CSA's climate-disclosure consultation a vital step forward for Canada

Two sustainability leaders commend regulators' resolve in promoting climate change action among companies, but questions remain

CSA's climate-disclosure consultation a vital step forward for Canada

While global leaders continue to consider the ramifications of climate change and what policy actions can be taken to avert the worst-case environmental scenario for the planet in the coming decades, a new set of climate-related disclosure proposals from Canada’s securities regulators is stoking cautious optimism among ESG-focused professionals in the investing industry.

Last month, the Canadian Securities Administrators (CSA) took a significant step forward in advancing ESG investing by unveiling a draft framework of proposed climate disclosure requirements for reporting issuers.

“With global momentum building on sustainability-related disclosures in both the public and private sectors, these proposals reflect our vision and expectations for reporting issuers as we move towards a global baseline for such disclosures,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers, in a statement announcing the draft requirements.

The proposal, which has been opened to a 90-day public consultation ending on January 17, 2022, draws substantially from a framework recommended by the Task Force on Climate-related Financial Disclosures (TCFD). That framework is built upon four core elements: governance, strategy, risk management, and metrics and targets.

To Jamie Bonham, director of Corporate Engagement at NEI Investments, the CSA’s climate-disclosure consultation represents a vital step forward for responsible investing in Canada.

“It's been a long time coming. Investors have been pretty clear about the need for this kind of disclosure framework for a while now,” Bonham told Wealth Professional. “There's been fits and starts where CSA has jumped into this space, but hasn't really done anything all that satisfactory. So I see this as a substantive improvement on what we've seen before.”

Michael Torrance, vice president and chief sustainability officer at BMO Financial Group, saw the CSA’s move as the latest piece in a broader regulatory trend. The U.S. Securities and Exchange Commission (SEC), he noted, has also launched a consultation on climate-related disclosures. Domestically, the report from Ontario’s Capital Markets Modernization Taskforce released in January this year specifically cited the TCFD framework in a section focused on enhancing climate disclosures.

“By following the TCFD framework, the CSA is encouraging a very comprehensive discussion of how climate is being thought of and managed within the organization,” Torrance said. “I think this will increase the focus on climate as a core part of business strategy.”
To Bonham, one thing that sticks out in the 74-page document concerns the disclosure of greenhouse gas (GHG) emissions, for which the CSA is considering two different approaches. Under one approach, reporting issuers would be required to report only scope 1 emissions – greenhouse gases generated by company-owned and controlled resources. In the alternative, issuers would also have to disclose scope 2 and 3 emissions, which include GHGs generated from the company’s energy use, the goods and services it purchases, its business travel activities, its leased assets, and a plethora of other sources outside of its direct control.

“I’m struggling to see the purpose of having those two alternatives,” Bonham said. “For some industries, scope 1 emissions represent the bulk of their emissions. But for many others, it doesn’t even come close to representing what their actual carbon footprint is.”

For his part, Torrance acknowledged that quantifying indirect emissions, particularly under scope 3, represents a significant challenge. Because there aren’t clear international standards around how to quantify and disclose scope 3 data, imposing regulatory requirements on all emissions across all industries could, at this point, be a bridge too far.

Another interesting item, can be found under the CSA framework’s strategy pillar. While the actual TCFD recommendations call for companies to do an analysis of risks they would face under different climate-change scenarios, the CSA’s proposal drops that requirement.

“The scenario analysis is easily the hardest ask in the TCFD framework,” Bonham said. “Frankly, the ones doing it tend to be companies with a lot of resources and dedicated teams to work through the permutations of scenarios. And unlike the usual financial disclosures, these types of analysis tend to be a lot fuzzier – a company could model a particular set of possibilities and impacts, which could diverge radically under different conditions – which tends to make people uncomfortable.”

To avoid excessively burdening smaller venture issuers, he said the CSA is giving them a window of three years to comply with its disclosure requirements, in contrast to just one year for larger businesses. During that phased-in transition, he said industry associations can step in – particularly in sectors with a lot of small enterprises – to assist their members in navigating through reporting frameworks and methodologies to measure and account for climate-related data.

Still, Torrance sees that as a challenge in itself. “I think there’s going to have to be a lot of additional work within the industry, maybe the accounting profession, to develop more clear methodologies for how this is done,” he said. “Otherwise we’ll be back at square one, with metrics and disclosed data being produced based on uncertain methodologies, which impair their comparability.”

Many other questions will also have to be answered down the line. With respect to materiality, for example, companies may have to make judgment calls on whether a climate issue that’s relevant to their investors, but not necessarily to their businesses specifically, should be included in reporting. There’s also the question of where the disclosure framework would be best applied – whether in annual sustainability reports, MD&As, or elsewhere.

But wherever the industry and regulators land, one thing is clear to Bonham as of now: the new disclosure consultation promises to be a major step forward from the present situation, where Canadian investors have to struggle with inadequate, non-standardized, and fragmented climate information from companies.

“It will give us that kind of consistent data that is just not there right now,” he said. “I think it’s another signal that Canada is taking the climate change challenge seriously, which will serve us well in international markets.”

Torrance agrees. “It’s a positive development when important players like the CSA are helping to set standards, and doing it in a way that takes broader international efforts into account,” he said. “We would love to see alignment, to avoid having competing and divergent expectations across different jurisdictions. And I think the CSA’s work reflects that.”