Canada’s Climate-Change Carrot: Federal Government Launches Net-Zero Challenge

Authors: MLT Aikins ESG practice group

Choosing the proverbial carrot over the stick, a new initiative launched by the federal government aims to encourage private sector companies across Canada to develop credible – and accountable – net-zero plans.

On August 26, the Government of Canada announced the launch of the Net-Zero Challenge, a voluntary initiative for Canadian businesses to commit to developing and implementing effective plans to achieve net-zero emissions by the year 2050.

So far, 12 organizations across Canada – including companies in the construction, energy, transportation and financial services sectors – have joined the challenge, which complements the federal government’s 2030 Emissions Reduction Plan.

How It Works

For companies to participate in the challenge, they must commit to meet the minimum requirements, which include:

  • Setting a net-zero target for 2050 or earlier
  • Developing a preliminary net-zero plan within 12 months and a comprehensive plan within 24 months of joining
  • Setting at least two interim emissions reduction targets
  • Making annual progress reports
  • Making attestations to the content of net-zero plans and progress reports, with strong encouragement to publicly disclose this information
  • Making public climate-related financial disclosures based on the recommendations of the Task Force on Climate-Related Financial Disclosures (small- and medium-sized business are exempted from this requirement)

There are three participation streams: Stream 1 is for large industrial emitters, Stream 2 is for financial institutions and Stream 3 is for all other companies. Each stream has different requirements for reporting Scope 3 emissions.

What is the Carrot?

Although there are no specific financial or other incentives offered, participants will be grouped in accordance with their level of participation in several tiers including: Bronze, Silver, Gold, Platinum and Diamond. Companies that meet the minimum requirements are in the Bronze tier, while businesses with the most ambitious plans are in the Diamond tier. Details on technical requirements for each tier are in the program’s comprehensive (185 page) Technical Guide.

Interplay with Other Net-Zero Initiatives

The Net-Zero Challenge acknowledges the work of other global target setting and net-zero initiatives such as the Science-Based Targets Initiative (SBTi) while “offering a made-in-Canada approach.” Similarities between to SBTi Net-Zero Standard include a phased approach to target setting with timelines around corporate commitments and comprehensive net-zero planning, expectations for public reporting and guidance for plan updates.

Unlike the SBTi, there is no validation of corporate net-zero plans as part of the Net-Zero Challenge with requirements limited to submission of participation checklists with attestation of preliminary and comprehensive net-zero plan development. The Technical Guide notes that Environment and Climate Change Canada will be evaluating validation tools, but placement in a participation tier is not “an endorsement of the net-zero plan, nor an indication of whether the net-zero plan is achievable.”

Another significant difference between the SBTi and the Net-Zero Challenge is around the use of carbon offset credits to meet near or long-term emissions targets. SBTi does not allow the use of carbon offset credits when companies are setting net-zero targets for their Scope 1, 2 and 3 emissions. Under the Net-Zero Challenge, companies will be allowed to use carbon offset credits as part of corporate net-zero plans with guidance provided around their sourcing and use.

Challenge Comes Amid Heightened Scrutiny

While the federal government’s initiative is voluntary, and is intended to encourage net-zero goal setting and action, it will also serve as additional pressure on companies scrambling to get climate-related disclosures and GHG emissions reductions plans ready before pending mandatory disclosure requirements come into effect. As discussed in a previous article, these mandatory disclosure requirements will create significant legal risk for companies, in particular in relation sustainability reports and net-zero commitments. In addition, and from a practical perspective, companies currently lacking baseline carbon footprint information will require additional internal focus and resources to participate in the Net-Zero Challenge.

Earlier this year, shareholders of Shell threatened legal action against the company’s directors over allegations that the energy giant’s net-zero plan was “fundamentally flawed.” This marked the first time shareholders sought to hold directors personally liable for perceived shortcomings in a company’s climate plan.

We also saw the U.S. Securities and Exchange Commission charge a Brazilian mining company for allegedly making false and misleading claims in its sustainability reports, and German police raid the offices of Deutsche Bank to investigate claims the bank was misleading clients about green investments.

With the heightened litigation and enforcement activity around climate-related disclosures, companies would be wise to take a methodical and structured approach when developing such plans or commitments.

MLT Aikins has wide-ranging and multi-disciplinary experience advising clients in all industries on their ESG strategies, including helping clients implement credible net-zero plans while avoiding potential litigation or enforcement.

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.