Climate change from the corporate perspective: the CSA’s proposed climate-related disclosure requirements
In recent years, shareholder and stakeholder activism has led to an increased focus on companies’ performance and disclosures on environmental, social and governance (ESG) issues. In 2017, we wrote about the need for the boardrooms of corporate Canada to proactively discuss climate change in order to meet stakeholder demands for information.
Many issuers are already providing disclosure on environmental issues. However, issuers may choose to voluntarily use one of many frameworks and standards to assess and disclose climate-related information. Given the lack of uniformity across the frameworks and standards, investors are often left with limited and inconsistent information.
Securities regulators have now started to focus on ESG issues as well. The Canadian Securities Administrators (CSA) recently proposed National Instrument 51-107 Disclosure of Climate-related Matters and companion policy [PDF] (the Proposed Instrument and Policy, respectively) that will establish a regime in which climate-related disclosures will be presented in a consistent format and within consistent parameters related to governance, strategy, risk management, metrics and targets. Given this recent development, climate change will no longer be merely an encouraged topic of discussion, but rather something that reporting issuers will have to turn their minds to in Canada.
Purpose: providing consistent, comparable and decision-useful information
The proposed climate-related disclosure requirements largely mirror the recommendations from the Task Force on Climate-related Financial Disclosures (the TCFD). They are intended to align Canadian disclosure standards with the expectations of international investors, to provide investors with comparable and consistent information, as well as to streamline disclosure frameworks and standards.
Key requirements: disclosing information related to four main themes
The disclosure requirements are set out in Part 2 of the Proposed Instrument, Form 51-107A and Form 51-107B and would apply to reporting issuers (with limited exceptions). Pursuant to section 2 of the Proposed Instrument, the exceptions include investment funds, issuers of asset-backed securities, designated foreign issuers, SEC foreign issuers, certain exchangeable security issuers and certain credit support issuers.
The disclosure requirements can be categorized into the four core elements of the TCFD recommendations:
- The governance requirements relate to board and management oversight of climate-related risks and opportunities (Form 51-107A).
- The strategy requirements relate to the issuer accounting for the impact of client-related risks and opportunities within their business, strategy and financial planning over the short, medium and long term. However, issuers will not be required to describe the resiliency of the issuer’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario (as recommended by the TCFD) (Form 51-107B).
- The risk management requirements relate to issuers’ processes for identifying, assessing and managing climate-related risks within overall risk management (Form 51-107B).
- The metrics and targets requirements relate to disclosing metrics and targets used to assess climate-related opportunities and targets. Notably, issuers will be required to disclose their greenhouse gas (GHG) emissions and the related risks or the reasons for not disclosing this information (Form 51-107B).
The CSA is also consulting on whether to require issuers to disclose Scope 1 GHG emissions when that information is material, or in all cases.
The Proposed Instrument will not override or modify existing disclosure requirements under Canadian securities legislation. In fact, certain disclosure requirements in the Proposed Instrument are consistent with pre-existing requirements.
Scope: the “materiality” assessment varies based on theme
For the requirements under “governance” and “risk management”, issuers must provide the disclosures in the applicable continuous disclosure document as required by the Proposed Instrument. However, the requirements under “strategy” and “metrics and targets” are only required where such information is material — meaning that it would likely influence or change a reasonable investor’s decision whether to buy, sell or hold securities in an issuer if omitted or misstated.
Takeaways: issuers should prepare for the future to mitigate risks and costs
As we have previously written, there is an increasing push for responsible business conduct globally. The Proposed Instrument and Policy align with the push while providing investors with more reliable information, particularly on ESG issues. However, for issuers, the mandatory climate-related disclosures will come with additional regulatory burdens and costs and the potential for increased litigation risk. (See our previous posts on climate change litigation and class actions.)
While the Proposed Instrument and Policy will be phased in with non-venture issuers subject to a one-year transition phase and venture issuers subject to a three-year transition phase, issuers should begin integrating climate-related discussions and policies. In doing so, issuers will remain competitive and forward-thinking as investors, and particularly institutional investors, become increasingly interested in the implications of climate change.
Given the significant implications, issuers should also consider offering their feedback on the Proposed Instrument and Policy during the comment period, which expires on January 17, 2022.
 Such as the Task Force on Climate-related Financial Disclosure, the FINANCIAL Stability Board's GIFCC framework and recommendations from the Global Reporting Initiative (GRI), and the Sustainability Accounting Standards Board (SASB).
 See, for example National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102); National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109); National Instrument 52-110 Audit Committees (NI 52-110); National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101); and National Policy 58-201 Corporate Governance Guidelines (NP 58-201).
 For example, the CSA highlighted that item 1(a) of Form 51-107B (outlined under the “strategy” heading above) issuers to describe the climate-related risks and opportunities it has identified over the short, medium, and long term. This disclosure requirement is consistent with risk factor disclosure required under National Instrument 51-102 Continuous Disclosure Obligations.