There seem to be daily reports of new developments across the ESG reporting landscape. What has been nice to have for only a segment of the investment community is entering the category of must have for companies looking to attract capital from the mainstream capital markets. This means more attention focused on getting those users the information they need and an increased call from many stakeholders to standardize ESG corporate disclosure.
Standardization is common ground for both issuers and investors. Once established, it is more efficient and effective for issuers when communicating with a broad investor base. At the same time, it solves one of the biggest challenges for investors – the lack of comparability among peers. Investors continue to struggle to accurately assess ESG performance when companies report using different metrics, or similar metrics are measured in unique ways.
With common interest between issuers and investors, it is not surprising to see so much support for the work proposed by the IFRS Foundation to establish an International Sustainability Standards Board (ISSB). This would be in parallel to the work of the International Accounting Standards Board (IASB) and has the potential to create the standardization that preparers and users of ESG data seek. Climate change disclosure will be the top priority for the ISSB at the outset. However, commenters are also telling them that they need to move quickly to address ESG more broadly. The IFRS Foundation gives this initiative global credibility and wide reach, given the organization’s connection to regulatory bodies worldwide.
Canada is Stepping Up
While the IFRS Foundation has committed to deciding on a location for the ISSB headquarters before the beginning of the Glasgow UN Climate Change Conference in late October, Canada is now officially in the running. The Government of Canada publicly announced its offer to host the ISSB headquarters in a letter signed by Deputy Prime Minister and Minister of Finance Chrystia Freeland in July 2021. The letter includes an offer of initial financial support from a broad coalition of public and private sources.
Whether or not the ISSB is headquartered in Canada, the shift towards more mandatory ESG reporting is clear. It was a subject investigated by the federal government’s Expert Panel on Sustainable Finance in its final report more than two years ago, which included a recommendation to ”Define and pursue a Canadian approach to implementing the recommendations of the Task Force on Climate-Related Financial Disclosure”. This recommendation will be given further momentum within the mandate of the recently formed Sustainable Finance Action Council (SFAC), as reporting is one of its priority areas.
We also saw movement from Ontario during its consultations leading up to a Final Report released early in 2021 by the Ontario Capital Markets Modernization Taskforce. This expert group made a final recommendation to mandate disclosure of material ESG information, specifically climate change-related disclosure compliant with TCFD recommendations. This recommendation was already acted on in the most recent Ontario provincial budget. In the budget release, the Ontario Securities Commission has been instructed to begin policy work on potential disclosure changes, with further consultation later this year.
These developments in Canada are entirely in line with what is happening at a much faster pace in the United States following the election of President Joe Biden. The Chair of the U.S. Securities and Exchange Commission (SEC), Gary Gensler, is a vocal proponent of increased disclosure requirements, and we expect proposed rules from the SEC by the end of 2021.
How Prepared Are Canadian Issuers?
Despite the Canadian market being dominated by the energy and materials industries as well as financials, which are all intricately linked to high-emitting industries, evidence suggests that Canadian companies are not very well prepared for mandatory disclosure requirements. This is especially true as we go further down the market capitalization spectrum.
The Institute for Sustainable Finance at Queen’s University recently assessed the TSX Composite for climate change disclosure rates and found that two-thirds were already providing greenhouse gas emissions data. However, emissions are only one small piece of TCFD disclosure, and the same report found that only 27% had set targets relating to GHG emissions.
On the topic of broad TCFD alignment, ESG advisory service provider Millani reviewed the TSX Composite and found that only 23% of listed companies explicitly stated that their reporting was aligned with the TCFD recommendations. More than half of the TSX Composite issuers made no mention whatsoever of TCFD in their recent reporting.
While additional disclosure requirements often face resistance, I encourage all issuers to look at these developments as an opportunity to expand your investor base, find new pockets of capital, or deepen relationships with existing long-term investors.
Last fall, BCI and several other Canadian pension plans, known as the Maple 8, issued a public statement encouraging disclosure in line with TCFD and SASB (https://www.bci.ca/ceos-of-eight-leading-canadian-pension-plan-investment-managers-call-on-companies-and-investors-to-help-drive-sustainable-and-inclusive-economic-growth/). Globally, investors are looking for consistent and comparable ESG data to integrate into their investment decisions. Rather than focus on barriers to making this happen, issuers should consider the opportunity it represents for them and Canada more broadly.
Jennifer Coulson is Vice President, ESG, Public Markets, at BCI.