Canadian Securities Administrators Propose Climate-Related and ESG Disclosure Requirements
On October 18, 2021, the Canadian Securities Administrators (the “CSA”) released proposed National Instrument 51-107 Disclosure of Climate-related Matters (the “Proposed Instrument” or “NI 51-107”) and its Companion Policy 51-107CP Disclosure of Climate-related Matters (the “Proposed Policy”) for a comment period which ended on February 16, 2022. The CSA also released the Consultation – Climate-related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument 51-107 Disclosure of Climate-related Matters on October 18, 2021 (the “Consultation”). On January 19, 2022, the CSA released CSA Staff Notice 81-334 ESG-Related Investment Fund Disclosure (the “Investment Fund Notice”).
The Proposed Instrument introduces disclosure requirements regarding climate-related matters for all reporting issuers other than those in particular categories.1 While the Proposed Instrument would not apply to investment funds, the Investment Fund Notice serves to provide guidance on the disclosure practices of investment funds as they relate to environmental, social and governance (“ESG”) considerations.
The CSA notes a number of concerns surrounding current climate-related disclosure, including issuers’ potentially incomplete and inconsistent disclosure, the fact that issuers may be selectively reporting and that sustainability reporting may not be integrated into companies’ periodic reporting structures. In the Consultation, the CSA states that the new climate-related disclosure requirements in the Proposed Instrument are designed to:
- improve issuer access to global capital markets;
- assist investors in making more informed investments;
- facilitate an equal playing field for all issuers; and
- remove the costs associated with navigating and reporting to multiple disclosure frameworks.
The CSA does not anticipate that the Proposed Instrument will come into force before December 31, 2022. Assuming this effective date and that an issuer has a December 31 year-end, the associated climate-related disclosure would need to be included in annual filings made in early 2024 for non-venture issuers and in early 2026 for venture issuers due to a proposed phased-in transition to the new disclosure regime.
In this article, we briefly discuss the current landscape that has led to the Proposed Instrument, the Proposed Policy and the Investment Fund Notice. We then provide a more detailed overview of the Proposed Instrument and the Investment Fund Notice.
II. Why Now – The Landscape
As stated in the Companion Policy, the CSA believes that climate-related information is becoming increasingly important to Canadian and international investors, and that the proposed disclosure of NI 51-107 is an important element to their investment and voting decisions. Further, concern over the need for the effective mitigation of global temperatures to lessen and prepare for the adverse effects of climate change permeates a broad spectrum of individual and institutional investors, other stakeholders and companies alike.
The CSA highlights these points in the Investment Fund Notice by emphasizing how Canadians have become increasingly interested in ESG investing, including within the investment fund industry. The investment fund industry has responded to this growing interest and investor demand by creating new ESG-Related Funds (i.e. funds that use ESG strategies) as well as incorporating ESG considerations into pre-existing funds. However, the CSA notes that this increasing focus on ESG-related issues has brought the potential for “greenwashing,” which the CSA describes as a fund misleading investors about its ESG-related aspects.
III. The Proposed Instrument
Disclosure Requirements in the Proposed Instrument
Proposed Form 51-107A and proposed Form 51-107B of the Proposed Instrument require different types of disclosure: (i) climate-related governance disclosure and (ii) climate-related strategy, risk management and metrics and targets disclosure, respectively. The disclosure required in these Forms is consistent with the recommendations developed by the Task Force on Climate-related Financial Disclosure (“the “Task Force”) and published in their report entitled Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017). The Task Force recommendations and disclosure required by the Proposed Instrument generally require governance disclosure, strategy disclosure, risk management disclosure and metrics and targets disclosure.
The climate-related governance disclosure in Form 51-107A would require a description of the company’s board of directors’ oversight of climate-related risks and opportunities, as well as management’s role in assessing and managing those same risks and opportunities. Strategy disclosure would require a description of the climate-related risks and opportunities the issuer has identified over the short, medium and long-term, and the impact on the issuer’s business, strategy and financial planning. Risk management disclosure would require a description of the issuer’s processes for identifying, assessing and managing climate-related risks, including a description of how those processes are integrated into the issuer’s overall risk management. Metrics and targets disclosure would require issuers to describe the metrics used by the issuer to assess climate-related risks and opportunities, in addition to a description of the targets used to manage those same risks and opportunities, along with the issuer’s performance against these targets.
The climate-related strategy, risk management and metrics and targets disclosure of Form 51-107B would also require disclosure regarding greenhouse gas (“GHG”) emissions. GHG emissions disclosure would require disclosure of, among other things, all direct GHG emissions (Scope 1), indirect GHG emissions (Scope 2) and all other indirect GHG emissions not disclosed under Scope 2 (Scope 3) and their related risks. If the GHG emissions are not disclosed, the issuer must provide reasons for not doing so. The issuer must also disclose the reporting standard used to calculate and disclose the GHG emissions. As mentioned in the Proposed Policy, if an issuer’s GHG emissions reporting standard is not the GHG Protocol,2 then the issuer must describe how the standard used is comparable with the GHG Protocol.
The Consultation sought input from market participants regarding whether or not to require issuers to disclose direct GHG emissions only when it is material, or in all cases. Further detail of this alternative is provided in the Proposed Instrument.
The Companion Policy mentions a number of other jurisdictions which have introduced or plan on introducing climate-related disclosure, including the United States, the United Kingdom, the European Union, Australia, New Zealand and Switzerland. The Companion Policy emphasizes that these jurisdictions’ approaches, coupled with other international initiatives (including those headed by the G7 Finance Ministers and Central Bank Governors, the G20 Sustainable Finance Study Group, the Financial Stability Board and the World Economic Forum) demonstrate the importance of disclosure consistent with the Task Force’s recommendations.
IV. The Investment Fund Notice
The purpose of the Investment Fund Notice is to provide an overview of ESG-related terms and strategies, summarize certain international and domestic developments in the ESG landscape and offer guidance for investment funds and their investment fund managers (“IFMs”) to enhance ESG-related disclosure.
To help stakeholders understand the correct terminology and ESG-related practices, the Investment Fund Notice lists and defines a number of common ESG strategies, which ESG-related funds use in their investment decision-making processes:
Negative screening. The fund excludes certain types of securities or companies from its portfolio based on certain ESG-related activities, business practices or business segments.
ESG integration. The fund explicitly considers ESG-related factors that are material to the risk and return of the investment, alongside traditional financial factors, when making investment decisions.
Best-in-class. The fund aims to invest in companies that perform better than their peers in one or more performance metrics related to ESG matters.
Thematic investing. The fund aims to invest in sectors, industries or companies that are expected to benefit from long-term macro or structural ESG-related trends.
Impact investing. The fund seeks to generate a positive, measurable social or environmental impact alongside a financial return.
Stewardship. The fund uses rights and position of ownership to influence the activities or behaviour of underlying portfolio companies in relation to ESG matters. This may include the use of ESG strategies such as proxy voting and/or shareholder engagement.
Proxy voting. The fund votes on management and/or shareholder resolutions in accordance with certain ESG-related considerations or aims.
Shareholder engagement. The fund interacts with the management of the company through meetings and/or written dialogue in accordance with certain ESG-related considerations or aims.
ESG CD Reviews and Guidance
The CSA also conducted reviews of the disclosure documents and sales communications of ESG-related funds and others that market themselves as such (“ESG CD Reviews”). The purpose of these reviews was to assess the quality of the ESG-related aspects of the fund’s disclosure. In essence, the CSA reviewed whether the ESG-related disclosure met the standard of full, true and plain disclosure of all material facts. One of the goals of the ESG CD Reviews was to assess whether the current disclosure requirements are sufficient to address ESG-related issues or whether guidance was needed to allow for proper and effective disclosure in this regard.
From the ESG CD Reviews, the CSA found current disclosure requirements to be broad enough in scope to address ESG-related disclosure and funds, though guidance was needed to clarify how this is the case. Further, the CSA found that ESG-related funds would benefit from more detailed disclosure surrounding ESG investment strategies, proxy voting and continuous disclosure.
Based on the ESG CD Reviews and other factors, the CSA provides guidance in the Investment Fund Notice on how existing regulatory requirements apply to investment funds when it comes to ESG-related issues, specifically in the following areas: (i) investment objectives and fund names; (ii) fund types; (iii) investment strategies disclosure; (iv) proxy voting and shareholder engagement policies and procedures; (v) risk disclosure; (vi) suitability; (vii) continuous disclosure; (viii) sales communications; (ix) ESG-related changes to existing funds; and (x) ESG-related terminology.
For example, regarding continuous disclosure, the CSA states that an investment fund must include in its annual and interim management reports of fund performance (“MRFP”) a summary of the results of operations of the investment fund for the financial year to which the MRFP pertains, including discussion of how the composition and changes to the composition of the investment portfolio relate to the fund’s fundamental investment objective and strategies. However, the disclosure is only required for material information. The CSA continues by stating that, for funds with ESG-related investment objectives, continuous disclosure can help prevent greenwashing by allowing investors to monitor the fund’s ESG performance and therefore evaluate the fund’s progress in terms of meeting its ESG-related investment objectives.
The Capital Markets Group at Aird & Berlis will continue to monitor developments in climate-related disclosure. Please contact a member of our Group if you have questions or require assistance with any matter related to securities legislation, including the aforementioned disclosure requirements.
1 The Proposed Instrument does not apply to investment funds, issuers of asset-based securities, designated foreign issuers, SEC foreign issuers, or exchangeable security issuers that are exempt under section 13.3 of National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) and certain subsidiary issuers.
2 The GHG Protocol is the reporting standard for calculating and reporting GHG emissions by companies and organizations as developed by the World Resources Institute and World Business Council for Sustainable Development.