On October 18, 2021, the Canadian Securities Administrators (“CSA”) published for comment Proposed National Instrument 51‑107 ‑ Disclosure of Climate‑Related Matters (the “Proposed Instrument”) and its companion policy (“CP”). The Proposed Instrument would introduce climate‑related disclosure requirements for reporting issuers in Canada with limited exceptions.
The CSA has requested feedback on the Proposed Instrument by January 17, 2022.
What is the purpose of the Proposed Instrument – and why now?
The CSA observed in its announcement of the Proposed Instrument that the international focus on climate change has become a mainstream business issue. The CSA notes the prevailing demand for climate‑related disclosure that is consistent, comparable, and decision‑useful for market participants. On that basis, the CSA identified four concerns with existing voluntary climate‑related disclosures. These concerns were substantiated by a Spring 2021 targeted review of current disclosure of large Canadian issuers by certain Canadian securities regulators:
- climate-related disclosure may not be complete, consistent, or comparable;
- quantitative information is often limited and not necessarily consistent;
- under voluntary disclosure frameworks, an issuer may “cherry pick” and report selectively; and
- sustainability reporting is prone to being siloed and not being integrated into periodic reporting structures.
The CSA’s position is that the mandatory climate‑related disclosure in the Proposed Instrument is responsive to these concerns and is intended to yield the following outcomes:
- improve issuer access to global capital markets by aligning Canadian disclosure standards with expectations of international investors;
- assist investors in making more informed investment decisions by enhancing climate‑related disclosure;
- facilitate an “equal playing field” for all issuers through comparable and consistent disclosure; and
- remove the costs associated with navigating and reporting under multiple disclosure frameworks as well as reducing market fragmentation.
What is in the Proposed Instrument?
The Proposed Instrument would require a reporting issuer in Canada to meet prescribed disclosure requirements respecting:
- climate-related governance (Form 51‑107A) in its:
- management information circular or,
- if it does not send a management information circular, its annual information form (“AIF”) or,
- if it does not file an AIF, its annual management discussion & analysis (“MD&A”); and
- climate‑related strategy, risk management and metrics and targets (Form 51‑107A) in its AIF, or if it does not file an AIF, in its annual MD&A.
These requirements align with the recommendations of the Task Force on Climate‑Related Financial Disclosures (“TCFD”), with select modifications that are detailed in the CP. The TCFD was established in 2015 by the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, to develop a set of voluntary climate‑related financial risk disclosures. In 2017, the TCFD published its final recommendations, which as of 2020 have received the support of more than 110 regulators and governmental entities across the world.
In particular, the climate‑related disclosure to be made by an issuer corresponds to each of the four core elements of the TCFD recommendations: governance; strategy; risk management; and metrics and targets.
I. Climate‑Related Governance Disclosure Requirements (Form 51‑107A)
To satisfy the Proposed Instrument’s “Governance” disclosure requirement, an issuer must describe two things: 1) the oversight of climate‑related risks and opportunities by its board of directors, and 2) management’s role in assessing and managing climate‑related risks and opportunities.
II. Climate‑Related Strategy, Risk Management and Metrics and Targets Disclosure Requirements (Form 51‑107B)
Where material, an issuer would have to describe the following to satisfy the Proposed Instrument’s “Strategy” disclosure requirement: 1) the climate‑related risks and opportunities the issuer has identified over the short, medium, and long term, and 2) the impact of climate‑related risks and opportunities on the issuer’s businesses, strategy, and financial planning.
b. Risk Management
To satisfy the Proposed Instrument’s “Risk Management” disclosure requirement, an issuer must describe three things: 1) the issuer’s processes for identifying and assessing climate‑related risks; 2) the issuer’s processes for managing climate‑related risks; and 3) how processes for identifying, assessing, and managing climate‑related risks are integrated into the issuer’s overall risk management.
c. Metrics and Targets
To satisfy the Proposed Instrument’s “Metrics and Targets” disclosure requirement, an issuer must disclose three things: 1) the metrics used by the issuer to assess climate‑related risks and opportunities in line with its strategy and risk management process where such information is material; 2) all of its direct greenhouse gas (“GHG”) emissions (Scope 1 GHG emissions), all indirect GHG emissions arising from its consumption of purchased electricity, heat or steam (Scope 2 GHG emissions), and all its other indirect GHG emissions, other than those described in the definition of Scope 2 (Scope 3 GHG emissions), and the related risks or the issuer’s reasons for not disclosing this information; and 3) where material, the targets used by the issuer to manage climate‑related risks and opportunities and performance against targets.
With respect to the disclosure of GHG emissions, the CSA is consulting on an alternative approach that would only require issuers to make a Scope 1 GHG emissions disclosure (i.e., direct GHG emissions). Scope 2 and Scope 3 disclosures would not be mandatory under the alternative approach, but the issuer would have to provide its reasons for not disclosing this information, commonly known as “comply or explain”. Whether Scope 2 and Scope 3 disclosures are ultimately required will make a significant difference for issuers in terms of depth and rigour of data.
What Issuers must comply?
The Proposed Instrument would apply to reporting issuers with certain exceptions including:
- Investment funds;
- Issuers of asset‑backed securities;
- Designated foreign issuers;
- SEC foreign issuers;
- Certain exchangeable security issuers; and
- Certain credit support issuers.
What steps is the CSA taking to reduce regulatory burden and cost of disclosure?
The CSA acknowledged concerns regarding the regulatory burden and costs imposed on issuers as a result of mandatory climate‑related disclosure requirements. However, the CSA takes the view that the Proposed Instrument addresses the concern in three ways:
- it will not require issuers to disclose scenario analysis, including a 2°C or lower scenario;
- it will allow issuers to disclose their GHG emissions or explain why they have not done so; and
- it will be phased‑in over a one‑year period for non‑venture issuers and over a three‑year period for venture issuers. The Proposed Instrument is not anticipated to come into force prior to December 31, 2022.
What about existing disclosure requirements?
The Proposed Instrument does not modify existing disclosure requirements, which continue to apply to issuers. Currently, Canadian securities law requires the disclosure of climate‑related information in an issuer’s filings if that information is material in nature. These requirements are set out in National Instruments 51‑102 ‑ Continuous Disclosure Obligations, 52‑109 ‑ Certification of Disclosure in Issuers’ Annual and Interim Filings, 52‑110 ‑ Audit Committees, and 58‑101 ‑ Disclosure of Corporate Governance Practices.
How can you participate?
The 90‑day public consultation period ends January 17, 2022. The public is invited to respond to a series of 18 questions related to the Proposed Instrument and climate‑related disclosure by submitting comments and responses to their local securities regulator. We would be pleased to assist you with this process.
The bottom line
The Proposed Instrument marks the impending arrival of prescribed climate‑related disclosure in Canada and is the latest development in the global environmental, social and corporate governance (“ESG”) movement that has seen similar developments occur recently in the United States, New Zealand, and the European Union. Our analysis of those developments and their implications for Canadian businesses can be found here, here, and here, respectively.
The Proposed Instrument follows guidance from the CSA in 2010 regarding climate‑related reporting and, more recently, the 2019 CSA Staff Notice 51‑358 ‑ Reporting on Climate Change‑Related Risks.
The Proposed Instrument precedes a similar expected proposal from the United States Securities Exchange Commission this December.