Spotlight on: The environment and climate change
Jonathan Cocker & Kristyn Annis
Growing action on climate change
The Clean Fuel Regulations is a notable program designed to encourage the use of low carbon fuels, technologies and processes within the transportation industry. Its primary objective is to progressively enhance the cleanliness of everyday fuels by enforcing a requirement for fossil fuel producers and suppliers to decrease the carbon intensity of their products by 2030. An essential aspect of the program allows producers and suppliers to obtain credits from third-party entities, including charging network operators and clean hydrogen producers—who specialize in fuel switching, enabling them to effectively reduce their carbon footprint. Additionally, the program encompasses a dedicated fund that aims to expedite the production and adoption of low-carbon fuels, such as hydrogen and biofuels.
Meanwhile, Canada is poised to join the growing list of countries that will soon enforce mandatory carbon emissions disclosure by companies. Currently, the Canadian Securities Administrators (CSA) and the US SEC have each introduced draft disclosure regulations, drawing inspiration from the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. Originally expected to be implemented in April 2023, the SEC delayed its issuance of the much-debated climate change disclosure rule until at least the fall of 2023. Consequently, affected companies will not be required to disclose until 2024, considering the extended timeline. Similarly, the CSA, which unveiled its proposed National Instrument 51-107, Disclosure of Climate-related Matters, ahead of the SEC's disclosure standard, has also postponed the finalization of its instrument. It is worth noting that the disclosure requirements outlined in proposed NI 51-107 were perceived to be less stringent compared to those mandated by the TCFD or the SEC's proposed rule. Despite these draft rules not being expected to take effect until 2024 — numerous organizations, including pension fund managers, have already proactively adopted stricter disclosure practices as a demonstration of sound governance.
In addition to mandatory reporting, the International Sustainability Standards Board (ISSB) has finalized and issued its International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards, S1 and S2. These standards, which have been globally developed, aim to establish a consistent set of accounting rules for public companies, ensuring comparability in financial statements and reporting of specific transactions across various sectors and jurisdictions. It will be up to domestic regulators like the CSA to decide whether to mandate the application of the IFRS Sustainability Standards for reporting issuers and other entities under their jurisdiction. Notably, the CSA strongly supports the ISSB and actively advocated for one of its head offices to be located in Montreal. However, many companies are voluntarily adopting the standards in anticipation of future mandatory application.
Why it matters
Organizations that have adopted a wait-and-see stance towards greenhouse gas reduction and climate change-related disclosure should seize the moment to step out of the sidelines. It is crucial for these organizations to comprehend their reporting and emissions obligations in light of the latest federal and provincial reduction plans. They must then formulate suitable compliance and remediation strategies to ensure their facilities align with the required standards. Making carbon emissions tracking a common practice is essential, particularly as banks, investors and suppliers increasingly demand disclosure of a company’s scope 1 and scope 2 emissions. In many cases, this will likely involve reducing emissions profiles—and there is no better time to do so than the present. By 2025 or 2026, many of the government’s cleaner energy projects will start coming online which means, right now, sourcing opportunities abound. Companies that seize this moment to invest in new energy projects and sources will not only benefit from lower pricing, but will also gain a leg up on their competitors. Additionally, buying low-carbon energy now may allow companies to acquire carbon credits early in the game—or become strategic investors in the space.
Things to think about
While today’s proposed disclosure drafts focus primarily on publicly-listed companies, it is only a matter of time before these requirements trickle down to private companies. This will inevitably impact the expectations of debt and equity issuers.
To prepare, private companies would be well-served to outsource some of the work needed to track and reduce their carbon emissions and to implement a governance structure focused on reducing climate-related risk. Addressing climate change, along with its associated risks and opportunities, should become a recurring agenda item in board meetings as a matter of good governance.
As we move forward, companies will inevitably have to act aggressively to hit their mandated ESG targets, which may involve setting emissions reductions targets for senior executives. Additionally, governments have an increased interest in seeing how companies are including Indigenous communities in their energy projects. In several cases, the success of many climate change solutions and resource projects in Canada will depend on the involvement of Indigenous communities who are proximate to the projects.