Canadian securities regulators seek comment on climate-related disclosure requirements

On October 18, 2021, the Canadian Securities Administrators (CSA) published a notice (the Notice) asking for comments on proposed National Instrument 51-107 Disclosure of Climate-related Matters and its companion policy (collectively, the Proposed Instrument). The full text of the Notice and Proposed Instrument are available here.

Purpose of Proposed Instrument

With the ever growing focus on climate-related issues, and climate-related risk becoming mainstream business issues, there has been a push to implement mandatory climate-related disclosure requirements.

To support this, the CSA has introduced the Proposed Instrument which sets out disclosure requirements regarding climate-related matters for reporting issuers. This is intended to improve issuer access to global capital markets by aligning Canadian disclosure standards with the expectations of international investors, assist investors in making informed decisions, facilitate an "equal playing field" for issuers through comparable and consistent disclosure, and to reduce the costs associated with multiple disclosure requirements.

Proposed Instrument

Proposed Instrument Will be Applicable to All Reporting Issuers, Subject to Exceptions

All reporting issuers would (regardless of size) be subject to the Proposed Instrument, other than investment funds, issuers of an asset-backed securities, designated foreign issuers, SEC foreign issuers, certain exchangeable security issuers and certain credit support issuers.

Proposed Disclosure Requirements

The requirements set out in the Proposed Instrument are largely consistent with the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) recommendations published in June 2017. The disclosure requirements found in the Proposed Instrument relate to the four core elements of the TCFD recommendations:

Governance. The Proposed Instrument would require reporting issuers to describe the board of directors' oversight of climate-related risks and opportunities. Reporting issuers would also be required to describe management's role in assessing and managing climate-related risk and opportunities.

Strategy. The Proposed Instrument would require reporting issuers to describe the climate-related risks and opportunities the issuer has identified over the short, medium and long term, and describe the impact of climate-related risks and opportunities on the issuer's businesses, strategy and financial planning.

Risk Management. The Proposed Instrument would require reporting issuers to describe the issuer's processes for identifying and assessing climate-related risk, processes for managing climate-related risks and how processes for identifying, assessing and managing climate-related risks are integrated into the issuer's overall risk management.

Metrics and Targets. The Proposed Instrument would require reporting issuers to disclose the metrics used by the issuer to assess climate-related risks and opportunities in line with its strategy and risk management process. Reporting issuers would also be required to describe the targets used by the issuer to manage climate-related risks and opportunities and the issuer's performance against these targets.

Note, unlike the TCFD recommendations, the Proposed Instrument would not require reporting issuers to provide a scenario analysis. This recommendation of the TCFD would have required issuers to describe how resilient the issuer's strategies are to climate-related risks and opportunities, taking into consideration a transition to a lower-carbon economy consistent with a 2℃ or lower scenario and increased physical climate-related risks.

Proposed Disclosure Requirements With Respect to GHG Emissions

The Proposed Instrument provides for certain reporting requirements by issuers in respect to greenhouse gas (GHG) emissions. The Proposed Instrument would require reporting issuers to disclose Scope 1, Scope 2, and Scope 3 GHG emissions and the related risks, or provide the issuer's reasons for not disclosing this information. The Proposed Instrument categorizes Scope 1, Scope 2 and Scope 3 GHG emissions as follows:

Scope 1 – being all direct GHG emissions by an issuer;

Scope 2 – being all indirect GHG emissions arising from the issuer's consumption of purchased electricity, heat or steam; and

Scope 3 – being all other indirect GHG emissions of an issuer, other than those described under Scope 2. This would include, but is not limited to, GHG emissions of the issuer attributed to transportation and distribution of products purchase or sold by the issuer, and GHG emissions attributed to the extraction, production and transportation of fuels and energy purchased or acquired by the issuer, which are not already included in Scope 1 or 2.

In determining the GHG emissions to be calculated and reported, the Proposed Instrument would require the calculation and reporting of GHG emissions to be in accordance with the greenhouse gas reporting standards developed by the World Resources Institute and World Business Council for Sustainable Development.

As an alternative to the above disclosure, CSA is also consulting on a reporting requirement which would require issuers to disclose only Scope 1 GHG emissions. Under this alternative, disclosure of Scope 2 and Scope 3 GHG emissions would not be mandatory, but issuers would either have to disclose their Scope 2 and Scope 3 GHG emissions and related risks, or provide reasons for not disclosing this information. Under this alternative, the CSA is considering whether such disclosure would be required only when material or in all cases.

Location of Disclosures

The climate-related disclosure requirements related to governance would be included in an issuer's management information circular. If the issuer does not send a management information circulate to security holders, the disclosure would be included in the issuer's annual information form (AIF), or its annual management's discussion and analysis (MD&A), if the issuer does not file an AIF.

The climate-related disclosures related to strategy, risk management, metrics and targets, and GHG emissions specified by Proposed Instrument would be included in an issuer's AIF, or its annual MD&A, if the issuer does not file an AIF.

It should be noted that issuers who are currently required to report on GHG emissions provincially and federally may be required to have their data collection, analysis and governance processes set up earlier than current deadlines require in order to prepare and report in time under the Proposed Instrument. This is because issuer's who are required to file AIF's, where GHG emission disclosure are required, will typically file such AIF's in the first quarter, while issuers who are required to report their GHG emissions provincially and federally are currently required to have their data collection, analysis and governance processes set up to meet filing deadlines in the second quarter. This could result in issuers needing to have their data collection, analysis and governance processes set up earlier to ensure all compliance obligations are met.

Certain Climate-related Disclosures not subject to materiality assessment

It is further noted similar to disclosure requirements respecting corporate governance matters under National Instrument 58-101 Disclosure of Corporate Governance Practices, and consistent with the TCFD recommendations, the disclosures required by the Proposed Instrument relating to the climate-related "Governance" and "Risk Management" are not subject to a materiality assessment. Accordingly, issuers would be required to provide the disclosures required by the Proposed Instrument relating to the climate-related "Governance" and "Risk Management" in their applicable continuous disclosure documents regardless of the issuer's materiality assessment of those governance matters.

Transition of Proposed Instrument

Once approved, the Proposed Instrument would be phased in over one and three-year periods, depending on the issuer's status as a venture or non-venture issuer. The Proposed Instrument provides that non-venture issuers with financial years beginning on or after January 1 of the year after the effective date of the Proposed Instrument will be subject to a one-year transition phase, while venture issuers with financial years beginning on or after January 1 of the year after the effective date of the Proposed Instrument will be subject to a three-year transition phase.

For illustrative purposes, if a reporting issuer has a December 31 financial year-end and the Proposed Instrument came into force on December 1, 2022, non-venture issuers would be subject to the disclosure requirements provided in the Proposed Instrument for financial year ending December 31, 2023, which would be due in March 2024, while venture issuers would be subject to the disclosure requirements provided in the Proposed Instrument for financial year ending December 31, 2025, which would be due in April 2026.

With the Proposed Instrument coming into force, non-venture issuers will be required to set up their data collection systems by the end of year when the Proposed Instrument comes into effect. For example, if the Proposed Instrument came into force on December 1, 2022, non-venture issuers will need to have their data collection system in place by December 31, 2022, to ensure all compliance obligations are met.

Feedback on the Proposed Instrument and Proposed Policy

The CSA asks that any comments regarding the Proposed Instrument or the Proposed Policy be submitted in writing by January 17, 2022. This includes seeking comment on issuer's experiences with the TCFD recommendations, GHG emission disclosures, and the costs and challenges faced by issuer's with climate-related disclosures.

Please contact any member of our Business Law Group to discuss any of the Proposed Amendments or the Proposed Framework and any comments that you may have for the CSA.

The full text of the Notice is available here.