On October 18, 2021, the Canadian Securities Administrators (the “CSA”) published the proposed National Instrument 51-107 – Disclosure of Climate-Related Matters (the “Proposed NI 51-107”) and companion policy for comments. The Proposed NI 51-107 introduces new climate-related disclosure requirements for reporting issuers. After the CSE reviewed public comments in 2022, the Proposed NI 51-107 still remains a draft national instrument, as the CSA has been reviewing international developments and recommendations from various organizations, including those of the International Sustainability Standard Board and the Canadian Sustainability Standards Board, before moving forward with revising and implementing the Proposed NI 51-107.

Until the Proposed NI 51-107 has been finalized, the extent to which issuers will need to disclose their climate-related practices is not certain. Nonetheless, issuers should be aware that current continuous disclosure obligations under securities laws require issuers to disclose material climate-related information in certain circumstances. Issuer should also consider current guidelines provided by the CSA and other organizations to prepare for a wider range of disclosure obligations that will be introduced with the implementation of the Proposed NI 51-107.

This articles provides a summary of the Proposed NI 51-107, and an analysis of existing climate-related disclosure requirements and recommendations that are applicable to Canadian reporting issuers.

Proposed National Instrument 51-107

The Proposed NI 51-107 would require reporting issuers including venture issuers, other than investment funds and certain other specified issuers, to disclose climate information based on the recommendations of the Task Force on Climate-related Financial Disclosures (“TFCD”). The core elements of the TFCD recommendations contained in Proposed NI 51-107 are the disclosure of governance, strategy, risk management and metrics and targets, as described in further detail below:

Management Information Circular Disclosure, as set out in Form 51-107A:

1. Governance (mandatory) – Involves describing the board’s oversight of climate-related risks and opportunities, and management’s role in assessing and managing climate-related risks and opportunities.

Annual Information Form or Annual Management’s Discussion and Analysis Disclosure, as set out in Form 51-107B:

2. Strategy (if material) – Involves describing climate-related risks and opportunities, and the impact of climate-related risks and opportunities on the issuer’s businesses, strategy and financial planning.

3. Risk management (mandatory) – Involves describing how the issuer identifies, assesses and manages climate-related risks.

4. Metrics and targets (if material) – Involves disclosing the metrics and targets used by the issuer to assess and manage relevant climate-related risks and opportunities, and the issuer’s performance against these targets.

5. GHG emissions (mandatory) – The issuer would also be required to “comply or explain” its greenhouse gas (“GHG”) emissions, by either: (1) disclosing GHG emissions under Scope 1, 2 and 3 (see the below description of these scopes) and the related risks, or (2) disclosing the issuer’s reasons for not disclosing such information. Disclosure of GHG emissions can also be incorporated by reference to another document filed on the issuer’s SEDAR+ profile.

GHG emissions can be calculated and disclosed in accordance with the Greenhouse Gas Protocol (the “GHG Protocol”), or an alternative reporting standard if the issuer explains how it is comparable to the GHG Protocol. The GHG Protocol is recognized as a global standard for calculating and reporting GHG emissions. The three scopes of GHG emissions under the GPG Protocol are as follows:

Scope 1: Direct emissions from the issuer’s owned or controlled sources, including fuel combustion and industrial processes;

Scope 2: Indirect emissions from the issuer consuming purchased electricity, heat, or steam; and

Scope 3: Other indirect emissions occurring throughout the value chain, but outside the issuer’s direct control. This includes emissions from business travel, purchased goods and services, waste disposal and employee commuting.

Governance disclosure would be located in the issuer’s management information circular. If the issuer does not send a management information circular to its securityholders, the disclosure would be contained in the issuer’s annual information form (“AIF”) or annual management’s discussion and analysis (“MD&A”), if the issuer does not file an AIF. For strategy, risk management, metrics and targets and GHG emissions, the required disclosure would be included in the issuer’s AIF, or annual MD&A if the issuer does not file an AIF.

The CSA is also considering an alternative approach to make disclosure of Scope 1 GHG emissions mandatory, either when the information is material or for all cases.

The Proposed NI 51-107 would not require reporting issuers to conduct a scenario analysis to assess the potential impacts of climate-related risks over the medium to long term, which was one of the TFCD recommendations. The CSA mentioned that there was concern over the lack of standardization with the scenario analysis, and the costs associated with developing the scenario analysis.

Timeline for the Implementation of NI 51-107

The Canada Climate Law Initiative and other organizations are urging regulators to finalize and implement the Proposed NI 51-107 in order to bring clarity to climate change disclosure for issuers.

In March 13, 2024, the CSA announced that once the Canadian Sustainability Standards Board’s consultation on its first set of standards has been completed and the standards finalized, the CSA anticipates seeking comments on revised climate-related disclosure requirements. The CSA is also monitoring international developments, including the climate-related disclosure standard published by the International Sustainability Standards Board in 2023 and the recent climate-related disclosures rules of the United States Securities and Exchange Commission approved in March 2024, which are applicable to domestic U.S. issuers as well as certain foreign issuers. It is anticipated that the CSA will refine the Proposed NI 51-107 based on international guidance.

The Proposed NI 51-107 also contemplates a phased-in transition period for the disclosure requirements, depending on the issuer’s status as a venture or non-venture issuer. Non-venture issuers would be required to comply with the Proposed NI 51-107 for financial years beginning on or after January 1 of the first year after the effective date of the Proposed NI 51-107, while venture issuers would be required to comply with the Proposed NI 51-107 for financial years beginning on or after January 1 of the third year after the effective date of the Proposed NI 51-107.

Current Landscape for Climate-Related Disclosure

While we do not have clarity on when the Proposed NI 51-107 will be amended or implemented, issuers should be mindful that existing continuous disclosure obligations, such as identifying material risk factors, involve climate-related considerations that require disclosure. There also various recommendations provided by securities regulators and other organizations that issuers should consider to address climate-related issues now and prepare for the implementation of the Proposed NI 51-107.

Disclosure of Material Risk Factors

Currently, the determination of whether climate disclosure needs to be included in the issuer’s continuous disclosure documents depends on whether the disclosure is material. Only material information needs to be included in an issuer’s AIF and MD&A. For the purpose of those forms, information is likely material where a reasonable investor’s decision on whether or not to trade or hold securities of the issuer would likely be influenced or changed if the information was omitted or misstated. The Proposed NI 51-107, however, will introduce certain mandatory climate-related disclosures, which would apply regardless of whether an issuer considers it to be material or not.

Securities legislation requires issuers to disclose material risks affecting their business, and where practicable, the financial impact of these risks. Risk factor disclosure is currently required under National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”). An issuer is required to disclose in its AIF, if filed, risk factors relating to it and its business that would be most likely to influence an investor’s decision to purchase the issuer’s securities. An issuer is also required to discuss in its annual MD&A an analysis of its operations for the most recently completed financial year, including commitments, events, risks or uncertainties that it reasonably believes will materially affect its future performance. The CSA has provided helpful guidelines in CSA Staff Notice 51-333 (https://www.osc.ca/sites/default/files/pdfs/irps/csa_20101027_51-333_environmental-reporting.pdf) and CSA Staff Notice 51-358 (https://www.osc.ca/sites/default/files/pdfs/irps/csa_20190801_51-358_reporting-of-climate-change-related-risks.pdf), which include an overview of the current disclosure requirements for climate-related risks and examples of the types of risks that issuers may be exposed to.

As part of a materiality assessment, issuers should consider, where practicable, quantifying and disclosing the potential financial and other impacts of climate-related risks, including their magnitude and timing. An AIF requires an issuer to disclose the financial and operational effects of environmental protection requirements in the current financial year and the expected effect in future years. In an MD&A, issuers should disclose: (i) what has been, and is reasonably likely to be, the impact of environmental trends or uncertainties on revenues, expenditures and cash flows, and (ii) the impact environmental trends or uncertainties have on its financial condition and liquidity, if any. Issuers should consider both qualitative and quantitative factors in making a materiality assessment. External resources and benchmarking against industry peers is helpful in this regard.

Corporate Governance

Issuers should consider developing and strengthening internal governance structures for overseeing climate-related strategies and risks. The guidelines provided in National Policy 58-201 – Corporate Governance Principles state that the board of directors should consider adopting a mandate that acknowledges responsibility for, among other things, (i) adopting a strategic process and approving, at least annually, a strategic plan that takes into account the opportunities and risks of the business; and (ii) the identification of the principal risks of the issuer’s business and ensuring the implementation of appropriate systems to manage these risks. It is recommended for issuers to review their existing board charters and mandates and board skills and competencies matrices, and consider whether any changes need to be made to include oversight and responsibility for climate matters, and to ensure that the board has the necessary climate competence to provide oversight of climate-related issues. The board should also consider tasking management with the responsibility for assessing and managing climate-related risks and opportunities.

The proxy-advisory firm Glass, Lewis & Co. (“Glass Lewis”) has stated that it generally recommends that shareholders vote against a governance committee chair of an issuer on the S&P/TSX Composite Index that does not provide clear disclosure about the board’s oversight of climate issues. Furthermore, in situations where an issuer has not properly managed or mitigated climate risks to the detriment of shareholder value, Glass Lewis may recommend that shareholders vote against certain members of the board responsible for climate risks, or vote against members of the audit committee in the absence of explicit board oversight over climate issues. Glass Lewis believes that companies should provide thorough climate-related disclosures in line with the recommendations of the TFCD.

Disclosure Issues

The CSA has noted that while the volume of climate-related disclosure has increased in recent years, the disclosure is often limited and lacked specificity, and typically disclosure of climate-related risks are boilerplate, vague or incomplete and often do not address the financial impact of these risks. It is important for issuers to take the time to tailor their climate disclosure to the circumstances of their business. Clear and understandable disclosure helps investors understand specifically how the issuer’s business is affected by material risks resulting from climate change.

The CSA has also noted a number of issuers making potentially misleading, unsubstantiated or otherwise incomplete claims about business operations or the sustainability of a product or service, through the practice known as “greenwashing”. If an issuer chooses to disclose forward-looking information (“FLI”) related to the climate (e.g., disclosing targets to reduce GHG emissions or making sustainability claims about their activities), the issuer should make sure to comply with forward-looking information requirements in Part 4A of NI 51-102, which includes identifying the information as FLI, providing cautionary language, stating the material factors or assumptions used to develop the FLI and describing the issuer’s policy for updating FLI. Securities legislation contains prohibitions against making statements that a company or person knows, or reasonably ought to know, are materially misleading or untrue. If an issuer is disclosing GHG emission targets, for example, the issuer should consider disclosing its plan to achieve those targets and use historical data points to communicate its current status and progress. Issuers should make sure they have a robust process for reviewing any voluntary disclosure, and ensure that promotional language regarding the sustainability of the issuer’s operations are supported by facts and information about the issuer’s current activities.

In order to make sustainability claims and set climate-related targets, it is important for issuers to understand their current GHG emissions. The GHG Protocol provides a guide entitled A Corporate Accounting and Reporting Standard (https://ghgprotocol.org/corporate-standard), which sets out how issuers can measure and report on emissions. By calculating current emissions based on these guidelines, issuers can get a better sense of their overall impact on the climate and start setting targets to reduce emissions. It can also help issuers get prepared for the future implementation of Proposed NI 51-107, where the disclosure of certain GHG emissions may be mandatory.

Looking Ahead

We will continue to monitor developments on the changes to and the implementation of the Proposed NI 51-107. In the meantime, reporting issuers would do well to acquaint themselves with the current regulatory environment for climate-related disclosure. Please reach out to us if you have any questions on this information.