Janis Sarra is a professor of law at the University of British Columbia and principal co-investigator with the Canada Climate Law Initiative.
Canada’s securities regulators have announced proposed new rules for climate-related disclosures by companies, long awaited by Canadian investors, issuers and civil society organizations.
It’s about time.
By requiring mandatory disclosure of climate-related material information, Canada will join the growing international movement to provide transparency in capital markets regarding greenhouse gas emissions, including the need for serious reductions and the scaling up of sustainable finance.
Canadian investors have long asked securities regulators to require more consistent and comparable information to help them make informed investment decisions. The proposed National Instrument on Disclosure of Climate-related Matters should create greater fairness among publicly listed companies and allow investors to make company-to-company and year-over-year comparisons in making these decisions on sustainable finance.
The disclosure aligns with the framework proposed by the G20 Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD). Mandatory TCFD-aligned disclosure has already been introduced in eight countries, including the United Kingdom and New Zealand, and has been endorsed by more than 100 governments and regulators globally.
The proposed new Instrument was prompted, in part, by a review by the Canadian Securities Administrators (CSA) of 48 Canadian publicly trading companies in 2021, primarily from the S&P/TSX Composite Index. It found that while the volume and quality of climate-related disclosures has generally improved, they are limited and lack specificity; for example, while 68 per cent of the risk disclosures provided a qualitative discussion of the related financial impacts, 25 per cent of risk disclosures did not address the financial impact at all, and no issuers quantified the financial impact of the identified risks.
This latter failure may place these companies in violation of International Financial Reporting Standards, as 11 different accounting standards have been identified by IFRS as requiring disclosure of material climate-related financial risk.
The proposed Instrument contemplates disclosure by companies of the four core elements of the TCFD recommendations – governance, strategy, risk management, and targets and metrics. Specifically, boards of directors need to disclose how they are assessing and managing climate-related risks over the short, medium and long term, including disclosing the impact of climate risks and opportunities on their business, strategy and financial planning. While they may do some scenario testing to assess the resilience of their climate strategies at different rates of global warming, they will not be required to disclose that testing. They will have to disclose metrics and targets regarding climate-related risks and opportunities where the information is material.
The CSA is proposing that issuers should be required to disclose their Scope 1, Scope 2 and Scope 3 GHG emissions and the related risks or offer a rationale for not doing so. Scope 1 covers direct emissions from owned or controlled sources; Scope 2 covers indirect emissions from the generation of purchased electricity, heating and cooling the company consumes; and Scope 3 includes all other indirect emissions that occur in a company’s value chain.
However, the CSA has left itself an out. It is consulting on whether required disclosures should be just Scope 1 emissions. That alternative proposal is completely out of line with international developments. Former Bank of Canada governor Mark Carney, currently UN Special Envoy for Climate Action and Finance, has said that a priority for the coming United Nations COP 26 meeting is to ensure that governments and the private sector set targets for net-zero emissions, including Scopes 1, 2 and 3 emissions.
Investors and lenders need to know that a company has a net-zero target that covers Scopes 1, 2 and 3 emissions, including short- and medium-term milestones to monitor progress in the transition. Mr. Carney has urged companies to invest to reduce emissions in their supply chain in order to meet Scope 3 net-zero targets.
The proposed instrument contemplates a phased-in transition of the disclosure requirements, with all companies, except venture start-up companies, given a year to transition, and venture companies given three years to meet the new requirements. The CSA is suggesting that if the proposed instrument comes into force in December, 2022, these disclosures would be included in annual filings due in 2024 and 2026.
The release of the proposed National Instrument on Disclosure of Climate-related Matters is overdue, but a positive move by securities regulators. It should be accompanied by federal government action to align financial markets. Some of Canada’s most powerful banks, and insurance companies and institutional investors are federally regulated and the government should move swiftly to require climate action plans that align with setting emissions-reductions targets.
The U.K. and other governments are extending climate action disclosure and management of risk requirements to large privately held companies in order to ensure consistent and meaningful transition across the economy. Canada should follow suit.
Directors, officers and pension fiduciaries are already obligated as part of their duty to act in the best interests of the company or pension beneficiaries to identify and manage climate-related financial risks. The proposed Instrument, accompanied by new federal regulation, would help crystallize the full scope of those duties and make transition toward net-zero emissions transparent and meaningful for the investing public, consumers, and pension beneficiaries.
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