The new ISSB climate standards: stay tuned for made-in-Canada rules

On June 26, 2023, the International Sustainability Standards Board (ISSB) published IFRS S1 Sustainability Disclosure Standard (IFRS S1) and IFRS S2 Climate-Related Disclosures (IFRS S2, together with IFRS S1, the ISSB Standards)¹. IFRS S2 has garnered particular interest as a potential global baseline for climate-related disclosure based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). As such, it will likely influence the climate-related disclosure requirements being developed by regulators around the world, including by the Canadian Securities Administrators (CSA), which published NI 51-107 Disclosure of Climate-related Matters in Canada (CSA Proposal) for feedback in October 2021², and the Office of the Superintendent of Financial Institutions (OSFI).

On July 5, the CSA issued a news release responding to the ISSB Standards. The CSA indicated that its staff intend to conduct further consultations with the Canadian Sustainability Standards Board (CSSB) to adopt disclosure standards based on ISSB Standards, with modifications considered necessary and appropriate in the Canadian context. The CSA advised that a further market update will follow in the coming months.

Do the ISSB Standards apply to Canadian issuers?

Currently, the ISSB Standards do not apply to Canadian issuers. The ISSB was formed to create a global baseline for sustainability reporting that could then be adopted domestically in jurisdictions around the world. There are two principal avenues through which these standards may, in the future, become mandatory in Canada:

1. the CSA may require the use of these standards, or certain aspects of them, by reporting issuers in Canada through the implementation of a new instrument (including a revised version of the CSA Proposal); and/or
2. the Canadian accounting and auditing regulatory bodies may mandate the use of these standards, or certain aspects of them, in financial reporting.

Work is already underway to determine whether and how the ISSB Standards—especially IFRS S2—will be adopted in Canada. In particular, the Canadian accounting and auditing standard-setting bodies established the CSSB to work in tandem with the ISSB to develop and support the adoption of these standards, to ensure that any standards adopted in Canada are relevant, responsive and fit-for-purpose domestically.

For federally regulated financial institutions subject to OFSI Guideline B-15 on Climate Risk Management (B-15), OSFI indicated earlier this year that it would consider incorporating elements from the final ISSB Standards into a future updated version of B-15.

As noted by the CSA, while it is responsible for developing climate-related disclosure requirements for reporting issuers in Canada, it expects to work collaboratively with the CSSB with respect to the ISSB Standards. The CSSB has indicated that it will seek to appoint additional members, with a focus on including strong representation from Québec, pension funds or others with a long-term investment horizon, and those who operate outside capital markets, including not-for-profits, and small- and medium-sized enterprises.

What are the material differences between IFRS S2 and the CSA Proposal?

In general, although IFRS S2 and the CSA Proposal are both based on the TCFD recommendations, IFRS S2 incorporates more, and more prescriptive, climate-related disclosure requirements than the CSA Proposal. IFRS S2 also provides far more detailed guidance for each requirement than the CSA Proposal.

In particular, the requirements of IFRS S2 go beyond the CSA Proposal in the following ways:

• Mandatory greenhouse gas (GHG) emissions reporting. IFRS S2 mandates³ disclosure of Scope 1, Scope 2 and Scope 3 GHG emissions⁴, whereas the CSA Proposal contemplates a more flexible “comply or explain” disclosure model, which would allow issuers to disclose GHG emissions or explain their reasons for not doing so (in the alternative, the CSA was considering mandatory disclosure of Scope 1 GHG emissions). IFRS S2 also mandates that entities use the Greenhouse Gas Protocol⁵, whereas the CSA Proposal would allow issuers to utilize alternative methodologies, so long as the issuer also disclosed how such standard is comparable with the Greenhouse Gas Protocol.
• Scenario analysis. IFRS S2 requires entities to use climate-related scenario analysis to assess their climate resilience. The CSA Proposal does not include any such requirement, with the CSA specifically noting that it chose not to mandate scenario analysis due to concerns regarding the usefulness of such analysis and issuer concerns with the costs associated with developing scenario analysis.
• Quantitative disclosure. IFRS S2 requires entities to disclose quantitative and qualitative information about how climate-related risks and opportunities have affected the entity’s financial position, financial performance and cash flows for the reporting period and whether the entity expects such financial performance to change over the short, medium and long term. The CSA Proposal requires issuers to describe, where material, the impact of climate-related risks on the issuer’s businesses, strategy and financial planning. While the CSA Proposal is not inconsistent with IFRS S2 in this respect, and the CSA has published guidance encouraging disclosure of both quantitative and qualitative factors, the CSA Proposal does not mandate quantitative disclosure.

The ISSB recognizes the additional work and burden that certain IFRS S2 disclosure requirements might place on an entity—particularly reporting of Scope 3 GHG emissions as well as the financial reporting requirements, which were highlighted in a number of comment letters the ISSB received in response to the original IFRS S2 proposal. In responding to these comments, the ISSB has provided temporary relief from those two requirements, providing an entity with an additional year to provide that disclosure after it first applies the IFRS S2 standard.

Another difference between IFRS S2 and the CSA Proposal is the application of materiality thresholds in determining whether an issuer must make the disclosures prescribed by the applicable rule. While the CSA Proposal applies materiality on an item-by-item basis, with certain “Governance” and “Risk Management” disclosures not being subject to materiality assessment, IFRS S2 applies an overarching materiality standard that limits an entity’s disclosure requirements to only that information which could reasonably be expected to affect the entity’s cash flows, its access to finance or its cost of capital over the short, medium or long term.

We expect that the final climate-reporting rules in Canada will reflect a middle ground between the CSA Proposal and the more rigorous ISSB Standards. In particular, we expect the CSA will be focused on balancing the burden that these new rules may place on reporting issuers in Canada, including venture issuers, with the goal of ensuring that the Canadian capital markets are keeping pace with investor expectations and global sustainability reporting standards.

When are the ISSB Standards (or a Canadian variation) expected to come into force?

The ISSB has set an effective date for reporting to commence as early as 2025 (in respect of 2024). While there is still more work to be done by both the CSSB and the CSA in evaluating the ISSB Standards from a Canadian perspective, we expect there will be a push to finalize Canadian climate reporting standards as soon as practicable. We also expect the CSA to provide a longer phase-in period for venture issuers as was contemplated by the CSA Proposal.

What is the status of the SEC proposed climate disclosure rules?

As detailed in our bulletin, the U.S. Securities and Exchange Commission (SEC) also proposed climate-related disclosure rules modelled on the TCFD recommendations. Most of the proposed SEC rules would not apply to Canadian companies that report under the multijurisdictional disclosure system (MJDS). According to the SEC’s Spring 2023 Regulatory Agenda, it is aiming to finalize its climate-related disclosure rules by the end of October 2023.

What can you do to prepare?

Issuers are encouraged to start taking steps in preparation for the implementation of climate-disclosure reporting rules. Please refer to our article in the Spring 2023 edition of the Torys Quarterly for specific recommendations. The ISSB also plans to establish a Transition Implementation Group and launch capacity-building initiatives to help companies and jurisdictions with adoption of the standards.

For more detailed information about the distinctions between IFRS S2 and the CSA Proposal, please contact the authors.