FINANCIAL REPORTING & IR

In Canada, environmental, social and governance (ESG) issues have been an increasingly important topic for the past several years. Investors, employees and customers are looking for clarity in the action plans of companies as they begin to create and implement their ESG strategies, specifically around sustainability. There is also a heightened focus on understanding companies’ ESG initiatives and how they affect corporate results and investment decisions.

According to a recent study conducted by KPMG in relation to the Canadian ESG reporting landscape, 92% of Canadian companies now report on their sustainability initiatives. As well, 62% of Canadian companies that report on sustainability also disclose their carbon reduction targets. These findings reinforce the idea that it is important for investor relations professionals to understand the financial reporting implications of their companies’ ESG strategies and commitments as they convey their ESG journeys to investors through financial statements and annual reports.

In Canada, a number of publicly traded companies have set clear ESG targets and committed to net zero emissions by mid-century. As more Canadian companies embark on their ESG journeys, financial reporting implications that will impact businesses across many sectors include:

Impairment of property, plant and equipment and other tangible assets –  Companies will need to reassess some of their existing property, plant and equipment (PP&E) and other tangible assets in the context of long-term sustainability goals, particularly as this relates to energy consumption, and also consider the impact of technical or commercial obsolescence on estimates of useful life, and residual value and impairment.

Provisions and contingent liabilities – ESG strategies can potentially result in the need for cost accruals and disclosure of contingent liabilities, especially for companies that have defined ESG targets. Where these commitments exist, companies need to evaluate what expenditures must be made and the appropriate time to recognize the costs in the financial statements. An example of such costs are environmental and decommissioning obligations that arise from both legal and constructive obligations.

Impairment of financial assets – Valuation of accounts receivable and accrual of expected credit losses needs to consider the impact of client-related factors on some specific borrowers, and on forecasts of future macroeconomic conditions.

Capital management and financing – ESG-related financial obligations can be material for some companies and will require them to carefully monitor their ESG plans and manage their budgets, recognizing the additional financing requirements that ESG entails. Any incremental liquidity risks need to be appropriately disclosed in the financial statements.

While most Canadian companies are still actively in the process of developing their ESG plans, it is important to stay abreast of evolving shareholder expectations, as well as changing regulatory and disclosure requirements. In Canada, the Canadian Securities Administrators (CSA) recently requested comments for the proposed National Instrument 51-107 Disclosure of Climate-related Matters. This aims to introduce mandatory climate-related disclosures that will require reporting issuers to disclose climate-related governance, strategy, risk management and metrics and targets aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). These requirements can impact some reporting issuers as early as 2023.  

Similarly, in November 2021 the European Securities and Markets Authority (ESMA) issued a statement highlighting the areas that European national securities regulators will focus on when reviewing listed companies’ 2021 annual reports. The statement noted the need for financial and non-financial information on climate-related matters, and for consistency between information disclosed in annual reports and financial statements.

Investor relations professionals have a strategic role to play in monitoring and understanding evolving institutional investor and shareholder perspectives on ESG. They need to assess how their companies are meeting expectations, especially compared to others in the sector. Expectations are now often largely focused on climate change and sustainability, but we should expect growing interest in disclosure of corporate social impact and value creation for society. These issues will become increasingly important to employees and customers, as well as to current and future shareholders.

Keith Leung, CPA, CA is a Senior Manager, Accounting Advisory Services, and Rob Brouwer, FCPA, CPA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.