This article appears in the November 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Canadian securities regulators are reconsidering their climate risk disclosure proposals in light of feedback from Canadian firms and organizations to align rules with global standards.
In October 2021, the Canadian Securities Administrators (CSA) was among the first out of the blocks with proposals to beef up climate reporting standards for public companies. Since then, the International Sustainability Standards Board (ISSB) launched and issued its own draft standards and the U.S. Securities and Exchange Commission (SEC) waded into the fray. Now, the CSA is reviewing how such initiatives may affect its proposals.
Canadian issuers, asset managers, trade groups and others have made numerous submissions to both the SEC and ISSB consultations. Most submissions encourage the various standards-setters to harmonize their proposals.
“Ideally, the SEC and CSA align their reporting requirements with global standards, such as those being proposed by ISSB, to further support consistency and comparability of data,” stated the Canadian Investor Relations Institute’s submission to the SEC.
Moreover, some submissions warned that divergent requirements would add compliance costs for companies but offer little benefit to investors.
“Introducing additional climate disclosure obligations as similar rules are being developed in Canada would also introduce a significant regulatory burden for issuers without improving access to climate-related information,” stated Sun Life Financial Inc.’s submission to the SEC.
While all three regulators based their proposed requirements on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), there are fundamental differences among the approaches that can’t be easily resolved.
Overall, the CSA’s proposals are much less demanding than the SEC’s and the ISSB’s. The CSA’s initiative contemplates voluntary, limited disclosure requirements, while the SEC calls for more extensive mandatory disclosures, including detailed, location-specific disclosure of climate risks and exhaustive financial impact disclosure. The ISSB also would mandate more extensive requirements than the CSA’s proposals.
Other key points of divergence include the location of disclosure (within issuers’ financial statements or not) and the degree of oversight required (such as independent attestation).
“Divergence in methodologies and requirements is emerging, which could result in added confusion for investors and other stakeholders, operational challenges, reporting burden for preparers, and increased compliance costs,” the Canadian Bankers Association’s submission to the ISSB stated.
And submissions to the SEC from several issuers argued interlisted companies should be allowed to rely on the so-called multijurisdictional disclosure system to comply with rules in the U.S. by meeting Canadian standards that will probably be more lax.
However, asset managers and pension funds generally prefer the tougher standards of the SEC and the ISSB.
“While Canadian climate-related disclosure requirements are currently being formalized by the [CSA], we are concerned there may be material gaps between the requirements in the CSA standard and what the [SEC] has proposed,” stated Toronto-based fund manager NEI Investments’ submission to the SEC. “At present, we believe the best way to ensure a consistent disclosure standard across registrants is to require all issuers to follow the [SEC’s] disclosure requirements.”
To the extent that the ISSB standards meet the SEC’s requirements, NEI stated, “we believe there would be significant utility in aligning the two regimes such that they are interchangeable for compliance purposes.”
Yet, the CSA revealed in its submission to the ISSB that it appears committed to a softer approach, advocating for less stringent rules.
For example, the CSA said it believes it’s “premature at this time to require disclosure of Scope 3 greenhouse-gas emissions as well as scenario analysis or other assessments of climate resilience.”
Scope 1 refers to an issuer’s direct emissions, Scope 2 covers indirect emissions that a company has control over (such as its own power consumption), while Scope 3 includes all emissions connected to a company’s operations (upstream and downstream). Scenario analysis — recommended under the TCFD requirements but ruled out in the CSA’s proposal — aims to project how a company could be affected by climate change.
The CSA’s submission to the ISSB acknowledged the potential value of these kinds of disclosure, but suggested the disclosure be introduced on a voluntary basis or that the requirements be phased in to allow more time for the industry to develop the data and methodologies.
“[W]e do not support requiring these disclosures until assessments of climate resilience are more mature and there is greater consensus around the appropriate assumptions, methodologies and timeframes for these assessments,” the CSA stated.
The CSA also suggested that the disclosure surrounding carbon offsets proposed by the ISSB is premature, given the relative youth of the carbon offset market — notwithstanding the fact that the European Union Emissions Trading Scheme has been up and running since 2005. And the CSA recommended the ISSB’s reporting standards include accommodations for smaller issuers.
Some investors are pushing back on this cautious approach, arguing there’s no need to wait until emissions reporting becomes highly standardized before demanding disclosure from companies.
“While we understand that methodologies for assessing Scope 3 emissions continue to evolve, the true value of a Scope 3 emissions assessment is not in the number itself. Rather, it is a lens with which companies, and investors, can view the company’s strategy through,” NEI Investments’ submission to the SEC stated.
“Similar to scenario analysis, we believe the real value in Scope 3 reporting is in the process and would like to see all companies with a material Scope 3 footprint undertake the exercise of assessing their exposure,” NEI added. “We believe the international trend is towards the disclosure of Scope 3 emissions.”
The British Columbia Investment Management Corp., based in Victoria, B.C., also favours mandatory disclosure for companies where deemed material. “Scenario analysis is a key pillar of the TCFD recommendations and is most material for those companies with capital-intensive businesses and those significantly impacted by transition and physical climate risk,” the corporation’s submission to the SEC stated.
The SEC had planned to finalize its requirements in October 2022, but that’s been pushed back after the comment period was extended by a month. The ISSB’s target for issuing final standards is Q1 2023 (with the International Organization of Securities Commissions aiming to endorse the final requirements soon after).
The CSA has been on a similar timeline for finalizing its rules, with the expectation that those requirements will be phased in over several years.