In our last blog, we discussed the Canadian Securities Administrators’ (“CSA”) proposed climate-related disclosure requirements (the “Canadian Proposal”). This week, we’ll discuss international developments that have impacted the Canadian Proposal.
Since the Canadian Proposal was published in October 2021, the U.S. Securities and Exchange Commission (“SEC”) proposed climate-related disclosure requirements in annual reports and registration statements and the International Sustainability Standards Board (“ISSB”) published an Exposure Draft outlining proposed standards for sustainability- and climate-related disclosure.
“Substantive differences” among proposed requirements
Like the Canadian Proposal, the international proposals align with the Task Force on Climate-Related Financial Disclosures (“TCFD”) recommendations, but the CSA noted that “substantive differences exist” between the various proposals. Two key areas where regulators’ approaches vary are scenario analysis and greenhouse gas (“GHG”) emissions reporting. The SEC and ISSB each take more hardline approaches to these areas, as described below.
- Scenario Analysis
Scenario analysis is an area where regulators continue to look for a balance between useful, comparable information and the resources required to obtain that information.
The Canadian Proposal would not require reporting issuers to conduct a scenario analysis. The CSA cited concerns about the usefulness, consistency and comparability of scenario analysis without a standardized set of assumptions.
The SEC’s proposal does not specifically require scenario analysis, but it requires registrants to describe the resilience of their business strategies considering potential future changes in climate-related risks. Registrants are also required to describe any analytical tools (such as scenario analysis) they use to determine their resilience.
The ISSB Exposure Draft discusses “climate resilience,” focusing on whether an entity has used scenario analysis or another method to determine its resilience. While scenario analysis is a widely accepted approach, the ISSB recognizes that its application at the entity level and across sectors is evolving.
- GHG Emissions Reporting
Regulators also take different approaches to GHG emissions reporting. Canada’s approach is more flexible than that of the SEC and ISSB.
The Canadian Proposal includes disclosure of scope 1, 2 and 3 GHG emissions, but issuers can elect not to report these metrics if they provide their reasons for not doing so.
The SEC would require registrants to report on all three scopes of GHG emissions and break their emissions down by gas (e.g., carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, etc.).
The ISSB Exposure Draft is the middle ground, requiring entities to disclose scope 1, 2 and 3 GHG emissions without breaking the emissions down by gas.
The ISSB Exposure Draft defines scope 3 emissions as indirect emissions outside of scope 2 emissions that occur in an entity’s value chain, including upstream and downstream emissions. Unlike the CSA’s definition of scope 3 emissions, which include all indirect GHG emissions other than scope 2 emissions, the ISSB definition of scope 3 includes the following categories:
- purchased goods and services
- capital goods
- fuel and energy-related activities (not included in scope 1 and 2)
- upstream transportation and distribution
- waste generated in operations
- business travel
- employee commuting
- upstream leased assets
- downstream transportation and distribution
- processing of sold products
- use of sold products
- end-of-life treatment of sold products
- downstream leased assets
The ISSB definition goes on to explain that scope 3 emissions can include the extraction and production of purchased materials and fuels; transport-related activities in vehicles not owned or controlled by the reporting entity; electricity-related activity (transmission or distribution losses), outsourced activities; and waste disposal.
Considerations for Canadian reporting issuers
We know that prescriptive climate-related disclosure requirements are coming. Canadian reporting issuers are well advised to:
- Review the requirements of the Canadian Proposal and consider whether their internal practices and procedures can meet future disclosure requirements.
- Consider what may be required from a data-collection perspective, should more rigorous requirements for GHG emission disclosure and scenario analysis be required.
If you’re looking to excel during the transition to a low-carbon economy, reach out to the MLT Aikins Corporate Finance & Securities and ESG teams to discuss your strategy and reporting obligations.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.