Mandatory climate disclosure is coming to Canada: how to prepare and the risks of non-compliance
It’s official: mandatory climate-related financial risk disclosure is coming to Canada. What are the requirements? Which companies are affected? And what are the risks of failing to comply?
In April 2022, the Canadian government released its latest federal budget, announcing mandatory reporting of climate-related financial risks for all federally regulated financial institutions from 2024. This includes all Canadian banks and all federally incorporated or registered insurance companies, among others.
Who is impacted by Canada's new climate-risk disclosure?
Although the reporting requirements will only apply to federally regulated financial institutions for a start, there’s a wide range of companies indirectly affected by the new regulation. The government expects it to have a comprehensive impact throughout the entire Canadian economy as the financial institutions will be required to collect and assess climate-related risks and emissions from their clients to meet the requirements.
This means that other businesses will be forced to disclose their climate metrics accordingly as well – or risk losing access to capital, partnerships, or other financial services.
So, what can you do to prepare? In this blog, we have gathered everything you need to know about Canada’s mandatory ESG disclosure requirements: what are the requirements? And what are the consequences if you fail to comply in time?
What are the requirements of the Canadian new climate disclosure?
- In-scope financial institutions will be expected to report their climate-related financial risks following the Task Force on Climate-Related Financial Disclosures (TCFD) framework;
- In-scope financial institutions are expected to collect and assess information on climate risks and emissions from their clients;
- The reporting requirements are expected to start in 2024, with a “gradually phased-in” approach.
- Separately, the Canadian government will also start to require federally regulated pension plans to disclose their environmental, social, and governance (ESG) considerations when building their portfolios. This implies that even more companies will be forced to disclose their ESG metrics – and not just companies from the financial sector.
What happens if a business fails to meet Canada’s climate disclosure requirements?
Starting from 2024, businesses and organizations that fail to meet the compulsory disclosure requirement or are misleading risk being faced with lawsuits, injunctions, and severe fines – as we have witnessed with other mandatory ESG legislations around the world.
In 2020, for instance, the multinational company Total was taken to court in an effort to force it to take the necessary measures to drastically reduce its greenhouse gas emissions under the French law on Corporate Duty of Vigilance. In addition, earlier this year, the European Commission published its long-awaited proposal for a union-wide Directive on corporate sustainability due diligence (CSDD), where they ensured that companies will be held liable for hazards that could’ve been prevented if appropriate measures would've been taken.
Canadian banks and other asset managers have long been pressured to disclose their sustainability information and be held accountable for the climate impacts of their financing. With the new mandatory climate disclosure around the corner, this will soon become a reality.
How to prepare your business for Canada’s climate disclosure requirements?
Regardless if you’re an asset manager in need of ESG information from your portfolio companies or a company required to disclose your information – foresight is the key. Too often, companies miscalculate the amount of work, time, and resources required when reporting. Reporting under the TCFD framework isn’t a checklist you tick off. To meet the requirements of the framework, issuers must collect and analyze robust data to identify actual and potential risks and opportunities, measure portfolio or company exposure, and take necessary action to manage those risks.
The easiest way to get the results you’re looking for is to take advantage of the dedicated tools and ESG software out there. Using a central software platform allows companies to systematically assess and work with the data on an ongoing basis – and store the data to easily monitor its performance over time. So any initial costs, whether it’s time or money, for sustainability reporting software should be seen as a high-priority investment.
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