Canada’s sustainability disclosure standards

Sarah Marsh, Partner, National Sustainability Report and Assurance Leader
Scott Morrison, Partner, Sustainability Reporting & Assurance
Jennifer Lawson, Director, Sustainability Reporting & Assurance

Canadian Sustainability Disclosure Standards

New sustainability reporting standards are taking shape in Canada.

The International Sustainability Standards Board (ISSB), under the IFRS Foundation, established a global baseline for sustainability reporting in June 2023. These standards—IFRS S1 and IFRS S2—aim to promote more uniform and comparable sustainability disclosures for investors and other users of companies’ sustainability reporting.

The Canadian Sustainability Standards Board (CSSB) was created to develop Canadian sustainability disclosure standards that take the ISSB standards into consideration. On March 13, 2024, the CSSB released its first draft standards for comment which, if approved, would form part of the Canadian Sustainability Disclosure Standards (CSDS). These include CSDS 1, General Requirements for Disclosure of Sustainability-related Financial Information, and CSDS 2, Climate-related Disclosures. In addition, the CSSB released a consultation paper outlining the criteria they intend to adopt for additions, deletions and/or amendments to an IFRS Sustainability Disclosure Standard.

CSDS 1 and 2 largely align with IFRS S1 and S2, but contain some recommended Canadian-specific modifications, which include:

extending the earliest voluntary adoption dates for CSDS 1 and CSDS 2 from January 1, 2024, to January 1, 2025.
the proposed transition relief for disclosures beyond climate-related risks and opportunities has been extended from one year granted by the ISSB to two years. This means entities that voluntarily adopt the CSSB standards on January 1, 2025, will be required to disclose information on all sustainability-related risks and opportunities from the reporting period beginning on or after January 1, 2027.
the proposed transition relief for disclosure of Scope 3 GHG emissions has been extended from one year granted by the ISSB to two years. This means entities that voluntarily adopt the CSSB on January 1, 2025, will be required to disclose Scope 3 GHG emissions from the reporting period beginning on or after January 1, 2027.

The exposure drafts are open for public comments until June 10, 2024.

The regulatory angle

The Canadian Securities Administrators (CSA) released a press release¹ noting they are pleased to see the CSSB’s consultation and expressing interest in understanding the feedback the CSSB receives in relation to questions posed in the exposure drafts.

Importantly, the CSA also notes:

In order to become mandatory under Canadian securities legislation, the CSSB standards must first be incorporated into a CSA rule. Once the CSSB consultation is complete and its standards are finalized, the CSA anticipates seeking comment on a revised rule setting out climate-related disclosure requirements. The CSA proposal will consider the final CSSB standards and may include modifications appropriate for the Canadian capital markets. The CSA anticipates adopting only those provisions of the sustainability standards that are necessary to support climate-related disclosures … When the CSA publishes its revised rule, it will seek public comments on a number of matters, including the scope of application and the need for additional time and/or guidance for reporting issuers to comply with certain disclosure requirements.

Although companies will be able to voluntarily adopt CSSB standards upon finalization, the regulatory aspects will be also extremely important in shaping how CSSB standards are actually applied in Canada. We expect there will be more discussions on how these two aspects intersect. But what’s clear is the need for Canadian companies to provide input into the standard-setting process from both a CSSB and regulatory perspective.

There’s a global trend toward mandatory sustainability disclosures. Canadian public companies are unlikely to be immune from some form of mandatory reporting requirement. Companies should therefore continue planning for further reporting requirements.

Disclosing sustainability-related risks and opportunities:
What’s required?

• How you’ve identified and prioritized your risks and opportunities

• A description of your risks and opportunities, as well as the short-, medium- and long-term impact on your business model and value chain

• Quantitative and qualitative information on how the risks and opportunities affect your financial position, financial performance and cash flows over the short, medium and long term

• Your planned response to these risks and opportunities, your progress against these plans and the tradeoffs you’ve considered

How Canadian companies can prepare for CSDS

Companies that choose to report under the CSDS will need to do more than just refine what information they are disclosing. It requires rethinking the processes used to pinpoint your areas of focus, determine materiality and collect the necessary information.

Here are several actions to include in your approach:

Assess your CSDS gaps. See how your existing sustainability reporting compares to the requirements of the CSDS. You may find gaps—not just in your disclosures, but in your underlying internal processes and data. For example, a company may report its Scope 1 and 2 emissions, but may not consider its entire organization as required by CSDS 2. Therefore, the disclosure gap may reveal an underlying gap in the data collection process that needs to be bridged for CSDS-compliant reporting. Once you’ve identified your reporting gaps, reporting and operations teams can work together to design the processes needed to obtain the required information for CSDS.
Conduct or refresh your materiality assessment. We expect many companies will need to conduct or refresh their materiality assessment to understand what information is material for each risk and opportunity. Engaging your stakeholders—your investors in particular—to understand what they consider material is a critical step in this process. Consider this example: a company may have performed materiality assessments at the topic level in the past and identified water usage. Under CSDS 1, companies have to perform the assessment at the material information level. This requires understanding the risks and opportunities associated with the topic. In the example above, the company may identify the impact as potential water scarcity in the community. This could present a risk if laws and regulations related to water consumption change. Specifically, it could have a financial impact due to potential compliance costs associated with new regulations or cost of permits.
Review your reporting entity boundaries. CSDS reporting standards require you to look beyond your organization and its subsidiaries and consider how sustainability-related risks and opportunities in your value chain—both upstream and downstream—can affect your business model and its prospects. This can require a significantly different mindset for companies accustomed to focusing exclusively on their consolidated group for financial reporting. For example, an auto parts manufacturer that’s expanding into components for electric vehicles may consider upstream risks such as supply chain disruptions caused by geopolitical tensions that affect its ability to source critical minerals. The same auto parts manufacturer may also identify downstream opportunities such as working with other organizations to recycle the waste generated by its batteries when they reach the end of their life.
Incorporate sustainability into your overall risk management process. Companies should explore how they can integrate the identification and monitoring of sustainability-related risks and opportunities in their enterprise risk management process. Many companies already evaluate the likelihood of various business risks and the magnitude of exposure for those risks. Organizations now need to apply that same thinking to sustainability-related risks and opportunities. For example, a hospitality company with waterfront properties may need to consider the physical climate risks caused by more frequent and severe storms as well as rising sea levels. Investors are likely interested in the likelihood of the property flooding and how that would affect the company’s cash flows through higher insurance costs, increased maintenance expenditures and possible loss of assets.

Many companies now understand they may have exposure to multiple new regulations—including Canada’s new modern slavery rules, the Corporate Sustainability Reporting Directive (CSRD) in Europe and California’s climate disclosure rules (PDF), among others—and are creating a single reporting process that meets these different requirements.

Adopting CSDS standards when they are finalized, and meeting the requirements of any other relevant new regulations, will be a large undertaking requiring collaboration between reporting, risk management and operations. Companies face considerable work ahead, making it critical to start preparing now.

Creating sustained value through high-quality sustainability reporting

To the extent that final versions of the CSDS can appropriately adapt to the needs of the Canadian market, this will be another positive step toward creating greater consistency in sustainability reporting in Canada. The comment period is a critical time for Canadian companies to have their voices heard on how to best adapt these standards for Canada. Modifying IFRS sustainability standards—which are increasingly supported globally by investors, regulators, rating agencies such as the CDP and many other stakeholder groups—will likely help Canadian companies seeking global capital versus starting entirely from scratch.

Companies that understand the value creation opportunities of sustainability reporting are looking beyond ISSB and CSSB in their preparations. These leading companies are using sustainability standards to improve their internal business performance by finding operational efficiencies, generating savings, building resilience and improving their access to capital—outcomes that help businesses fulfill their purpose and remain financially successful.