Climate-Related Financial Disclosures in Canada: Progress and Challenges

• Despite supporting ISSB Standards adoption, Canadian regulators may be cautious on how to mandate them due to potential complexities.
• Canadian regulators and banks must navigate IFRS S2 and CSDS 2 complexities to align climate reporting with global norms and local economic realities.

In tandem with many jurisdictions around the world, mandatory disclosure of climate-related financial risk and opportunity information is becoming a landmark for sustainability transparency across various industries in Canada.

Building upon the Canadian Government’s commitment in 2021 to integrate the Task Force on Climate-related Financial Disclosures’ (TCFD) framework as part of its efforts to maintain financial stability against the threat of climate change, the Canada’s financial industry has made progress developing their own climate-related disclosure regime over the past years.

Just like other companies, banks are expected to report on governance, strategy, risk management, and metrics and targets related to climate-related risks and opportunities.

With the TCFD framework now fully incorporated in the International Sustainability Standards Board’s (ISSB) Standards, the banking sector could face challenges to adjust such as potential disruption to already-developed industry mandates and the need for continuous adaptation to evolving disclosure requirements.

This raises critical questions about how banks will navigate these potential changes and what impact they will have on the industry's approach to climate disclosure and financial stability.

This article reviews the status quo of climate-related financial disclosures in Canada, highlighting advancement and potential challenges of these disclosures affecting banks, associated with the transition to the ISSB Standards (particularly IFRS S2-based framework).

The article also explores the role of regulatory bodies in promoting such evolving disclosures.

“Global standards are emerging for declaring sustainability- and climate-related risks. At the Bank, we are exploring how we can align our climate disclosures with these emerging standards”  – Governor Tiff Macklem, Bank of Canada.

While the Canadian government actively support the establishment of the ISSB standards, it remains unclear whether Canada’s banking system will eventually adopt an ISSB-based Standards as a mandatory framework, although there are convincing arguments.

For instance, the formation of the Canadian Sustainability Standards Board (CSSB) in mid-2023 and its publication of an ISSB-based disclosure standards draft – CSDS 1 and CSDS 2, nearly identical to IFRS S1 and S2 respectively – in March 2024 reinforce this expectation.

The CSSB, consisting of 12 members from both public and private sectors, including from the banking sector, aims to collaborate with the International Sustainability Standards Board (ISSB) to facilitate the adoption of ISSB Standards within Canada.

In this attempt for instance, the proposed CSDS 2 exceeds both the U.S. Proposed National Instrument 51-107 and the SEC’s climate disclosure rules in certain aspects.

It mandates climate-resilience scenario analysis and Scope 3 GHG emissions disclosure (like IFRS S2), which were not fully required by the others. The CSDS 2 is quite similar to the IFRS S2, except for their different implementation timelines (January 2025 and 2024 respectively).

This could imply that a mandatory shift to an ISSB-based standards, particularly IFRS S2, could bring more precision and relevance to the development of climate-related financial disclosures like CSDS 2 in Canada, but also a degree of complexity:

• More Data Intensive: IFRS S2 demands more specific data, such as detailed climate-related financial impacts, granular emission data, and scenario analysis, resulting in detailed and comprehensive reporting, especially in areas like Strategy and Metrics and Targets.
  
  Adopting IFRS S2 can enhance the precision and transparency of climate-related disclosures, fostering greater investor confidence and better risk management. It can also facilitate comparability with international peers, aiding in global investment decisions.
  
  However, the increased data requirements may pose significant challenges in terms of data collection, analysis, and reporting, potentially leading to higher compliance costs and resource allocation issues.
  
  Data related to physical and transition risks and opportunities from counterparties may be complex to obtain, depending on their ability to generate specific information from the real economy, such as geographical impacts and translating physical risk data into financial losses, which could vary significantly across different industries and regions.
  
  
• Expanded Scope: Compared to TCFD, IFRS S2 significantly broadens the scope and detail of required disclosures, including more extensive information on transition plans, climate resilience, and detailed financial impact assessments across different time horizons.
  
  This broader scope can provide a more holistic view of climate-related risks and opportunities, helping banks to better integrate climate considerations into strategic planning and operational decisions.
  
  However, the expanded requirements may overwhelm smaller banks or those with less advanced reporting systems, requiring substantial investments in upgrading reporting infrastructure and staff training.
  
  
• Stringent Requirements: IFRS S2 enforces stricter disclosure requirements, including detailed industry-based metrics like sector-specific emission factors, comprehensive reporting on the use of carbon credits to achieve net emissions targets, and precise accounting of financed emissions with breakdowns by asset class and geography.
  
  These stringent requirements can lead to more accurate and reliable disclosures, enhancing the credibility of banks' climate commitments and improving stakeholder trust.
  
  From another angle, the inability to meet these requirements may lead to difficulties in ensuring compliance, necessitating significant expertise and potentially leading to inconsistencies in reporting quality across the industry.
  
  
• Global Support: Requirements under IFRS S2 have received widespread global support, with numerous jurisdictions, including the European Union, the US and several Asia-Pacific countries among others, actively consulting on and planning for the adoption of these standards into their regulatory frameworks.
  
  As a benefit, the global support for IFRS S2 facilitates the harmonisation of reporting standards across borders and can therefore making it easier for Canadian banks to operate in international markets and attract global investors.
  
  While global adoption can bring uniformity, it may also impose a one-size-fits-all approach that might not account for specific national or regional contexts, potentially leading to challenges in implementation and relevance of certain requirements.

It is also worth noting that IFRS S2 provides detailed guidelines specifically for climate-related disclosures (same as CSDS 2 objective), encompassing both physical and transition risks, along with opportunities, whereas IFRS S1 addresses broader sustainability risks and opportunities disclosures (also similar to CSDS 1).

While the CSSB disclosure project is still in development and set to be adopted by January 2025, it will be voluntary.

However, this comes as an incentive to financial institutions including banks and regulators to prepare an incorporation phase, potentially for new mandatory disclosure standards.

Dealing with the intricacies of IFRS S2 should also prompt concerns with CSDS 2 due to their similarities. This is vital for Canadian regulators and banks as they will likely aim to harmonise with global standards and ensure climate reporting accurately represents local economic conditions.

Regulatory bodies play a crucial role in facilitating the transition to ISSB standards and ensuring that disclosure requirements are well suited and effectively implemented.

In Canada, regulators such as the Office of the Superintendent of Financial Institutions (OSFI) and the Canadian Securities Administrators (CSA) are instrumental in setting expectations and providing guidance for banks. Their involvement helps to ensure that disclosures are not only comprehensive and accurate but also comparable across the industry.

As such, Canadian regulators must consider the following, should they decide to adopt mandatory ISSB-based standards:

• Ensuring Practicality: Ensuring ISSB Standards are practical and do not increase complexity before mandating them.
  
  This can helps facilitate banks’ integration of ISSB-aligned climate-related financial disclosures seamlessly into their operations, enhancing transparency and enabling informed decision-making by investors and stakeholders.
  
  
• Clear Timelines and Implementation Strategies: Providing clear timelines and phased implementation strategies to allow banks to adapt their reporting processes effectively, minimising disruption to their core operations while enhancing compliance with new standards.
  
  
• Stakeholder Consultations: Conducting regular consultations with stakeholders, including climate risk data providers, to gather feedback and address concerns about the practicality and impact of new disclosure requirements.
  
  These also ensure they capture relevant data without imposing undue burdens, thereby improving the quality and relevance of reported information.
  
  
• International Collaboration: Collaborating with international regulatory bodies to harmonise standards and facilitate global consistency in climate-related financial disclosures, facilitating cross-border investment and enhancing Canada's position in the global marketplace for sustainable finance.