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British energy company Shell employees walk through Shell's largest solar park in Europe hosting more than 128,000 solar panels in a polder near Terneuzen, southern Netherlands on Oct. 24.JEROEN JUMELET/AFP/Getty Images

Europe has ushered in a new era of sustainability reporting for companies, imposing new requirements to provide details about their impact on the climate and other environmental and social factors under new rules that many Canadian corporations will have to adopt.

Last week, the European Union formalized standards that take disclosure beyond climate- and sustainability-related risks affecting corporate prospects. Called the Corporate Sustainability Reporting Directive, or CSRD, corporations will have to also disclose their effects on the environment and society. A first group of companies will begin applying the new rules in 2024, and publish reports the following year.

Despite pushback from members of the European parliament opposed to increasing environmental, social and governance burdens, the body approved the rules that will eventually be adopted by nearly 50,000 companies. An estimated 10,000 corporations from outside the continent, many based in Canada, will have to report if they have met certain criteria.

Among those are listings on regulated EU stock exchanges, sizable operations on the continent or subsidiaries based in EU member countries. The regulation covers both public and private companies.

Beyond that, some Canadian companies are starting to gather data, establish reporting systems and understand legal risks on the assumption that a version of the EU rules could also be adopted in other jurisdictions down the road, said Roopa Davé, partner, ESG and climate services, at KPMG.

“Our clients are pragmatic in that they understand it’s coming. They want to understand the baseline: Where are we at? What are our gaps and what do we need to get started to get ready for this?” Ms. Davé said.

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Expanding disclosure into what is known as double materiality comes as Canada and rest of the world adopt the first two standardized reporting guidelines recently formalized by the International Sustainability Standards Board, or ISSB. A new Canadian Sustainability Standards Board is consulting with industry and studying how the international standards can be adapted to recognize the country’s heavy reliance on resource-based and export industries, as well as its large concentration of small and medium-sized businesses.

In a recent survey of Canadian ESG disclosure, the Montreal-based consultancy Millani found that 19 per cent of companies listed on the S&P/TSX Composite Index, many of them in resource extraction, conduct double-materiality assessments in some form. The survey found that not all of them use that terminology. The field is emerging, so any differences could stem from market confusion, uncertainty about recognized reporting frameworks or competitive considerations, Millani said.

It is not clear if Canadian regulators will force companies and financial institutions to adopt the EU-style requirements. After an early attempt to set rules for climate-related disclosure stalled, securities commissions are now focused on the the international standards, which start to come into effect next year, said Stan Magidson, chief executive officer of the Alberta Securities Commission and chair of Canadian Securities Administrators.

Rather than European rules, provincial securities watchdogs are more focused on developments at the U.S. Securities and Exchange Commission, given how influential it is for the Canadian market, partly because so many companies are listed in both countries. The SEC is in the process of developing its own rules against a backdrop of a backlash against ESG reporting, litigation and questions about the extent of the regulator’s authority, Mr. Magidson said in a recent interview.

“When we are thinking about whether or not we would want to adopt ISSB, they have prefaced their instrument on materiality to the issuer and the investor. So that currently is consistent with the view we have at the CSA,” he said.

Even if it does not become a regulatory requirement in Canada in the near future, double materiality represents best practice and can bolster competitiveness, said Milla Craig, CEO of Millani. It is also an opportunity for companies to highlight positives they are achieving on the sustainability front that may not be reflected in risk reporting.

“There are some really great insights that come to a business when you use this double-materiality lens. By doing that, even if you are not regulated by anyone to do so, this becomes a business strategy. Even if you don’t call it double materiality, you are learning something about the business or the perceptions or the impacts,” Ms. Craig said.

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