(left to right: David Frost, Partner; Sonia Struthers, Partner; Wendy Berman, Partner; Sheema Rezaei, Associate; and Christopher Yam, Associate, McCarthy Tétrault, LLP)
On March 13, 2024, the Canadian Sustainability Standards Board (CSSB) released its first proposed Canadian Sustainability Disclosure Standards for public comment – Exposure Drafts General Requirements for Disclosure of Sustainability-related Disclosure Standard (CSDS 1) and Climate-related Disclosures (CSDS 2, collectively with CSDS1, the CSSB Standards).
The CSSB expects final CSSB Standards to be published before the end of 2024, which makes them ready for Canadian organizations to voluntarily adopt. For the CSSB Standards to become mandatory for any Canadian organization, a Canadian regulator such as the Office of the Superintendent of Financial Institutions or a provincial securities regulator must adopt the CSSB Standards.
The proposed CSSB Standards substantially align with the International Sustainability Standards Board (ISSB) IFRS S1 and S2 standards (collectively, the ISSB Standards) – which are designed to serve as the global baseline for comprehensive, comparable and consistent reporting of climate-related disclosure – with minor modifications to address Canadian circumstances, primarily to extend the timeline for compliance and provide additional transition relief through a lengthier phase-in for Scope 3 greenhouse gas (GHG) emissions disclosures. For more information on the ISSB Standards, please refer to our in-depth analysis here.
The public consultation period for the CSSB standards closed on June 10, 2024, with the CSSB seeking feedback on the following topics:
Timing of reporting
Under the ISSB Standards, an entity is required to provide sustainability reports concurrently with any related financial statements. Some Canadian respondents to the ISSB’s consultation expressed concern with this requirement and the CSSB is seeking additional clarity on its implementation.
Scenario analysis
Scenario analysis, which tests the climate change resiliency of entities, has been the subject of much debate. The CSSB is consulting on whether transition relief and/or guidance would help entities conduct scenario analysis.
Scope 3 GHG Emissions
The CSSB is also requesting feedback on whether the proposed transition relief period is sufficient for entities to prepare for reporting Scope 3 GHG emissions.
Amendments to the ISSB Standards
When drafting the CSSB Standards, the CSSB made minimal revisions to the ISSB Standards, with noteworthy amendments made with the aim of providing Canadian entities with additional time for compliance. The changes are as follows:
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Effective date
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The CSSB Standards extend the effective date of application of the CSDS 1 and CSDS 2 requirements for annual reporting periods from January 1, 2024 to January 1, 2025, granting Canadian companies one additional year to prepare for implementation.
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Transition relief for disclosures beyond climate-related
risks and opportunities
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The transition relief for disclosures beyond climate-related risks and opportunities (in accordance with CSDS 2) has been extended by one additional year.
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Comparative Information
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The requirement for entities to disclose comparative information on sustainability related risks and opportunities, excluding those linked to climate, have also been extended for one additional year.
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Transition relief for disclosures of
Scope 3 GHG emissions
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The transition relief for disclosures of Scope 3 GHG emissions has been extended by one additional year. This extension permits entities adopting the CSDS 2 standard to omit disclosures related to Scope 3 GHG emissions for its first two annual reporting periods.
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Key differences between the CSSB Standards and the SEC and CSA frameworks
The proposed CSSB Standards demonstrate a more rigorous approach to mandatory climate-related disclosures compared to the framework proposed by Canada’s securities regulators in October 2021 and the recently published final climate-related financial disclosure rules of the U.S. Securities and Exchange Commission (SEC).
The CSSB Standards closely mirror the ISSB Standards. Echoing the ISSB Standards, CSDS 2 works in conjunction with CSDS 1 to offer (i) specific requirements for climate-related disclosures, including mandatory reporting of Scopes 1, 2 and 3 GHG emissions, (ii) the extent of assets’ and business operations’ vulnerability to climate impacts, and (iii) the reporting of quantitative and qualitative information such as capital expenditure, financing and investments deployed addressing climate-related risks and opportunities. Moreover, CSDS 2 would require mandatory scenario analysis gauging entities’ resilience to climate change.
By contrast, the recently published final SEC climate-related disclosure rules opted not to compel Scope 3 GHG emission reporting. Companies will instead disclose climate-related risks that have financial materiality, including risks that may occur in the company’s value chain.
Similarly, under the Canadian Securities Administrators’ (CSA) proposed National Instrument 51-107 Disclosure of Climate-related Matters (the proposed instrument), the approach to disclosure allowed for more discretion. Under one of the potential options, companies would only be required to disclose Scope 1 or direct GHG emissions. Companies also have the choice to omit GHG emission data altogether if justified by the company.
While the CSA has currently put a pause on the implementation of the proposed instrument, it is actively seeking insights informed by the CSSB’s public consultation on the CSSB Standards (see CSA’s public statement on CSSB Standards). For the CSSB Standards to become mandatory for any Canadian entity, a Canadian regulator such as the Office of the Superintendent of Financial Institutions or the CSA must adopt the CSSB Standards.
The CSSB Standards are an important benchmark that has already become a topic of conversation in investor, issuer, and regulator environments, with the potential to garner even more attention. For many years, there has been increasing pressure from investors for global consistency and comparability in sustainability-related disclosures. The federal Sustainable Finance Action Council (made up of representatives from 25 Canadian financial institutions) has made a clear recommendation that Canadian disclosure requirements should align with the ISSB Standards to support Canadian competitiveness in global capital markets and warned that lack of alignment could lead to competitive disadvantages, reduce confidence in Canada’s management of climate risk and be burdensome for some Canadian companies.
In May 2024, the 21st Century Business Act (Bill S-285), a public bill introduced by a senator, gained traction following its first reading in the Canadian Senate. Bill S-285 proposes amendments to the Canada Business Corporations Act (CBCA), which governs federally incorporated corporations (both public and private), by requiring CBCA corporations to “operate in a manner that benefits the wider society and the environment” and to minimize and aim to eliminate harm caused to these areas. This requirement would also extend to the fiduciary duty of directors and officers and be placed under their duty of care. Further, Bill S-285 will require CBCA corporations to prepare an impact report for annual shareholder meetings based on prescribed third-party standards that, while yet to be specified, may apply the CSSB Standards.
David Frost is a Partner at McCarthy Tétrault LLP. This article was written by Sonia Struthers, Partner; Wendy Berman, Partner; Sheema Rezaei, Associate; and Christopher Yam, Associate, McCarthy Tétrault, LLP.