The rollout will be gradual, but mandatory ESG disclosure is finally coming to Canada – and so are legal risks for companies that fail to meet disclosure requirements.
On April 7, the federal government tabled its latest budget, which included a number of measures aimed at achieving a net zero economy, as well as a promise to bring mandatory climate-related reporting requirements to federally regulated banks and insurance companies.
Mandatory ESG Reporting Coming in 2024
In the budget, the government outlined its plan to require federally regulated financial institutions to begin reporting on climate-related financial risks in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) framework.
Beginning this year, the Office of the Superintendent of Financial Institutions (OSFI) will consult with banks and insurers on developing climate disclosure guidelines that adhere to the TCFD framework. The goal is to gradually phase in reporting requirements for financial institutions beginning in 2024.
Although the OSFI guidelines will focus on reporting requirements for financial institutions, they are expected to have wide-ranging impacts throughout the Canadian economy, the government noted.
"As federally regulated banks and insurers play a prominent role in shaping Canada's economy, OSFI guidance will have a significant impact on how Canadian businesses manage and report on climate-related risks and exposures," the budget document read.
Banks and other financial institutions will also be expected to collect climate risks and emissions from their clients – which means the companies they do business with will also need to make climate-related disclosures in order to access financing and other financial services.
Banks and Insurers Will Face Possible Regulatory and Legal Risks
Come 2024, any federally regulated bank or insurance company that fails to meet the forthcoming disclosure requirements could face potential regulatory enforcement and possible litigation. We're already seeing this play out in other parts of the world that have mandated ESG disclosure.
In Europe, for example, the Hague District Court ordered energy giant Shell to slash its worldwide emissions by 45% after shareholders took the company to court. More recently, a group of shareholders threatened legal action against the directors of Shell over the company's net zero plan.
As we've discussed in previous blogs, companies across Canada are already facing mounting pressure to develop credible net zero plans – and ESG disclosure isn't even a legal requirement yet. That will soon change, and when it does, companies that fail to meet disclosure requirements will not only risk losing access to capital, but risk facing regulatory enforcement or court proceedings.
Changes Coming for Pensions
In the budget, the government also announced it plans to require federally regulated pensions to disclose the ESG considerations they use in their portfolio construction, including climate-related risks.
The feds didn't provide any details on how or when this requirement would be rolled out, but it stands to reason that such a requirement would go hand-in-hand with mandatory ESG disclosure. If pensions are forced to report on how they're using ESG strategies to build their portfolios, they'll need reliable disclosure from companies – and not just from companies in the financial sector.
How Can You Prepare?
Regardless of the sector you're in, mandatory ESG disclosure in the financial services industry will have a ripple effect throughout the Canadian economy.
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.