CSA Proposal of Standardized Climate Change Disclosure: The Forest Through the Trees (While We Still Have Them)

On October 18, 2021, the Canadian Securities Administrators (“CSA”) published proposed National Instrument 51-107 Disclosure of Climate-related Matters (the “Proposed Instrument”) and its companion policy for a 90-day comment period (the “Request for Comment”). The Proposed Instrument prescribes disclosure requirements for reporting issuers1 regarding climate-related matters.

Background

The Request for Comment follows CSA Staff Notices 51-358 Reporting of Climate Change Related Risks issued in August 2019, which provided guidance on risk identification and disclosure by reporting issuers as it relates to climate change. The Request for Comment was published in furtherance of the CSA’s strategy to implement mandatory climate-related disclosure that provides consistent, comparable and decision-useful information to market participants. This strategy aligns with a larger international effort to adopt standardized ESG reporting practices. The Proposed Instrument incorporates core recommendations from the Task Force on Climate-Related Financial Disclosure (“TCFD”) in an effort to align Canadian disclosure standards with expectations of international investors.

The Proposed Instrument and companion policy were informed by a targeted review of current public disclosure practices with respect to climate-related information conducted by the CSA in Spring 2021 (the “Disclosure Review”). The Disclosure Review revealed that, while issuers are generally providing more climate-related information in their Continuous Disclosure filings and voluntary reports, the disclosure:

• Lacked specificity and relevance,
• Was boilerplate, vague or incomplete, and
• Did not provide qualitative discussion about the financial impacts.

Disclosure under the Proposed Instrument – Incorporation of TCFD Recommendations

The Proposed Instrument models proposed disclosure along the TCFD guidelines (subject to some modifications) and adopts four core elements of the TCFD recommendations:

• Governance,
• Strategy,
• Risk management, and
• Metrics and targets.

Two notable exceptions to the adopted TCFD recommendations are:

• Reporting issuers are not required to disclose scenario analysis, which is the TCFD recommended disclosure that describes the resilience of an issuer’s strategy, taking into consideration different climate-related scenarios, and
• Issuers may elect to not disclose the TCFD recommended disclosure respecting greenhouse gas (“GHG”) emissions and their related risks, provided they instead disclose their reasons for not including this disclosure. As an alternative, the CSA are also consulting on requiring reporting issuers to disclose Scope 1 GHG emissions.

The disclosure requirements and the Continuous Disclosure (“CD”) document in which the disclosure is proposed to be made are summarized in the table below:

It is worth noting that the Proposed Instrument requires multiple locations for climate-related disclosure, unlike other mandated CD that often can be contained in one designated document, undoubtedly as a way to ensure that reporting issuers are constantly thinking about this disclosure. However, the need to include it in multiple CD documents might be confusing and unnecessarily burdensome to reporting issuers and may bear some commentary.

Materiality

Materiality will be the determining factor in assessing whether climate-related information should be disclosed. For the purposes of Form 51-102F1 Management’s Discussion and Analysis and Form 51-102F2 Annual Information Form, information is likely material if a reasonable investor’s decision whether to buy, sell or hold securities in an issuer would likely be influenced or changed if the information in question was omitted or misstated.

Issuers should take heed to avoid the practice of defaulting to boilerplate language in their continuous disclosure of climate-related matters and in their analysis of materiality. The strategy-based disclosure requirement detailed above indicates the CSA’s displeasure with this particular practice, and history with past CSA implementation of new CD requirements suggests that something other than a reporting issuer carefully considering materiality issues and its climate-related disclosure will be viewed dimly by the CSA.

Different Reporting Standards

Consistent with the CSA’s approach on many CD documents, the Proposed Instrument and companion policy propose less stringent requirements for venture issuers. However, the review conducted by the CSA that formed the basis for the Proposed Instrument seems to have been based on non-venture issuers only and therefore there may be gaps that the CSA have not considered, or considered carefully enough. Venture issuers are therefore encouraged to carefully examine whether sufficient accommodation has been made for their different circumstances and if not, consider providing to the CSA comments on how the Proposed Instrument could better accommodate them.

As well, reporting issuers that have used reporting frameworks other than the TCFD should note that the Proposed Instrument notes the need for a universal standard and marks the apparently irrevocable victory of the TCFD; issuers using other standards should therefore start considering what it will take for them to adopt the TCFD standards.

Timelines

The Proposed Instrument will not likely come into force earlier than December 31, 2022. The Request for Comment contemplates a phased-in transition of the disclosure requirement over the following time periods:

• For venture issuers: 3 year transition period.
• For non-venture issuers: 1 year transition period.

Comments are to be submitted in writing on or before January 17, 2022.

There is no doubt that the time has come for more robust climate-related disclosure; the CSA themselves note in the Request for Comment many examples from around the world where requirements like the CSA are proposing are already in place. We therefore believe reporting issuers should engage with the Request for Comment as an opportunity to develop and improve the capital markets’ climate-related disclosure requirements and the issuer’s disclosure practices in the coming years, rather than fight the rising tide in favour of such disclosure.

Should you wish to discuss the Request for Comment and the specifics of the required disclosure, or whether and how to provide comments to the CSA, we would be delighted to speak with you. Please feel free to contact Peter Volk ([email protected]), Liza Quail ([email protected]) or any other member of Wildeboer Dellelce LLP.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.

1 Other than investment funds, issuers of asset-backed securities, designated foreign issuers, SEC foreign issuers, certain exchangeable security issuers and certain credit support issuers.