O Canada!

OSFI’s draft guideline on culture and behaviour risks

Recognizing that organizational culture plays a critical role in decision-making and particularly in effective risk management, the Canadian Government’s Office of the Superintendent of Financial Institutions (OSFI) has released a draft Culture and Behaviour Risk Guideline outlining principles-based expectations for Federally Regulated Financial Institutions to oversee their culture and assess the impact of behavioural patterns to effectively manage associated risks. Importantly, it is intended to be used in conjunction with other OSFI guidelines on corporate governance, operational risk management, and regulatory compliance management. The consultation period ends May 31, 2023, and a final guideline is expected by the end of 2023. In a nutshell, OSFI expects Federally Regulated Financial Institutions to (i) define a desired culture and continuously develop and improve the culture to support their purpose, strategy, effective management of risks, and resilience; and (ii) continuously evaluate and respond to behaviour risks that can affect their overall safety and soundness. We find it significantly noteworthy that a federal financial market regulator considers it part of its purview to set expectations about organizational culture. Furthermore, the guidance explicitly positions culture as part of governance and management functions. It elevates the importance of culture as a management tool for which senior management needs to be accountable. The principles-based and outcomes-focused approach reflects the recognition that every organizational culture is unique. Indeed. Which makes this guidance applicable to all organizations, including companies!

OSFI’s final guideline on climate risk management

It’s been a busy period for the Office of the Superintendent of Financial Institutions (OSFI), which also released its long-awaited final Guideline B-15: Climate Risk Management . This guideline establishes the regulator’s expectations for how all Federally Regulated Financial Institutions, including all major banks and insurance companies, manage and disclose climate-related risks. Disclosure expectations are heavily based on the Task Force on Climate-related Financial Disclosure (TCFD) Recommendations, as well as the Partnership for Carbon Accounting Financials’ (PCAF) Global GHG Accounting and Reporting Standard for the Financial Industry. Interestingly, what seems to have been dropped from the guideline since the draft version is reference to the IFRS Foundation’s IFRS S2 Climate-related Disclosures (and related financial sector-specific SASB Standards). Implementation of the disclosures required by this guideline will be effective for fiscal periods ending on or after October 1, 2024 following a phase-in approach (see Annex 2-2). As we mentioned last May when the draft version was released for consultation, when it comes to mandatory climate disclosures, the Canadian federal government has proven much bolder and more forward-thinking than the Canadian Securities Administrators (aka provincial securities commissions) thus far.

Government of Canada new green standards for major contracts

Speaking of climate disclosures, the Government of Canada is implementing a new Treasury Board Standard on the Disclosure of Greenhouse Gas Emissions and the Setting of Reduction Targets. As of April 1, 2023, major Government of Canada suppliers (for procurements over CA$25M) will now be compelled to disclose their greenhouse gas emissions and set reduction targets. Perhaps a little disappointingly, this requirement can be fulfilled simply by participating in Canada’s Net-Zero Challenge or another approved internationally recognized and functionally equivalent standard or initiative. The Canadian Government also announced a new Treasury Board Standard on Embodied Carbon in Construction that will require the reporting and reduction of the embodied carbon footprint of all new major government construction projects and is part of implementing a Buy Clean Strategy in federal government procurement.

Canada’s Taxonomy Roadmap Report

The Sustainable Finance Action Council (SFAC) has released its Taxonomy Roadmap Report (finalized last September), which outlines a framework to guide the development of a Canadian Green and Transition Finance Taxonomy that will enable businesses and capital providers to credibly identify green and transition projects and facilitate the mobilization of capital towards the transition to a net-zero economy. In other words, a “made-in-Canada framework to establish standardized and science-based definitions of?climate-compatible investments ”. It makes ten recommendations, including that Canada should indeed develop its own green taxonomy, that this should be done by the federal government with the financial sector, and that a three-tier governance model to create the taxonomy should be implemented. As the independent Core Knowledge Partners for this project, the Canadian Climate Institute’s summary article and the Institute for Sustainable Finance’s Briefing Note are both very useful to quickly wrap your head around this taxonomy project, while this article from Investors for Paris Compliance makes for an interesting counterpoint read.

Final Report of the Independent Review Committee on Standard Setting in Canada

The Independent Review Committee on Standard Setting in Canada has released its final report – a process announced in May 2021, launched in December 2021, and open for consultation until February 2022. This review committee had been created by the Accounting Standards Oversight Council and the Auditing and Assurance Standards Oversight Council to conduct the first comprehensive review of the Canadian standard-setting environment in 20 years, with the objective of considering i) the extent to which the Canadian accounting, auditing, and assurance standard-setting model can effectively respond to the rapidly evolving global environment and ii) any changes needed to ensure that it will continue to be independent and internationally recognized. Of course, sustainability reporting and assurance standards were a significant driver and topic of this review. Recommendations include making changes to the current structure and funding of the Canadian standard-setting model to foster increased independence, efficiency, and effectiveness, as well as changes to better incorporate the unique rights and perspectives of Indigenous Peoples into Canadian standard setting. In addition, the review committee did not wait for its final report to recommend the creation of a Canadian Sustainability Standards Board (CSSB), which the two oversight councils approved last June, and which is expected to be operational on or around April 1, 2023. The CSSB will work alongside Canada's existing accounting, auditing, and assurance standards bodies and will liaise with the IFRS Foundation’s International Sustainability Standards Board to bring the Canadian perspective to international decision-making. It’s worth noting that this is actually normal course of business in many countries, which have their own national financial reporting standards that adopt and adapt the International Financial Reporting Standards (IFRS). It’s only normal to establish a similar structure for sustainability reporting standards.?

Useful summary on the European Sustainability Reporting Standards

Anyone looking to catch up quickly on the status of the European Sustainability Reporting Standards can do so with the EFRAG Update for March 2023. There is a good visual summary on page 2 and a detailed narrative starting on page 18. To access the actual standard documents, scroll to the bottom of this page .

Credit ratings vs ESG ratings

This explanation by the Principles for Responsible Investment of the differences between credit ratings and ESG ratings (and ESG in credit ratings) is by far the most useful resource we’ve seen in a long time. This is a must-read for anyone practicing in the corporate sustainability reporting and sustainable finance space. In addition to describing exactly how the two types of ratings are similar and (mostly) different, if you scroll to the bottom of the page you can download some additional tools, including an anonymized comparison of credit and ESG ratings for approximately 120 companies that shows i) much consistency of scores among credit ratings, much less so among ESG ratings (we knew that) and ii) not so much consistency in the levels of a company’s credit rating and ESG rating. Food for thought.