New Developments in the Sustainability Disclosure Landscape

On March 13, 2024, the Canadian Sustainability Standards Board (CSSB) initiated a consultation process on its first Canadian Sustainability Disclosure Standards (CSDS). The CSSB has developed for comment two exposure drafts for disclosure relating to environmental, social and governance (ESG) matters: CSDS 1 – General Requirements for Disclosure of Sustainability-related Financial Information (CSDS 1) and CSDS 2 – Climate-related Disclosures (CSDS 2, and together with CSDS 1, the Proposed Standards).

While the Proposed Standards would remain voluntary once finalized, they may form an important step towards mandatory sustainability- and climate-related disclosure reporting for Canadian public companies. They also come on the heels of the Securities and Exchange Commission’s (SEC) adoption, on March 6, 2024, of its final rules (Final Rules) to enhance and standardize climate-related disclosures by publicly traded companies in the United States.

In addition to the Proposed Standards, the CSSB concurrently published a consultation paper, Proposed Criteria for Modification Framework, which establishes criteria for modifying the standards previously published by the International Sustainability Standards Board (ISSB). 

The CSSB’s comment period for the Proposed Standards ends on June 10, 2024.

The Proposed Standards

As detailed in our June 2023 Blakes Bulletin: ISSB Issues Inaugural Standards for ESG-Related Disclosure, on June 26, 2023, the ISSB issued its two inaugural standards for ESG-related disclosure: IFRS S1 – General Requirement for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 – Climate-related Disclosures (IFRS S2, and together with IFRS S1, the ISSB Standards).

The ISSB Standards were built upon, and comprehensively incorporated, the recommendations of the Task Force on Climate-Related Financial Disclosures.

The CSSB became operational in April 2023, with the objective of advancing the adoption of sustainability standards in Canada. The CSSB used the ISSB Standards as a baseline to develop the Proposed Standards, modifying the standards for the Canadian context.

The objective of CSDS 1 is to require an entity to disclose information about its sustainability-related risks and opportunities. The objective of CSDS 2 is to require an entity to disclose information about its climate-related risks and opportunities, including climate-related physical risks and climate-related transition risks. For both CSDS 1 and CSDS 2, the risks and opportunities to be disclosed include those that could be reasonably expected to affect an entity’s cash flows, its access to finance or its cost of capital over the short, medium or long term.

Other than modifications for the effective date and transition relief, CSDS 1 and CSDS 2 propose to adopt IFRS S1 and IFRS S2, respectively, without modification. That said, the CSSB is seeking specific feedback on certain aspects of CSDS 2. 

The CSSB acknowledges that there has been public concern regarding some of the requirements set out in IFRS S2, particularly with respect to scenario analysis and Scope 3 GHG emissions (i.e., indirect emissions that occur in the value chain of an entity, including both upstream and downstream emissions). 

The CSSB notes that scenario analysis is a proven method for strategic planning, especially amid growing climate-related uncertainties, as it helps entities explore various future possibilities and adapt accordingly. However, it also recognizes that many entities are new to climate-related scenario analysis and may lack the resources and skills needed for such disclosures. As such, the CSSB is seeking input on whether transition relief or guidance could aid preparers and users in effectively conducting such analysis in their assessment of climate resilience.

The CSSB notes that Scope 3 GHG emissions constitute a significant portion of many companies' overall GHG emissions and that such emissions offer valuable insight into a company’s exposure to climate-related risks and opportunities along its value chains.

Many commenters, however, have voiced concerns about the uncertainty in measuring Scope 3 GHG emissions and the challenges regarding the process and capacity required to disclose such emissions alongside general-purpose financial reports. The CSSB sets out a goal of balancing these concerns with the urgency of managing climate-related risks. As drafted, CSDS 2 offers transitional relief by proposing that an entity will not be required to disclose its Scope 3 GHG emissions in the first two annual reporting periods in which such entity applies the standard. 

The CSSB proposes that CSDS 1 and CSDS 2, once finalized, become effective on the same date and is targeting an effective date of January 1, 2025, for such final standards. 

Any final standards would remain voluntary for Canadian companies unless and until mandated by the appropriate authorities, such as by the CSA through the publication of a national instrument.

Further Developments: SEC Final Rules

The U.S. Securities and Exchange Commission (SEC) adopted the Final Rules on March 6, 2024, nearly two years after its draft rules were published (Draft Rules).

Following an extensive consultation process, the Final Rules deviate from both the Draft Rules and the ISSB Standards in certain material respects, including scaling back disclosure requirements regarding GHG emissions. In the Final Rules, disclosure requirements regarding Scope 1 GHG emissions (i.e., direct emissions that occur from sources owned or controlled by an entity) and Scope 2 GHG emissions (i.e., indirect emissions from the generation of purchased energy by an entity) are limited to larger issuers and disclosure regarding Scope 3 GHG emissions has been removed altogether. 

Of particular note to certain Canadian issuers, the Final Rules do not apply to Canadian issuers that report under the multijurisdictional disclosure system (MJDS). 

Lastly, as anticipated, the Final Rules have been subject to multiple legal challenges across the U.S., including an administrative stay issued by the Fifth Court of Appeals on March 15, 2024. The outcome of these legal challenges and the fate of the Final Rules are uncertain.

The CSA’s Response

Immediately following the CSSB’s announcement of the Proposed Standards and the corresponding consultation process, the Canadian Securities Administrators (CSA) issued a press release in which it welcomed the launch of the CSSB’s consultation on CSDS 1 and CSDS 2. 

In the CSA’s announcement, Stan Magidson, Chair of the CSA, expressed interest in the feedback the CSSB receives. He urged stakeholders to actively participate and share their insights on the Proposed Standards and the specific questions raised and noted that such feedback may help inform revisions to the CSA’s previously proposed climate-related disclosure rule (Proposed Instrument) (see our October 2021 Blakes Bulletin: CSA Seeks Comments on Climate-Related Disclosure Rules and our October 2022 Blakes Bulletin: CSA Provides Update on Proposed Climate-Related Disclosure Rules). 

The CSA stated its continued commitment “to working towards disclosure requirements that support the assessment of material climate-related risks, reduce market fragmentation, and contribute to efficient capital markets while considering the needs and capabilities of issuers of different sizes.” It also noted that it continues to monitor and assess international developments in this area, specifically referencing the adoption by the SEC of the Final Rules.

The CSA noted that while it will consider the final CSSB standards, it anticipates adopting only those provisions that are necessary to support climate-related disclosures, suggesting that the CSA may be looking to adopt only CSDS 2, which would be in line with the approach taken by the SEC in the Final Rules. 

Consistent with some of the feedback sought by the CSSB on CSDS 2, the CSA also noted in its press release that upon publication of its revised Proposed Instrument, it will seek input on its scope of application and whether there is a need for additional time and/or guidance for reporting issuers to comply with certain disclosure requirements. This suggests that the CSA may be looking to different disclosure requirements, at least for venture and non-venture issuers, but that it may be considering further stratification. 

Lastly, with respect to timing, the CSA noted that it anticipates seeking feedback on a revised Proposed Instrument after the publication of the CSSB’s final standards. Given this, we do not anticipate a CSA-led consultation process prior to the first quarter of 2025 and a final CSA disclosure rule before 2026.

Conclusion

In publishing its Proposed Standards and through its public consultation, the CSSB seems to be trying to strike a balance between the concerns raised about the ISSB Standards by making appropriate modifications to take into account the Canadian public interest, on the one hand, and recognizing the benefits of standardization across jurisdictions that result from alignment with the ISSB Standards as a global baseline, on the other hand.

Since the CSA shares the same objective of ensuring the disclosure standards are fit for purpose for the Canadian capital markets, it will be interesting to see if the CSA ends up being satisfied with the CSSB’s final standards.  

It also remains to be seen how the CSA balances its interest in harmonizing Canadian requirements with global baseline standards, such as the ISSB Standards, and the somewhat scaled-back disclosure requirements set out in the SEC’s Final Rules.

We will continue to monitor developments to the Proposed Standards and the Proposed Instrument and will provide updates as material developments are announced.

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