Insight into climate-related disclosures

Dominique Barker: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Armand Capisciolto: The CSA in their proposals, they’re taking a position of comply or explain when it comes to the GHG emissions. So you either have to disclose the GHG emissions or disclose why you don’t have to.

Dominique Barker: Today, we welcome Kristyn Annis Counsel at one of Canada’s leading law firms, Borden Ladner Gervais or BLG, as well as Armand Capisciolto, National Accounting Standards Partner at BDO Canada, which is one of the leading accounting firms in Canada. Kristyn has more than a decade of experience advising clients and governments in the energy sector as well as on climate change issues. And Armand provides leadership to BDO Canada on all matters related to financial reporting standards and accounting advisory services. On today’s episode, we’re going to be focusing on mandatory climate related disclosures. This is an exciting topic, I’m sure, for everyone. We’re going to be comparing the ISSBs or that’s the International Sustainability Standards Board. ISSB’s Climate Exposure Draft to CSA’s proposed National Instrument 51-107 Disclosure of Climate Related Matters. Kristyn, Armand, thank you for joining us on today’s episode of The Sustainability Agenda.

Armand Capisciolto: Really happy to be here.

Kristyn Annis: Thank you, Dominique.

Dominique Barker: Okay. So first of all, can you provide a bit of background on the CSA, and that’s the Canadian Securities Administration, I believe, and correct me if I’m wrong, the CSA’s proposed instrument and the ISSB’s Climate Exposure Draft, and that’s more on the international side and how they will be used by investors.

Kristyn Annis: Yeah, sure. So I can start off. So CSA is the Canadian Securities Administrators and they’re an organization that kind of oversees all of these securities regulators in the different provinces because as you know, in Canada we don’t have a single national regulator. We have, it’s provincially based. So to give it a bit of background on the CSA’s proposed instrument, it’s National Instrument 51-107 and it was published just a few days prior to COP26 back in November of 2021. And so it predates the ISSB’s Climate Exposure Draft by about six months. The National Instrument is accompanied by the companion policy in two forms: form 51-107A, which is climate related governance disclosure and 51-107B, which is climate related strategy, risk management and metrics and targets disclosure. So for those of you that are familiar with the TCFD, you know that it kind of separates the pillars. It puts governance in one and then the other three in a separate form. But I would say both the ISSB and the proposed national instrument are largely based on the recommendations that were put forward by the TCFD, which stands for the Task Force on Climate Related Financial Disclosure for those that aren’t familiar. And of course, this was these recommendations released in 2017 and updated in 2021. And so like the TCFD recommendations, there are four pillars. We’ve got governance strategy, risk management and metrics and targets, and the 11 recommendations formulated by the TCFD fall under those four pillars. And I think a lot of focus in the media and by companies I think is on the metrics and targets, which includes the disclosure of scope one, scope two, and if appropriate, scope three emissions under the TCFD. But it’s important to note that the overarching pillar in the TCFD recommendations as well as 51-107 and the ISSB Exposure Draft is governance and this is important for continuous disclosure obligations for listed issuers. And so visually you can think of them as concentric circles with governance being the largest and metrics and targets being the smallest. And so what the TCFD recommendations do is they really put climate risk and opportunity at the top to sit with board and management. And like I said before, the CSA has separated the climate reporting to some extent. So they’ve got governance. The governance pillar has to be done in the issuers management information circular. And if the issuer does not publish an information circular, then it has to be disclosed in the AIF or Annual Information Form or management’s discussion and analysis. And then the other three pillars: risk management, strategy and metrics and targets. Those have to be included the issuer’s AIF or its annual MDNA if there is no AIF. So that’s kind of a very high level overview of the requirements for listed issuers.

Dominique Barker: Okay. Lots of work for accountants this year.

Armand Capisciolto: Yes, I know a lot of work for accountants and accountants, we love acronyms, right? As you can tell with everything that’s been said so far, I think you know, I think Kristyn mentioned that the TCFD, the Task Force on Climate Related Financial Disclosures, I think it’s really important to highlight that the TCFD was built for financial disclosures. It was a product of the Financial Stability Board that arose after the financial crisis in 2008. So it’s very much focused on investor decisions and I think that’s really important, whether we’re talking about the CSA’S requirements or the proposals issued by the ISSB, they are focused on what investors are asking for and I think that’s a really important point to make. Investors want to know how companies are positioning themselves, getting ready for both the physical and transitional risks related to climate change and these disclosures, whether the CSA proposed regulations or the ISSB proposed requirements are focused on those investor needs.

Dominique Barker: Great. Maybe you can get into some of the key differences between what is being proposed in Canada through the CSA and what is being proposed on the international stage through the ISSB. And I believe there’s been a couple of different drafts in the CSA as well, if you wanted to touch on that.

Armand Capisciolto: The first thing that’s really important to point out is the CSA requirements are focused on climate related disclosures. Right? It’s climate. The ISSBs, they issued two exposure drafts. One which they refer to as a general presentation standard, and one is a climate standard. And what’s interesting from the general presentation proposals is although they’re going to have a standard that specifically deals with climate, they’re saying you have to go beyond climate and really disclose information on all sustainability related risks and opportunities. So this is getting into equity and diversity. It’s getting into water usage. It’s getting into things beyond climate. So that’s the first and really a fundamental difference. As Kristyn mentioned, both are based on the TCFD requirements, but I think they do take a different approach with those TCFD requirements. I’ve kind of called the CSA proposals TCFD Lite and the ISSB proposals TCFD Plus when it comes to climate. And the reason related to that is really about some of the disclosure requirements. So the CSA in their proposals, they’re taking a position of comply or explain when it comes to the GHG emissions. So you either have to disclose the GHG emissions or disclose why you don’t have to, where the ISSB is saying, well, you must disclose scope one, scope two and scope three emissions, where the TCFD actually on scope three says if relevant, but where the ISSB says you must disclose scope three. The last area that I’ll point out where there’s a difference is what’s referred to as scenario analysis or the strategy resilience disclosures. There’s requirements to disclose how in the TCFD requirements and taking forward into the ISSB requirements, disclosures related to how resilient your strategy is against various scenarios and actually requires you to do a scenario analysis. Again, the CSA has said that’s not going to be required, hence why I refer to it as TCFD Lite.

Kristyn Annis: And Dominique, and I think you guys have done some talks on scenario analysis and I know it’s a very kind of important component of it. And like Armand said, ISSB is requiring a description of the climate change resiliency of the business strategy in multiple scenarios. So not just one. And I think they’ve also got, regarding transition planning, ISSB requires a focus on understanding how a firm is going to meet its emissions target. And importantly, if a firm is going to be using carbon offsets to reach their target, details of these carbon offsets have to be disclosed. So that is also kind of upping the game in terms of the voluntary market and the transparency in terms of how entities are getting to net zero. And then with respect to metrics and targets, in addition to requiring scope three emissions for all entities regardless of their line of business, the exposure draft has integrated the SASB standards into its disclosure requirement. And, you know, I think we’ll perhaps talk a little bit more about that.

Dominique Barker: Yeah. Why do you think it’s important to include those SASB industry based disclosure requirements?

Kristyn Annis: Yeah, the SASB standards stand for Sustainability Accounting Standards Board and they’re really focused on, they’re kind of a, they’re broader than just climate. So I think that’s important to note first of all. And then the other thing is, is that they’re industry specific. So they’ve got 77 industry specific standards and they’re quite technical in some respects. So they’re kind of like a plan to lay out for each of the industries what is important and how it should be disclosed. And I think it really takes by incorporating these and it’s important to note that the ISSB, they have integrated it such that even though the SASB standard is meant to be kind of an appendix, it is as important as the draft exposure itself. And they are very clear about that. So they’re really taking this and saying, you know what, here are these industry specific standards that relate to climate and other things and integrating it into the ISSB draft exposure. The only other thing I’d mention there too is that the industry specific standards when it comes to the SASB standards, some of them, they don’t require scope three or scope two even emissions reporting for each industry standard. But SASB actually put out a kind of a memo, I guess, saying that people could, if they chose to disclose scope one, two and three, that they didn’t have to limit themselves just because the SASB industry specific standard doesn’t require it. And so I think where we’re landing with the ISSB draft exposure is that you’ll have scope one, two and three required, notwithstanding an industry specific SASB standard that says that it’s not required. So that’s a mouthful. But yeah.

Dominique Barker: Speaking of scope three, so that’s where we get into data availability, use of estimates, all these challenges. I’m sure this is an area that you’re spending a lot of time on, Armand. What challenges do you see for companies as they look to report?

Armand Capisciolto: The inclusion of scope three and that’s related to GHG emissions. But even when we look at the ISSB standard and even the other sustainability risks, it talks about bringing your entire value chain into consideration with all the risks. And you know, whether I’m talking about the value chain or scope three specifically, it brings everybody along for the ride is the way I look at it. So, you know, again, we talk with the CSA focused on Canadian listed entities, the ISSB is focused on the capital markets with their standards. But by having scope three, companies that are not part of the capital markets need to care about these proposals and these requirements because for a public company to report its scope three GHG emissions, it’s going to need information from all its suppliers and all of its suppliers are not going to be other public companies. This scope three really is important because it brings the whole economy on board with doing this. And I think one of the challenges that companies that actually have to report on this are going to face is their suppliers, is their entire value chain tracking this information such that they can provide this information to them to report. And in some cases, I think large companies are probably going to have to help some of the smaller companies along to get there. Otherwise, they’re not going to be able to report.

Dominique Barker: It’s going to be a major challenge. So this is where we get to the advice stage of the podcast. How can companies prepare themselves to be ready to report when the time comes? What advice would you give?

Armand Capisciolto: Kristyn was talking about the requirements beyond metrics earlier. It’s about strategy. It’s about risk management and most importantly, about governance. I think it’s really important for companies and organizations to realize that. I’ve had conversations with our clients who just say, well, what are the metrics I have to disclose? And we have to say, well wait, slow down here. Before you even start talking about metrics, how are you incorporating this into your strategy? How are you incorporating this into your governance processes? And I think they have to do that work first before they get to the metrics. And the other thing, the last piece of advice, everything’s in the proposal stage right now. The CSA requirements are in the proposal stage. The ISSB standards are in the proposal stages. Across the border, the SEC is still in the proposal stage. Don’t wait for final standards. We know the direction it’s going. We know the link to TCFD requires. Start now. Use the proposals as they are to start building your plan. If you wait till the final standards are out, you’re going to be too late.

Kristyn Annis: Yeah, I think for me I would just say don’t let perfect be the enemy of good. It’s going to be a process that an entity will refine every year and will get better over time. And it’s not like Armand said, it’s not merely reporting requirements and a compliance issue. It’s actually hardcore business strategy. And so it’s an opportunity to put the resources necessary in place to plan for a future in which climate change is really is really kind of steering your business decisions. And you’re not reacting. You’re kind of taking a very proactive approach to how you’re going to manage these risks.

Dominique Barker: On the weekend, I saw a video, it was on LinkedIn, and I want everyone to look this up, including you guys. Gary Gensler did a little YouTube video on why the SEC is looking at climate risk and he points to back, post the depression, about that’s when accounting standards really came into being and that was because of investor demand. And so today, as you’ve both clearly articulated, it’s because of business demands by investors and other stakeholders that we want, people want this and lenders, frankly, I work at a bank, that want this disclosure. And so, as you’ve said, perfection is the enemy of action and start your climate journey ASAP. Armand, Kristyn, thank you so much for joining us today and helping to understand some of this. And I look forward to part two because once the CSA standards come out, we’re going to want to dissect that with you as well. Thank you very much.

Armand Capisciolto: Thank you for having us.

Kristyn Annis: Thank you, Dominique.

Dominique Barker: Please join us next time as we tackle some of sustainability’s biggest questions providing different perspectives to help you move forward. I’m your host, Dominique Barker, and this is The Sustainability Agenda.

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