New global sustainability reporting standards for companies were formalized on Monday, though Canadian businesses will have several months to prepare as a domestic standards body and financial regulators work out the details of how they will be adopted in this country.
The International Sustainability Standards Board, launched in 2021, is publishing its first two measures aimed at setting a global baseline for reporting on carbon emissions and other environmental and social issues that have material impact on the financial health of companies. The rules, designed to eliminate a mishmash of disclosure standards and protect investors from greenwashing, are set to become effective at the start of 2024.
But they won’t automatically be mandatory in Canada, or in other parts of the world.
“I’m hearing panic from the preparers,” said Lisa French, vice-president, sustainability standards, for Financial Reporting & Assurance Standards Canada. Ms. French has been instrumental in the establishment of the Canadian Sustainability Standards Board, which is charged with making sure the international rules are fit for the domestic economy.
“I think a lot of people think we just take these standards and that’s it,” she said. “They need to understand there’s a process for this and two distinct components of the machine – there’s the standard setters, the CSSB, and there are the regulators.”
Those include the provincial securities commissions as well as the Office of the Superintendent of Financial Institutions, which regulates the big banks, insurers and pension funds. The regulators are in charge of mandating the measures once the CSSB finishes researching their technical merits.
On Monday, the CSSB, led by chairman Charles-Antoine St-Jean, added five representatives from the energy, fertilizer and mining industries to its roster of members. Professionals from Quebec and from the pension sector will be appointed later this year. The board will examine the global standards and how they can be adapted to the Canadian context – recognizing the country’s heavy reliance on resource-based and export industries, as well as its large concentration of small and medium-sized businesses, Ms. French said.
The initial set of ISSB standards calls for disclosure of material information about sustainability-related financial, market and legal risks, in similar fashion to traditional accounting. Under that standard, sustainability and financial statements will be published at the same time. After consultations, the ISSB decided to recommend companies focus on climate first, then adopt disclosure practices for other sustainability factors, such as human rights and biodiversity, a year later.
The international board also calls for reporting of important climate-related factors, including risks tied to the transition to lower-carbon energy and physical damage to company assets from natural disasters, as well as opportunities that arise from technological advances.
Disclosure of three emission scopes will be required for investors to understand. Scope 1 includes carbon emissions from a company’s own operations. Scope 2 covers emissions from the energy a company buys to power its plants. Scope 3 comprises emissions along a company’s supply chain and from the end use of its products. In the latter case, companies will get an additional year to familiarize themselves with the technical aspects and gather data.
The ISSB material released on Monday provides more details and the rationale behind the standards, and aims to eliminate uncertainty, said Jingdong Hua, the ISSB’s vice-chair.
“We have a body of material that, once read in totality, in my judgment, will give a lot more clarity to the stakeholders, including preparers, investors and regulators,” he said in an interview. “So that package should be able to give a lot of answers to questions which obviously everybody is anxious about. So that is the first step.”
Mr. Hua, who was previously treasurer of the World Bank, said the ISSB will collaborate with its Canadian counterpart to move toward mandatory adoption of the standards. But he noted that the Canadian Securities Administrators, the umbrella group for provincial securities commissions, and other regulators will ultimately make those decisions.
The ISSB’s next standards will concentrate on biodiversity and nature, human capital, human rights and integrating financial and sustainability accounting. The board is seeking public comments through August to determine the order.
“We want the market to inform us what priorities they prefer, and within each topic, where we need to focus and what areas we’ve not really paid attention to,” Mr. Hua said.
Jeffrey Jones