Inconsistent climate-related disclosure is being addressed by the Canadian Securities Administrators (CSA) through a proposal to implement certain climate-related disclosure obligations based on recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
- The proposed climate-related disclosure requirements (Proposed Climate Disclosure) follow TCFD recommendations, with certain modifications, and would be mandated for all reporting issuers, other than investment funds, issuers of asset-backed securities, designated foreign issuers, SEC foreign issuers, certain exchangeable security issuers and certain credit support issuers.
- Governance related Proposed Climate Disclosure would be included in a reporting issuer's management information circular and Proposed Climate Disclosure related to strategy, risk management and metrics and targets would be included in the issuer's annual information form (AIF).
- The CSA is accepting comments on the Proposed Climate Disclosure until January 17, 2022. If adopted, the Proposed Climate Disclosure would have a phased-in transition over one- and three-year periods for non-venture and venture issuers, respectively.
Four Core Elements of Disclosure
The CSA has published for comment proposed National Instrument 51-107 Disclosure of Climate-related Matters and its companion policy which together are aimed at increasing clarity, consistency and comparability of climate-related disclosure among Canadian reporting issuers through the Proposed Climate Disclosure.
Applicable to reporting issuers (other than those noted above), the Proposed Climate Disclosure is focused on the following four core disclosure elements:
- Governance: the board's oversight of climate-related risks and opportunities, and management's role in assessing and managing climate-related risks and opportunities.
- Strategy: material climate-related risks and opportunities the issuer has identified over the short, medium and long term, and the impact of climate-related risks and opportunities on the issuer's businesses, strategy, and financial planning.
- Risk management: the issuer's processes for identifying and assessing climate-related risks, the issuer's processes for managing climate-related risks, and how processes for identifying, assessing, and managing climate-related risks are integrated into the issuer's overall risk management.
- Metrics and targets: the metrics used by the issuer to assess climate-related risks and opportunities in line with its strategy and risk management process where such information is material, Scope 1, Scope 2 and Scope 3 greenhouse gas (GHG) emissions (on a "comply-or-explain" basis as discussed further below), and the related risks or the issuer's reasons for not disclosing this information, and the targets used by the issuer to manage climate-related risks and opportunities and performance against targets where such information is material. The CSA is also consulting on an alternative approach that would require issuers to disclose Scope 1 GHG emissions.
Proposed Climate Disclosure related to governance would be included annually in the issuer's management information circular, or AIF or annual management's discussion and analysis (MD&A) where the issuer does not send a management information circular to its securityholders. Proposed Climate Disclosure related to strategy, risk management and metrics and targets would be included in the issuer's AIF (or annual MD&A if no AIF is filed).
Materiality would be an overarching consideration for the Proposed Climate Disclosure related to strategy, and metrics and targets. Reporting issuers are only required to include material information in their MD&A and AIF and therefore will be required to assess whether climate-related information responsive to the Proposed Climate Disclosure is material before including. Notably, however, governance and risk management related disclosure would not be subject to materiality assessment, consistent with the TCFD recommendations and with the disclosure requirements of National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101).
Differences from the TCFD Recommendations
While generally following recommendations made by the TCFD in June 2017, two key modifications have been made in the Proposed Climate Disclosure:
- Scenario analysis: Reporting issuers would not be required to provide "scenario analysis" disclosure which would describe the resiliency of an issuer's strategies to climate-related risks and opportunities as recommended by the TCFD. The Task Force's recommendation under the TCFD is for organizations to use lower-carbon economy consistent with a 2?C or lower scenario and, where relevant to the issuer, scenarios consistent with increased physical climate-related risks.
- GHG emissions: Issuers would not be required to disclose Scope 1, Scope 2 or Scope 3 GHG emissions and their related risks provided that they disclose reasons for not disclosing this information similar to the "comply-or-explain" structure used in other securities instruments. As an alternative proposal, the CSA is considering requiring issuers to disclose only Scope 1 GHG emissions, with disclosure of Scope 2 or Scope 3 GHG emissions being voluntary on a "comply-or-explain" basis. Issuers would be provided with flexibility as to the GHG emissions reporting standard being used, with the GHG reporting standards developed by the World Resources Institute and World Business Council for Sustainable Development being the baseline GHG protocol. Scope 1, Scope 2 or Scope 3 GHG emissions are defined in the Proposed Climate Disclosure as follows:
- Scope 1 refers to all direct GHG emissions.
- Scope 2 refers to indirect GHG emissions from consumption of purchased electricity, heat, or steam.
- Scope 3 refers to other indirect emissions not covered in Scope 2 that occur in the value chain of the reporting company, including both upstream and downstream emissions. Scope 3 emissions could include: the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities (e.g., transmission and distribution losses), outsourced activities, and waste disposal.
These modifications are responsive to stakeholder concerns heard by the CSA related to cost, usefulness and comparability of climate-related information, among other things.
Background
Globally, there has been a call for increased and more streamlined disclosure by issuers with respect to environmental, social and governance (ESG) matters. Over the last decade, the CSA has published guidance with respect to continuous disclosure requirements for climate-related matters under securities legislation. These include CSA Staff Notice 51-333 Environmental Reporting Guidance (October 2010), CSA Staff Notice 51-354 Report on Climate change-related Disclosure Project (April 2018) and CSA Staff Notice 51-358 Reporting of Climate Change-related Risks (August 2019). Each of these Staff Notices have provided issuers with incremental guidance as to how to report climate-related matters.
More recently, in a Spring 2021 targeted review of climate-related information disclosed by 48 selected large Canadian issuers primarily from the S&P/TSX Composite Index, members of the CSA found that issuers are generally including more climate-related information in their continuous disclosure and other filings but that there were areas where disclosure was limited or lacked specificity. The vast majority (92%) of the issuers reviewed reported climate-related information using voluntary frameworks like the TCFD recommendations, the Global Reporting Initiative (GRI) standards or the Sustainability Accounting Standards Board (SASB) framework.
As noted above, there is a broad push towards ESG accountability among Canadian public issuers, as was particularly evidenced by the announcement by the CEOs of eight leading Canadian pension plan investment managers calling for increased transparency from issuers with respect to ESG matters. In this respect, the pension plans asked that issuers disclose ESG data in a standardized manner and specifically pointed to the SASB standards and the TCFD framework as models for standardizing ESG disclosure.
The Ontario government has also called for additional ESG disclosure by reporting issuers. In early 2021, the Capital Markets Modernization Taskforce published recommendations aimed at modernizing Ontario capital markets which included implementing mandatory disclosure of material ESG information. It was suggested that reporting issuers provide climate-related disclosure that follows the TCFD recommendations. The 2021 Ontario Budget stated that the Ontario Securities Commission would begin policy work to inform further regulatory consultation on ESG disclosure.
Further Information
The CSA is accepting comments on the Proposed Climate Disclosure until January 17, 2021. If adopted, the Proposed Climate Disclosure would be phased-in over one and three-year periods for non-venture and venture issuers, respectively. For further information, please see Consultation Climate-Related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument 51-107 Disclosure of Climate-related Matters (October 18, 2021).
Additional information about the regulation of environmental disclosure and other ESG matters in Canada can be found in the Canadian chapter of Environmental, Social & Governance Law 2021 – First Edition authored by Vanessa Coiteux, Ramandeep K. Grewal and Catherine Grygar.
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.
