Carrot, stick or safe harbour? Regulators in Canada and the U.S. gearing up for mandatory ESG reporting & greenwashing enforcement

Authors: MLT Aikins ESG practice group

In the face of regulatory uncertainty and increased scrutiny, companies are growing weary of disclosing climate-related information. A recent complaint filed with the Alberta Securities Commission highlights increasing legal risks, interest in standardization as well as pressure on regulators to ensure climate-related disclosures are credible and accurate.

Sailing slowly toward safe harbours?

At its annual conference, the Alberta Securities Commission (ASC) confirmed that it is in the process of developing safe harbour provisions to mitigate legal risk for companies when it comes to the unreliability of scope 3 emissions.

According to the ASC’s General Counsel, Katrina Prokopy, the uncertainties surrounding disclosure of climate-related information could lead to significant legal liability and exposure for directors and officers. “Despite being made in good faith, climate related disclosures could be argued to be misrepresentative,” she explained. The Commission is currently reviewing the existing civil liability regime and considering what could be adapted to specifically address climate-related disclosure.

This comes a week after a complaint was filed with the ASC against Suncor Energy, alleging that the oil producer is failing to fully disclose climate-related risks to shareholders.

Unlike Suncor’s previous Climate Risk Reports, the complaint suggests that Suncor removed a section titled “Expected Impact on Suncor” from its latest report. Without information about the company’s climate scenario analysis, it is argued that investors may not have access to materially-significant information on the company’s transition risks. Specifically, it is alleged that Suncor removed warnings that oil sands projects could potentially become stranded assets in a low-carbon emissions scenario.

While the ASC has agreed to review the concern, it could be months before a decision is made as to whether Suncor adequately disclosed climate-related transition risks associated with the recent shift in its business strategy, and if the company will need to revise or restate information in its prior corporate disclosures.

Safe harbour provisions are a key point of discussion at other regulatory agencies beyond the ASC. The U.S. Securities and Exchange Commission’s (SEC) proposed rule for climate-related disclosures included safe harbour provisions whereby liability for scope 3 disclosures would not be considered fraudulent as long as they were provided in good faith or with reasonable basis for the conclusions or statements.

In Canada, expectations for safe harbour provisions are also clearly stated in the Sustainable Finance Action Council (SFAC)’s comment letter detailing the impact such practices would have on encouraging climate disclosures while recognizing the challenge of imperfect data and evolving methodologies.

Minding the regulatory disclosure gap

As requirements for mandatory climate-related disclosure continue to progress at varying paces across jurisdictions, there is concern over alignment and co-ordination.

This sentiment was expressed by the Toronto Stock Exchange’s CEO John McKenzie, who spoke at the ASC event, highlighting, “There is a reliability issue that needs to be resolved. We don’t want there to be a gap between U.S. and Canada since the U.S. is a much more litigious market.”

Although many applaud the climate reporting rules recently passed in California, developments such as these create uncertainty for many companies as they set requirements that go beyond the rules proposed by SEC.

At a recent ESG conference in New York City, SEC staff emphasized that the SEC’s Climate and ESG Task Force intends to continue and increase its enforcement efforts against greenwashing.  Notably, the SEC’s enforcement efforts to date have been in advance of the implementation of mandatory ESG reporting; as such, it is widely expected that enforcement activities will rise sharply following implementation of the mandatory rules.

In Canada, to mitigate the risk of a similar gap, a working group has been established by the Canadian Securities Administrators (CSA) and the Canadian Sustainability Standards Board (CSSB). While the CSA has already developed the proposed National Instrument (NI) 51-107, the CSSB needs to complete consultation activities beginning in the first half of 2024 and finalize the climate-related standards before the CSA can publish the rule for at least a 90-day comment period. A point often reiterated by securities commissions and issuers is that the global disclosure standards must be appropriately measured and tailored to the Canadian marketplace.

Transition relief is required

Speaking on the topic of sustainability disclosure at the ASC event, Charles-Antoine St-Jean, Chair of the CSSB, recognized there may be a need for transition amendments allowing for delayed reporting timelines tied to company size. The importance of transition relief was also underscored by Jonathan Taylor, Manager Continuous Disclosure Compliance & Market Analysis at the ASC, in his summary of feedback on climate disclosure requirements.

In addition to alignment with the International Sustainability Standards Board’s climate disclosure standard and operability with the SEC’s multijurisdictional disclosure system, Canadian companies continue to voice significant concerns about disclosure of scope 3 emissions, quantitative scenario analysis and timing of reporting.

Overall, there are numerous lively discussions occurring at ESG regulatory agencies in both Canada and the U.S. regarding how and when mandatory reporting requirements should be implemented, and the importance of avoiding and combatting greenwashing in corporate disclosures.

The MLT Aikins ESG practice group supports many companies in various industries in developing and reviewing ESG disclosures to ensure credibility, accuracy and consistency and to mitigate the risk of greenwashing. Download this free resource to learn more.

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.