Change group in Fasken's Vancouver office, and is also a member of ESG team.

E. Additional Resources

• "To ISSB or To Not ISSB, That is the Question - The New ISSB Sustainability Disclosure Standards Are Not Mandatory in Canada, But They Could Soon Be"
• ISSB General Sustainability-related Disclosures publication
• Fasken Benchmark ESG Survey Sheds Light on Key Trends For Corporate Decision-Makers

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.