If you are like most investor relations professionals these days, you have likely had a hard time keeping pace with ESG disclosure developments. So many global acronyms are floating around – ISSB, CSSB, EFRAG, CRD, TCFD – and the list goes on. This has been one of the fastest-moving landscapes over the last two years and the implications for companies are significant. The most relevant developments for Canadian issuers are, of course, those within Canada and the United States, which is my focus here. And, with the International Financial Reporting Standards (IFRS) Foundation announcing recently that the International Sustainability Standards Board (ISSB) standards will apply starting January 2024, it is time to get prepared.

A Global Baseline is Here

A critical milestone was reached in February of this year as a global community gathered at the IFRS Foundation Sustainability Symposium in Montreal. Just prior to this event, the technical content of the IFRS Sustainability Standards (S1 and S2) was approved by the ISSB, signalling that they will be formally issued and adopted in Q2 of 2023. The ISSB deserves credit for getting to this stage so quickly while managing several stakeholders and balancing a large volume of feedback during the consultation process. For those not yet familiar, the S1 and S2 standards cover both general ESG disclosures and those relating to climate change. These Exposure Drafts can be found here: https://www.ifrs.org/projects/work-plan/general-sustainability-related-disclosures/ - published-documents.

While the IFRS standards provide the global baseline that investors are calling for, they still need to go through a refinement process in different jurisdictions to ensure they are relevant and appropriate. In Canada, this has taken the form of the Canadian Sustainability Standards Board, or CSSB, which is in the process of forming and recruiting a Chair of the Board.

The CSSB was a recommendation stemming from the Independent Review Committee on Standard Setting in Canada in 2022 and is expected to be fully operational by April 2023. Its role is to facilitate the adoption of the IFRS Sustainability Standards in Canada and ensure that local perspectives are incorporated into the global standard. As just one example, the CSSB is likely to consider how reconciliation with Indigenous communities is reflected in Canada’s adoption of IFRS Sustainability Standards.

The exciting news for investors and issuers is that we can all align and get behind this global baseline to improve the comparability and consistency of ESG information. The even better news for issuers familiar with the Taskforce on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB) standards, is that you have a head start.

The IFRS Sustainability Standards build on the TCFD framework, and the SASB industry-based standards offer one way to meet the expectations of these new standards. While the details are being ironed out, issuers should know that these new standards are geared towards investors and other providers of capital, keeping the focus on financial materiality.

Awaiting Key Decisions on Climate Reporting

The backdrop to all this positive momentum on IFRS Sustainability Standards is that we are still waiting for updates from Canadian securities regulators and the U.S. SEC. South of the border, in March 2022, the SEC announced proposed rule changes that would require three broad categories of reporting:

• TCFD disclosure;
• Reporting on GHG emissions (including Scope 3 for certain issuers); and
• Notes to the financial statements where climate impacts represent over a 1% materiality threshold.

Meanwhile, in October 2022 the Canadian Securities Administrators (CSA) put a slight pause on their work in this area, given the uncertain outcome of the ISSB process and the SEC proposed rule changes. Many observers consider the CSA proposed rules to be much weaker than those being pursued elsewhere, so they will now have to wrestle with some key differences between the U.S. proposals and the IFRS climate-related standard.

Given the number of cross-listed issuers in Canada, developments in the U.S. are significant. We anticipate some resolution in the first half of 2023, including potential changes around Scope 3 emissions reporting, the financial statement requirements and assurance requirements. It is also highly likely that the final rules will be challenged in court, as many argue that the SEC is stepping outside its core mandate.  

What’s an Issuer to Do?

This will be a big year for ESG disclosure. We now have a line of sight for both the SEC rules and the IFRS Sustainability Standards. Regardless of the specifics and the legal battles that may arise, one thing is certain: mandatory ESG disclosure is fast approaching. Issuers need to be prepared and act quickly to meet the demands of investors and regulators.

More than half of Canada’s largest 200 companies are already reporting in line with TCFD, according to a recent report from KPMG. SASB adoption is also rapid, with 75% of the S&P/TSX60 now using the standards, according to ESG consultancy Millani.

If your business is not applying such standards yet, it is time to get familiar with their contents. Assess what information and data you currently have and what still requires additional preparation. It is also a good time to start talking to your internal controls team and consulting with external auditors.

The last piece of advice I leave for issuers is not to treat this as a compliance exercise simply because there are regulatory influences. Use this as an opportunity to ensure that you are considering all ESG risks and opportunities that can influence your business strategy. This is what investors are looking for, ultimately. ESG should be a strategic corporate issue supported by metrics that help companies succeed or reduce risk over the longer term. It is not a box-ticking exercise.

Jennifer Coulson is Vice President, ESG, Public Markets, at BCI.