David Frost, McCarthy Tetrault
Sonia Struthers
The International Sustainability Standards Board (ISSB) marked its first significant milestone recently. This involved the release in late March 2022 of exposure drafts of the first two sustainability disclosure standards, with public consultation open until July 29, 2022:
- IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (found here) (the Sustainability Standards); and
- IFRS S2 Climate-related Disclosures (found here) (the Climate Standards, and together with the Sustainability Standards, the Proposed Standards).
The Proposed Standards are a significant development in the global movement towards mandatory climate-related disclosures, as their final iterations are intended to provide the first global baseline of sustainability-related disclosures. With that objective in mind, the ISSB is working with stakeholders to ensure the Proposed Standards can be adopted into jurisdictional requirements. In Canada, this would mean that accounting and capital markets regulators would have to adopt the Proposed Standards in order for them to apply to Canadian issuers. Although the Canadian Securities Administrators (CSA) has not publicly stated whether it would adopt the Proposed Standards, it strongly supported the establishment of the ISSB. In addition, several Canadian securities regulators are members of the Sustainability Taskforce of the International Organization of Securities Commissions (IOSCO), which is working with the ISSB through the review process of the Proposed Standards.
Context and Purpose of the Proposed Standards
The development of a global baseline for sustainability and climate-related disclosures is expected to bring needed consistency and comparability to sustainability-related disclosures, which will make such disclosures more useful for investors and other end users. Globally accepted standards will also facilitate corporate disclosures across multiple jurisdictions, reducing the costs and difficulties associated with preparing disclosures that comply with varied requirements. Recognizing these benefits, the ISSB’s Proposed Standards are responsive to stakeholder feedback from entities such as IOSCO. They also build upon a Technical Readiness Working Group (TRWG), the Task Force on Climate-Related Financial Disclosure’s (TCFD) voluntary but widely recognized recommendations, and the industry-based disclosure requirements derived from the Sustainability Accounting Standards Board (SASB) standards.
Facilitating accurate assessments of enterprise value is a driving purpose of the Proposed Standards. With respect to the Sustainability Standards, the disclosure requirements are explicitly intended to allow end users of disclosures to assess enterprise value. Further, materiality assessments must be made by reporting issuers in the context of the information necessary for users to assess enterprise value. In the case of the Climate Standards, the driving purpose is to allow end users of disclosures to assess the effects of significant climate-related risks and opportunities on an entity’s enterprise value.
I. An Overview of the Sustainability Standards
A. Objective and Scope
The Sustainability Standards set out the key requirements for sustainability-related financial disclosures, with the overarching requirement that entities disclose material information about their significant sustainability-related risks and opportunities. The Sustainability Standards build upon the TCFD’s recommendations, as well as components of various frameworks and standards published in a December 2020 presentation by a number of leading reporting organizations, including SASB and the Climate Disclosure Standards Board (the December Presentation). The Sustainability Standards also provide guidance on identifying and developing appropriate disclosures for risks and opportunities that are not addressed by an IFRS Sustainability Disclosure Standard, such as by directing reporting issuers to industry-based SASB standards, non-mandatory ISSB guidance and other recent pronouncements from prominent standard-setting bodies.
Information disclosed pursuant to the Sustainability Standards must include a complete, neutral and accurate depiction of the reporting issuer’s sustainability-related financial information.
The Sustainability Standards are designed to be used by profit-oriented entities that have their financial statements prepared in accordance with IFRS Accounting Standards or other generally accepted accounting principles (GAAP). It may also be possible for non-profit and public sector entities to apply the Sustainability Standards, provided the descriptions for certain disclosure items are modified. An entity that complies with all relevant Sustainability Standards is expected to include an explicit, unqualified statement of compliance in its financial statements.
B. Core Content of the Sustainability Standards
The Sustainability Standards require a reporting issuer to provide the following disclosures, which mirror the TCFD’s recommendations:
a) Governance: The governance processes, controls and procedures an entity uses to monitor and manage sustainability-related risks and opportunities;
b) Strategy: The approach for addressing sustainability-related risks and opportunities that could affect an entity’s business model and strategy over the short, medium and long term;
c) Risk Management: The processes an entity used to identify, assess and manage sustainability-related risks;
d) Metrics and Targets: Information used to assess, manage and monitor an entity’s performance in relation to sustainability-related risks and opportunities over time.
II. An Overview of the Climate Standards
A. Objective and Scope
The Climate Standards set out the key requirements for the disclosure of information necessary for investors to assess the effect of climate-related risks and opportunities on an entity’s enterprise value. The Climate Standards prescribe the requirements for the identification, measurement, and disclosure of significant climate-related risks and opportunities, with the objective of providing disclosure users with assistance to assess future cash flows over short-, medium- and long-term time horizons. This in turn will enable users to assess enterprise value. The Climate Standards will also allow users of disclosures to understand how an entity’s use of resources corresponds with its strategy for managing climate-related risks and opportunities, as well as how it adapts its business model and operations to these risks and opportunities. As with the Sustainability Standards, the Climate Standards build upon their predecessor TRWG prototype, the TCFD’s recommendations and the December Presentation.
Risks within the scope of the Climate Standards include, but are not limited to, the physical risks associated with climate change as well as the risks associated with the transition to a lower-carbon economy.
B. Core Content of the Climate Standards
As with the Sustainability Standards, the Climate Standards mirror the TCFD’s recommendations, with climate framing the disclosure requirements in place of sustainability:
a) Governance: The governance processes, controls and procedures an entity uses to monitor and manage climate-related risks and opportunities.
b) Strategy: The approach for addressing significant climate-related risks and opportunities that could affect an entity’s business model, strategy, and access to capital over the short, medium and long term, including an entity’s climate resilience.
c) Risk management: How climate-related risks and opportunities are identified, assessed, managed and mitigated by an entity.
d) Metrics and targets: The metrics and targets used to manage and monitor an entity’s performance in relation to climate-related risks and opportunities, including performance and outcome measures.
Canada and the Proposed Standards
The publication of the Proposed Standards, particularly the Climate Standards, will likely be an influential consideration in the development of Canada’s climate-related financial disclosure regime. The Proposed Standards have arrived shortly after the end of a public consultation period for the CSA Proposed National Instrument 51-107 – Disclosure of Climate-Related Matters (NI 51-107), which was published for comment in October 2021.
The Climate Standards would mandate the disclosure of Scope 1, 2 and 3 greenhouse gas (GHG) emissions in accordance with the GHG Protocol, whereas NI 51-107 would feature a ‘comply or explain’ regime (or, as a possible alternative, mandated Scope 1 disclosures) as well as scenario analysis. This is significant because Scope 3 emissions are, for most entities, the greatest source of GHG emissions and scenario analysis is intended to reveal the entities’ resilience under certain global warming scenarios.
David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-author Sonia Struthers (Partner) and with help from Robert Richardson, Laurie Fouin, William Horne, Gurvir Sangha and Nicolas Choueri.