A primer on developments in the Canadian ESG regulatory environment
In Canada, existing federal and provincial laws cover a broad range of ESG related topics. For example, there are various “hard” (mandatory) laws regarding the environment, occupational health, and employee safety. These laws are clearly ESG in nature as they set requirements for reporting corporate performance on key environmental and social issues.
However, these laws are not referred to specifically as “ESG laws.” The fact that Canada already had comprehensive, hard laws that cover ESG related issues can be a potential reason the government was seen as being “slow” to legislate regulations that specifically alluded to “ESG.”
This changed recently. Both the federal and provincial governments are setting designated ESG regulations that outline more precise requirements that are more specific to Canada’s ESG-related goals. Additionally, former ESG “soft” laws (e.g., recommendations and policies) are increasingly becoming mandatory laws.
Financial analysts should be aware of the following ESG-specific regulatory developments in Canada.
This regulation outlines qualification criteria for investments (and other economic activities) that contribute to Canada’s ambition to ‘transition’ to a Net Zero economy by 2050. This regulation helps differentiate between which activities contribute to this Net Zero objective and which do not.
This regulation applies to investors, private and public companies, and financial intermediaries such as commercial and investment banks, as well as buy-side players like pension funds and other asset managers.
Its core purpose is to support both the assessment of and disclosure activities around investments, projects, and business activities that support Canada’s Net Zero transition.
The Taxonomy framework can also be used by government policymakers and regulators to determine how to allocate resources toward other climate-related activities that support this transition commitment. For example, local governments can use this framework to decide if investing in a power plant is beneficial to Canada’s transition to a net-zero economy.
The difference between these two labels is that “Green” projects are low or no carbon solutions (e.g., renewables, clean hydrogen, EV batteries), whereas “Transition” projects refer to those that significantly reduce the emissions from high-emitting sectors—such as oil extraction and coal mining.
This label would apply to projects that reduce emissions from hard-to-decarbonize sectors. Transition-labeled projects are short- medium term, meaning they have limited lifespans (a project of 20 years will not qualify for the transition label). This criterion is set to encourage projects that are more immediate and cost-effective. For example, a steel producer installing a technological solution to reduce emissions from its operations would be a project eligible for transition investment status.
This regulation is designed to advance Diversity, Equity, and Inclusion (DEI) in Canadian Corporations and promote greater disclosure on these topics.
The Corporate Diversity Reporting rules went into effect on January 1, 2020, and apply to federally incorporated public companies and non-venture reporting issuers. Non-venture reporting issuers are typically larger and more established companies that meet specific criteria such as having at least one million freely tradable securities and 300 public holders.
Some of the largest companies in Canada are private—such as Walmart Canada, Costco Wholesale Canada, and General Motors of Canada—and in turn have resulted in challenges and ambiguities surrounding enforcement. Now that the federal law applies to both public and private companies, the former regulatory loophole that challenged federal enforcement across the country has been addressed.
By setting these federal regulations that apply to public and non-public companies, the federal government can ensure there is a benchmark for DEI disclosure – regardless of their geographic location and incorporation status. (It should be noted that on April 13, 2023, the CSA published CSA Notice and Request for Comment with respect to proposed amendments to these regulations as the government is looking to enhance the disclosure requirements.)
Why? Because if a company does not comply, they must give a detailed explanation around why not. This explanation can be more revealing and potentially detrimental to its reputation. For example, if you are not sharing your board diversity statistics you have to explain why not. You can imagine the challenges of substantiating your case as to why you would not be disclosing this basic information.
Starting in 2024, federally regulated institutions, like banks and insurance companies, will be required to disclose their climate-related risks and exposure. See full article HERE.
This regulation will apply to the entire Canadian Market (to varying degrees)—starting with federally regulated financial institutions that must comply starting the end of fiscal year 2024. This includes Canadian banks and all federally incorporated or registered insurance companies.
By the end of 2025, additional companies will be required to comply based on their size, industry, and revenue.
Financial institutions can prepare by developing internal capabilities, resources, and infrastructure to support this annual need. For example, incorporating climate risk and emission information into due diligence can be a significant step in the right direction.
With that, it is important to note that since the TCFD was incorporated within the ISSB (International Sustainability Standards Boards) in July 2023, it could affect the terms associated with this framework and regulation.
Under these regulations, financial institutions will have to collect information on climate risks and emissions from their clients, which can indirectly impact many different companies within the client’s ecosystem and across their value chains. In short, any disclosure effort by these federally regulated financial institutions will require significant information gathering and provision by many companies that do business with the institution.
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