BACKGROUND
As we reported in our October 2021 Blakes Bulletin: CSA Seeks Comments on
Climate-Related Disclosure Rules, on October 18,
2021, the Canadian Securities Administrators (the CSA) issued a
notice and request for comment on proposed National Instrument
51-107 – Disclosure of Climate-related Matters and
its companion policy (collectively, the Proposed Instrument), which
would introduce specific disclosure requirements regarding
climate-related matters for most public companies in Canada. The
Proposed Instrument is largely based on the disclosure standards
prescribed by the Task Force on Climate-related Financial
Disclosures (the TCFD Framework).
Since the Proposed Instrument was issued and its comment period
closed, following a 30-day extension, on February 16, 2022, several
significant developments occurred in the international
climate-related disclosure landscape. In particular, on March 21,
2022, the United States Securities and Exchange Commission (the
SEC) published its proposed set of rules regarding climate-related
disclosure (the Proposed SEC Rules). Then, on March 31, 2022, the
International Sustainability Standards Board (the ISSB), an
environmental, social and governance (ESG) standard-setting body
established by the International Financial Reporting Standards
(IFRS) Foundation, issued two proposed international standards for
ESG-related disclosure: (i) IFRS S1 – General
Requirements for Disclosure of Sustainability-related Financial
Information; and (ii) IFRS S2 – Climate-related
Disclosures (collectively, the ISSB Drafts).
The Proposed SEC Rules, as presently drafted, will not impact the
vast majority of Canadian public companies, as they apply only to
domestic U.S. issuers, as well as foreign private issuers that do
not report through the multijurisdictional disclosure system.
Similarly, the ISSB Drafts are not intended to be binding on
Canadian public companies and are instead intended to function as a
global guidepost to promote consistency among climate-related
disclosure standards across jurisdictions. However, the Proposed
SEC Rules and the ISSB Drafts represent two of the most influential
climate-related disclosure frameworks, to which we nevertheless
expect Canadian public companies to look for guidance in developing
their climate-related disclosure. Accordingly, in response to these
developments, on October 12, 2022, the CSA provided an update on
the status of the Proposed Instrument (the CSA Update).
THE CSA UPDATE
The CSA advised that they are "actively considering
international developments", including the Proposed SEC Rules
and the ISSB Drafts, and how they may "impact or further
inform" the Proposed Instrument. In particular, the CSA noted
that while the Proposed SEC Rules and ISSB Drafts, like the
Proposed Instrument, are premised on the TCFD Framework, there are
"substantive differences" among the three proposals,
which the CSA is continuing to analyze.
Insight as to how the CSA will address these developments in the
Proposed Instrument may be drawn from a comment letter (the Comment
Letter) the CSA published on July 25, 2022, in response to the
issuance of the ISSB Drafts. In the Comment Letter, the CSA praised
the ISSB's "progress in developing a global reporting
baseline" for sustainability-related disclosure and lauded the
ISSB Drafts as "an important step forward" in this
regard. However, the CSA also highlighted four areas where, from
its perspective, the ISSB Drafts would benefit from certain
changes:
i. Primacy of Climate-Related Disclosure
Under the ISSB Drafts, issuers must disclose material information regarding "significant sustainability-related risks and opportunities". The CSA expressed concern that, by using the general term "sustainability-related" (as opposed to the more specific term "climate-related" in the Proposed Instrument), the ISSB Drafts encompass an overly broad range of activities. The CSA's issue with such approach is that it may have the unintended effect of deemphasizing the climate-specific aspects of such disclosure and thereby detract from the ISSB's "climate-first" mandate. The CSA therefore recommended that the ISSB consider the interaction between the ISSB Drafts and topic-specific disclosure standards, as well as prioritize finalizing the aspects of the ISSB Drafts that specifically address climate-related matters.
ii. Scalability and Phasing
The CSA also highlighted the cost and expertise required to
comply with several aspects of the ISSB Drafts. For example, the
ISSB Drafts would require issuers to engage in "scenario
analysis", which involves evaluating the resiliency of their
strategic plans to a range of climate-related scenarios, including
a 2°C scenario. They would also mandate the disclosure of Scope
1 greenhouse gas (GHG) emissions (all direct GHG emissions by an
issuer), Scope 2 GHG emissions (all indirect GHG emissions arising
from an issuer's consumption of purchased electricity, heat or
steam) and, subject to limited exceptions, Scope 3 GHG emissions
(all other indirect GHG emissions of an issuer, other than those
described in Scope 2). In contrast, due to the costs associated
with preparing such information, as well as concerns regarding its
consistency and comparability, the Proposed Instrument does not
presently require issuers to conduct a scenario analysis and takes
a "comply or explain" approach with respect to GHG
emissions disclosure.
In the Comment Letter, the CSA argued that including scalability
and phasing elements in the ISSB Drafts would better accommodate
the varying needs and capabilities of a diverse range of issuers,
and, in turn, promote more widespread adoption of ISSB standards.
In particular, the CSA recommended that the scenario analysis and
Scope 3 GHG emissions disclosure requirements be either phased in
or introduced initially on a non-mandatory basis. Furthermore, the
CSA suggested that certain of the more data-intensive disclosure
requirements in the ISSB Drafts would benefit from scaling and
improved implementation guidance to account for the fact that
smaller issuers may lack the resources and expertise required to
comply with such obligations.
iii. Industry-Specific Requirements
The ISSB Drafts include a number of industry-specific disclosure requirements, which were developed by the Sustainability Accounting Standards Board (SASB). In the Comment Letter, the CSA noted that such requirements would present "significant challenges" for issuers on account of the volume and specialist nature of information they entail. Consequently, the CSA suggested that the industry-based SASB standards be made optional, with the possibility of mandating such disclosure in the future. The CSA's position on this issue is consistent with the Proposed Instrument, which applies equally to all relevant issuers, irrespective of industry.
iv. International Alignment
Finally, in the Comment Letter, the CSA emphasized the importance of the ISSB cooperating with securities regulators across jurisdictions in order to promote consistency among climate-related reporting standards. In this context, the CSA made specific reference to "key differences" between the ISSB Drafts and the Proposed SEC Rules, noting that a patchwork of regulations could impair the ability of Canadian issuers to "effectively compete in domestic and global capital markets".
LOOKING AHEAD
As we previously reported, the CSA initially specified December
31, 2022, as being the earliest date on which it expected the
Proposed Instrument would come into force. Although the CSA Update
did not specifically address timing, given the extent of
international developments in the area of climate-related
disclosure, as well as the volume of comment letters the CSA
received in response to the Proposed Instrument (131 in total), the
December 31, 2022, early implementation date is likely off the
table.
We expect that the CSA will continue to refine the Proposed
Instrument to minimize the "substantive differences"
noted in the CSA Update. However, as the CSA has emphasized the
role of "international consensus" in its decision-making
process, we expect that the CSA will undertake this exercise in
collaboration with other regulators. In particular, given that each
of the three bodies has a strong influence on global ESG-related
disclosure standards, we anticipate that the CSA will work closely
with the SEC and the ISSB in furtherance of the goal of developing
"a comprehensive global baseline of sustainability
disclosures".
To the extent that material differences remain between the Proposed
Instrument, on the one hand, and the ISSB Drafts and the Proposed
SEC Rules, on the other, the CSA may further reconsider several
aspects of the Proposed Instrument, including its lack of required
scenario analysis and Scope 3 GHG emissions disclosure. However,
based on the Comment Letter (which we note was published following
the expiration of the Proposed Instrument's comment period), it
appears that the CSA is continuing to approach these issues in a
manner that is consistent with the current text of the Proposed
Instrument.
We will continue to monitor developments with respect to the
Proposed Instrument, the ISSB Drafts and the Proposed SEC
Rules.
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