Are actions to promote climate solutions in Canada adequate?

• Introduction: Global sustainability disclosure standards have evolved to meet the demands of investors.

In November 2021, the ISSB was established by the International Foundation for Financial Reporting Standards (IFRS) to develop a comprehensive international framework for sustainability disclosure standards. Following an extensive consultation process, the final versions of the ISSB standards were published on June 26, 2023. ISSB standards require companies to disclose information on all sustainability-related risks and opportunities likely to influence cash flow, access to financing, or the cost of capital in the short, medium and long term. Adoption of the ISSB standards is voluntary, and it is up to the world's regulators to determine whether their jurisdiction will make them mandatory. Each State can use these standards to develop disclosure requirements tailored to its structure and economic context.

Some jurisdictions have already drawn up regulations based on these standards to make these best practices mandatory.

• Progress observed in other regions

To ensure a successful transition, the government has a responsibility to provide incentives (the "carrot"), guidance (norms, such as the ISSB standards) and regulation (the "stick") so that companies adopt relevant, effective and sustainable changes. Some countries have managed to develop a plan incorporating a public policy that favors the transition, guidelines aligned with international standards, as well as the guarantee of complying with government regulations.

• In the United States

In the United States, the government has succeeded in establishing a public policy that favors transition. The American Inflation Reduction Act (IRA) of August 2022 is a budget reconciliation measure that encompasses a wide range of policies in the United States. Its main objective is to contain inflation and promote investment in domestic clean energy production. This law represents the most significant effort in American history to fight climate change, aiming to reduce greenhouse gas emissions by around 40% by 2030 compared to 2005 levels.

From a regulatory perspective, in March 2022, the U.S. Securities and Exchange Commission (SEC) introduced a new regulation to standardize climate disclosure by listed companies. This proposed rule requires these companies to provide specific information annually on their climate risk management, climate governance, and how they identify, assess, manage and disclose these risks. This proposal is widely considered a major and urgent change in the U.S. financial markets. However, the SEC continues to postpone the development of its regulations. Currently, the agency plans to finalize its March 2022 proposal in the fall of this year, but no final announcement has been made yet.

In addition, in September 2023, the California State Assembly passed a major climate bill, Senate Bill 253 (SB 253), which will change the way businesses operate and have a significant impact on the climate crisis. This law expands the information available to investors and consumers about a company's actions and sustainability concerns. SB 253 could significantly change what companies must include in their sustainability reports. Now enacted into law, it is the first law in the U.S. to require companies to report their greenhouse gas emissions on scopes 1, 2 and 3. In addition, another law, SB 261, requires companies to report on their climate risks.

• European Union

Within the European Union, those in charge have also succeeded in putting in place a government policy conducive to transition. The Commission's Green Deal Industrial Plan, announced on February 1, 2023, aims to boost the competitiveness of Europe's carbon-neutral industry and facilitate the rapid transition to climate neutrality. The plan seeks to promote an environment conducive to increasing the EU's production capacity in the zero-emission sector, necessary to meet Europe's ambitious climate targets.

From a regulatory point of view, the European Sustainability Reporting Standards (ESRS) are the new binding rules with which companies covered by the Corporate Sustainability Reporting Directive (CSRD) must comply. The European Commission has introduced these standards to ensure that corporate sustainability reporting within the EU is comparable, relevant and reliable. These standards are currently being developed by the European Financial Reporting Advisory Group (EFRAG), and should become mandatory from 2024.

While many countries are implementing necessary and beneficial measures in the field of sustainable finance, some are encountering obstacles that are holding back their efforts.

• Canada is three to five years behind in implementing climate finance policies, and lacks effective oversight in this area.

In October 2022, Canada revised its long-term strategy, examining various scenarios for achieving carbon neutrality by 2050, but without specifying a specific trajectory or detailing the policies and measures required to get there. However, Canada has implemented a public policy to encourage the transition to climate neutrality. It has announced an $80 billion investment plan in its 2023 budget to promote clean energy and sustainable infrastructure, in response to the U.S. Inflation Reduction Act. Nevertheless, Canada seems to remain dependent on oil and gas, and has failed to introduce binding climate disclosure regulations, particularly for financial institutions.

In February 2023, the United Nations Principles for Responsible Investment (UNPRI) designated Canada as a "weakly regulated jurisdiction" with respect to international standards, as disclosure of management practices and sustainability reporting remains largely voluntary. The lack of compulsion to comply with standards can be an obstacle to progress in efforts to combat climate change, particularly in the financial sector.

However, encouraging progress has been made in setting standards in Canada. Although Canadian entities are not currently required to comply with ISSB standards, there has been widespread support in Canada for the development and adoption of consistent and comparable sustainability reporting requirements. As part of efforts to establish standards in Canada, the Canadian Sustainability Standards Board (CSSB) was officially announced in June 2022. The CSSB works in collaboration with the ISSB to encourage the adoption of its standards in Canada, to identify issues critical to the Canadian context, and to facilitate interoperability between ISSB standards and future CSSB standards.

Another optimistic note is emerging with the proposed legislation to force Canadian banks and other federal financial institutions to comply with Canada's climate commitments. This proposal is currently being examined by the Senate Banking Committee, more than a year after it was first put forward by Senator Rosa Galvez. The objective of the Climate-Aligned Finance Act (CAFA) goes beyond simple disclosure. It requires financial institutions of all types to direct their capital towards climate initiatives. This law makes climate action an essential part of the corporate strategies of financial institutions, rather than a secondary consideration. If adopted, CAFA could propel Canada from laggard to leader in the field of climate change financing.

• Conclusion: It is imperative to intensify efforts so that Canada can keep up.

Given that climate represents both a major opportunity and a risk for companies, it is essential that governments implement appropriate and effective measures to facilitate a successful business transition. In addition to the implementation of transition-friendly public policies, the SEC climate proposal, California's SB 253 law, the CSRD, and other regulations and standards are increasingly prompting companies to review their climate change strategies. They particularly encourage companies to make their climate data public, making climate disclosure a must. It is imperative for Canada to catch up and accelerate the development of its climate regulations to avoid suffering a significant disadvantage.