ISSB Releases Environmental-Related Disclosure Standards
Published July 19, 2023
In June, 2023, the International Sustainability Standards Board (ISSB) issued its first two international financial reporting standards on sustainability: IFRS S1, which addresses sustainability-related disclosure, and IFRS S2, which addresses climate-related disclosure. The new standards are intended to set a universal yardstick for environmental-related reporting to enable delivery of consistent information to investors worldwide. It is clear that Canada is prepared to get on board with the currently non-binding new international standards, but the devil may be in the details.
The Securities Exchange Commission has issued its own proposed rules to standardize environmental-related reporting in the US, however it remains unclear where those standards and rules will end up, given the general trends in US markets and pronouncements of US courts.
The Canadian Sustainability Standards Board (CSSB) is reviewing the new international standards and the Canadian Securities Administrators (CSA) is taking them into consideration as it develops new Canadian rules that will create climate-related disclosure requirements for certain issuers.
Canadian accounting and auditing regulatory bodies could also require certain issuers to comply with (some or all of) the new international requirements in their financial reporting, and the Office of the Superintendent of Financial Institutions Canada (OSFI) indicated that it will consider updating its Guideline B-15 (which is its new climate change disclosure framework for certain federally regulated financial institutions), to incorporate the new international requirements.
In advance of the release of the finalized forms of IFRS S1 and IFRS S2, the proposed forms were made available by the ISSB for public comment. The CSA conducted its own 90-day comment period on the proposed form of National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107) and provided a comment letter on the ISSB's drafts of IFRS S1 and IFRS S2, which was based on its collection of public commentary regarding the potential of introducing environment-related disclosure in Canada. While the CSA's comment letter and draft NI 51-107 showed that Canadian reporting issuers are generally in favour of having standardized environmental-related disclosure requirements, there are still questions and concerns around what exactly the requirements and transition will look like.
IFRS S1 and IFRS S2 are complex and include detailed reporting requirements in the areas of governance, strategy, risk management, and metrics/targets as they relate to sustainability and climate reporting. As noted, the CSSB and CSA are still developing the Canadian standards and rules, with a view to creating a reliable form of standardized reporting that is generally consistent with international standards. As such, instead of providing an in-depth analysis of IFRS S1 and IFRS S2, the following provides a high-level overview of some of the more contentious points and pressing questions that remain unanswered.
The new disclosure requirements will not apply to all Canadian companies but rather to reporting issuers (other than investment funds). It remains to be seen, however, whether there will be scalability in the requirements' application to issuers dependent upon their size, whether they are listed on an exchange including a junior exchange, etc. (i.e. whether issuers with smaller market capitalizations, and thus fewer resources, will have the same requirements as those with large market capitalizations).
IFRS S1 and IFRS S2 establish an effective date and (minimal) guidance on transition, being that the new requirements apply to annual reporting periods beginning on or after January 1, 2024, and that there is certain relief available to issuers in the first year of reporting. These exemptions (for the first year of reporting) include that alternative methods of calculating greenhouse gas (GHG) emissions (from what is required by the new rules) will be accepted, and Scope 3 GHG emissions disclosure will not be required. It is unclear, however, whether the new Canadian rules will impose the same effective date and transition criteria, and/or whether it will consider varied flexibility for implementation.
Scenario Analysis & Quantitative Disclosure
IFRS S2 requires issuers to include quantitative information (i.e. numerical data) regarding their climate change considerations and scenario analysis in developing disclosure. Scenario analysis is a "process for identifying and assessing a potential range of outcomes of future events under conditions of uncertainty", to assess climate resilience. Some issuers are concerned about the complexity, and thus potential cost and time, of calculating quantitative disclosure and conducting scenario analysis.
Depth of Scope 3 Disclosure
There is widespread concern around the introduction of mandatory Scope 3 GHG emissions reporting. IFRS S2 requires reporting on Scope 3 emissions and includes 15 distinct categories as well as an extensive Scope 3 measurement framework.
Disclosure Requirement Parameters
Notwithstanding some of the more concerning points noted above, there are several limits built into the new international standards that may give issuers some comfort in what they may be required to report:
- Materiality: information that is "material" for the purpose of reporting under IFRS S1 may differ from what qualifies as material under securities legislation, and issuers are only required to disclose "material information about the sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects".
- Impracticability: according to both IFRS S1 and IFRS S2, issuers may be exempted from including certain disclosure, including comparative amounts for various metrics and estimations of Scope 3 GHG emissions, where they deem it impracticable to do so, so long as they have made reasonable efforts (and disclose/explain the impracticability in prescribed circumstances).
- Undue cost and effort: according to IFRS S2, issuers are expected to compile their disclosure, including expected financial effects of climate-related risk or opportunity, only if they can do so without expending "undue cost or effort".
Key Takeaways & Next Steps
The CSSB will likely release the finalized Canadian standards next, followed by the CSA releasing its finalized rules for reporting, thus morphing the non-binding international principles into rules that subject Canadian issuers are required to follow.
In the CSA's comment letter noted above, it recognized the necessity of having scalability in the application of environmental-related disclosure standards, noting the importance of balancing the need for universally consistent reporting standards against the burden that new disclosure requirements place on issuers. The CSA expressed the importance of a priority-based phasing in approach, a size and industry-based focus on considering applicability, and a pause in introducing Scope 3 GHG emissions requirements.
There is no anticipated release date of the finalized form of Canadian standards and rules, however we expect that more information will become available in the coming months. While it remains unclear what exactly the new Canadian disclosure requirements will look like, issuers should familiarize themselves with the new international standards and begin preparing to extend their sustainability and climate-related disclosure moving forward. For additional information, contact any member of our Business Law Group.
 IFRS S1 Appendix A: defined terms.
 For the purpose of sustainability-related disclosure, "information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports, which include financial statements and sustainability-related financial disclosures and which provide information about a specific reporting entity" (see IFRS S1, para 18).
 IFRS S1, para 17.
 See: IFRS S1 paras B51, B52, B54, B58, B59, B83, and IFRS S2 para B57.
 IFRS S2, para 18.