Climate change related reporting - those requirements may finally be coming out. Unfortunately they may not all be consistent.

Going back a few years, the topic of climate change was at the top of the list for most companies, but over the last few years, the broader topic of ESG (which obviously includes climate change) has made it’s way to the top of the priority pile. We are now several years into that discussion, and I would argue many years into it, we just don’t know it. But the point is we are moving past, if we have not already, the questions of “what is ESG” and “is it a topic I even need to address”, to more of a question of “what specifically do I need to do”. And the answer to that question is of course “it depends”. It depends on what industry you are in, what part of the world you are in, and whether you are in the public or private company worlds. In most cases though, it is hard to avoid the topic of ESG completely, and for some areas, such as energy transition, it is a full on priority issue to address. But like many topics, it is easier to digest when you bring it down into pieces. So let’s discuss the climate change portion.

?So where are we now, particularly in Canada which historically has not set a blazing pace of regulatory reform on that front? For Canadian companies, and those that go out into the rest of the world from here, generally we are still at the stage of facing guidance and proposals, rather than explicit regulations. There are four major climate change disclosure proposals that have been published and are at varying stages. There is a common thread across all four proposals in that they are all based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and cover similar topics—including climate-related governance, strategy, risk management and metrics and targets—the scope and depth of requirements of each proposal differs in important respects:

1. ?The Canadian Securities Administrators’ (CSA) proposal, National Instrument 51-107 - Disclosure of Climate-related Matters, released in October 2021.
2. The U.S. Securities and Exchange Commission’s (SEC) proposal, The Enhancement and Standardization of Climate-Related Disclosures for Investors, released in March 2022.
3. The International Sustainability Standards Board’s (ISSB) proposal, Exposure Draft IFRS S2 Climate-related Disclosures, released in March 2022, which aims to create a global baseline for climate-related disclosure standards (think about that – a global baseline – that is an ambitious target); and
4. the Office of the Superintendent of Financial Institutions (OSFI) Guideline B-15 Climate Risk Management, finalized on March 7, 2023, which sets out expectations for federally regulated financial institutions’ management and disclosure of climate-related risks.

?It wouldn’t be Canada if we didn’t have multiple bodies and organizations studying the same thing, so let’s also mention that a new Canadian Sustainability Standards Board (CSSB) has recently been established by Canadian accounting and auditing standard-setting bodies. The CSSB has been designed to work in tandem with the ISSB to develop and support the adoption of IFRS sustainability disclosure standards, to ensure that any standards adopted in Canada are relevant, responsive and fit-for-purpose domestically.

?Outside of these proposals, there are also stakeholder pressures coming through the regular engagement process. For public companies, shareholders have a mechanism to express their demands of company management when it comes to these topics and others. Public companies should expect stakeholders to demand accountability to targets and greater scrutiny of climate disclosures both from regulators and potential litigants focused on greenwashing claims. So we have moved from being in a world where you could say things you hoped to do, to a world where people will hold you accountable if you don’t do them. The markets also want consistent and comparable reporting. Many companies who have set net zero targets and are reporting, or intending to report, on Scope 3 emissions are also seeking standardized rules for greenhouse gas (GHG) emissions reporting in their value chain. The markets always want to be able to compare apples to apples.

?The four proposals above are working on different timelines. Here is where they are:

ISSB: working towards issuing final standards at the end of Q2 2023, with the first sustainability-related disclosures to be reported in 2025 in respect of annual reporting periods beginning on or after January 1, 2024. Although the UK government has confirmed its intention to adopt climate-related reporting standards in alignment with the final ISSB standards, Canadian and U.S. securities regulators have not made similar announcements to date.

CSA: analyzing the key differences between the proposals and continuing to monitor their evolution, as well as taking into account comments on the proposed rule. While finalizing climate change disclosure rules continues to be a priority for Canadian securities regulators, we expect that the CSA will be monitoring the release of the final ISSB standards, and their endorsement by the CSSB, before releasing a further proposal (that is consistent with the CSA’s past approach to new rules).

SEC: taking into account nearly 15,000 comments on the proposed rule and working towards issuing the final rule. Although initially targeted for publication in April 2023, the proposal has become highly politicized, attracting debate in the House of Representatives, and is expected to be delayed. No surprise to anyone on that front.

OSFI: Although last to publish its draft guideline, OSFI was the first, and so far the only, regulator to have finalized its climate proposal. OSFI has indicated that it intends to review and amend its guideline as practices evolve and standards harmonize, including to take account of the final ISSB standards.

While the initial CSA and SEC proposals contemplated reporting to commence as early as 2024 (in respect of 2023), given the delays, I would not be surprised if securities regulators instead adopt the current ISSB timeline. If they do so, reporting would likely be required in 2025 at the earliest and would be phased in over time. OSFI’s guideline staggers implementation, with disclosure requirements beginning no earlier than in respect of the fiscal period ending on or after October 1, 2024.

?The big question is what can you do to prepare? While the final rules are pending, assuming you expect they won’t just disappear completely, public companies are encouraged to take the following steps to prepare for implementation:

1. ?Internal consensus - Develop and strengthen internal governance structures for overseeing climate-change related strategy, risks and opportunities. It is easy to spin your wheels and go in multiple different directions that are not consistent with overall company strategy. Ask who will have oversight of the organization’s climate strategy and be the key decision makers for its implementation and public communications, and what processes will be established to ensure adequate board oversight? Consider board orientation and training tools to build climate competency so that boards are empowered to oversee this topic, like they do for many others.
2. Data collection – One of the toughest things for companies to do is figure out what information are they going to collect and from where. Establish a data collection process that can be reviewed and verified by a third party to obtain reliable GHG emissions data. Each of the proposals requires some version of GHG emissions reporting and it is likely that Scope 1 and 2 emissions reporting will become mandatory over time. So collect the information now, and figure out later on if you need all of it. While it is widely expected that Scope 3 emissions reporting will not be mandatory initially, market pressure might lead issuers over time to disclose at least some Scope 3 emissions related to a company’s value chain, especially to the extent the company covers those Scope 3 emissions in a GHG reduction target.
3. What do you hope to achieve? Obtain internal alignment on targets, including how those targets are defined, how they align to science-based emissions reduction trajectories, how they are measured, what steps will be required to achieve them, and, in cases where there is discretion in how to apply reporting metrics, the rationale for reporting decisions. Consider the internal controls and procedures you will need to have in place to ensure that your CEO and CFO can comfortably certify these disclosures, as they will likely have to do. Targets, metrics and related practices should be well-defined and reasonable before reporting obligations begin.
4. Be consistent with the past - Review your previous and upcoming voluntary disclosure on climate related matters and consider how it can be improved or may need to be revised. This is one of the first climate change related areas I worked on with clients – aligning then new climate disclosures with previous ones so you do not point out inconsistencies. If you are not already preparing TCFD-aligned disclosures, consider preparing a “dry run” report for internal purposes to familiarize management and the board with the disclosure that will be required under the new rules when implemented.
5. Consider whether to seek external validation of GHG emissions data. Even if not required by the final rules, third-party attestation gives investors, issuers and their boards a degree of comfort that these disclosures are reasonable, verifiable and have been subject to independent review. To me, this is a no brainer for board liability purposes.
6. Unfortunately, just meeting the requirements in your home jurisdiction isn’t usually enough. You have to know what local rules apply everywhere your company touches down or does business. Determine the applicability of other climate disclosure regimes. For example, the European Sustainability Reporting Standards are broad and apply to certain European Union (EU) subsidiaries of non-EU parent companies and non-EU parent companies.

?Finally, on the positive side, remember that in most cases, many companies have been addressing climate change and broader ESG issues for years, they just may not know it because we didn’t label it a “climate change strategy”. So be sure to review your corporate history and take credit for what you have done in the past or at least use it as a basis for continued behaviour in the future.