Operational implementation concerns
We support all transition relief proposed by the CSSB[2] as there are significant data challenges associated with the accurate measurement and disclosure of certain elements.
We acknowledge that both CSDS 1 and CSDS 2 are voluntary and Canadian regulators have indicated that their initial focus will be on climate-related disclosures. However, we would like to highlight the challenges associated with CSDS 1 implementation and want to ensure that there is sufficient transition relief and guidance for preparers of CSDS 1 disclosures. Some challenges include:
- methodologies to measure most sustainability-related risks and opportunities beyond climate are still nascent and under development.
- lack of available data.
- lack of sufficient direction and specificity on the selection of material, comparable, or reliable metrics, and targets for disclosure (i.e., are entities expected to consider Global Reporting Initiative Standards, European Sustainability Reporting Standards, etc.).
As noted, we are supportive of the transitional relief for other sustainability disclosures of two years and suggest a further one-year deferral for disclosure of non-climate industry-specific quantitative metrics information under CSDS 1. As banks start to build the capability to identify, monitor, and report other sustainability-related risks and opportunities beyond climate, it is likely that they will start with qualitative disclosures and will require at least another year to develop appropriate processes and data sources to provide useful quantitative disclosures (i.e., for reporting periods after January 1, 2028).
We recommend that jurisdictional regulators determine the appropriate timelines for disclosures under their purview. This should be done in consideration of optimal trade-offs between relevance/timeliness and verifiability/understandability/data availability. For example, OSFI Guideline B-15 requires climate-related disclosures to be published no later than 180 days after fiscal year-end. CSDS 1 provides similar transitional relief[3]for an entity to report their sustainability disclosures at the same time as its next second-quarter general-purpose financial report. OSFI's disclosure timeline is not transitional, while the CSSB's timeline relief is limited to the first year of adoption. We request that the CSSB consider modifying its standards to allow for sustainability disclosures to be published within 180 days after fiscal year-end as we have strong concerns with being able to provide financial reporting and sustainability reporting at the same time for the reasons noted below.
Data availability and quality remain key barriers to reliable, comparable, and timely disclosures. We would like to highlight that the energy consumption data collection and calculation for operating emissions, and financed emissions data collection and calculation typically takes many months to complete after the end of the annual emissions reporting period. Moreover, this may already conclude earlier than the banks' fiscal year-end (e.g., many banks report operational emissions for the period of August 1st to July 31st) to ensure sufficient data availability. By contrast, Canadian banks publish their annual financial reports within four to six weeks after their fiscal year-end. We believe that providing the disclosures in that short of a timeframe would result in greater use of estimates, and unintentionally increase the measurement uncertainty and complexity of key metrics and sacrifice the verifiability and understandability of the disclosed results. We believe that a lag between the financial statements and sustainability-related disclosures will not materially affect the decision-usefulness/ relevance of the information.
We also believe that jurisdictional regulators should determine the location of disclosures, and that the disclosures should not be required to be published in a “core” document (i.e., an issuer’s Management Discussion & Analysis, Annual Information Form or Management Proxy Circular (“core securities law documents”)). For example, OSFI has not required the climate-related disclosures to be included within the financial institutions’ financial reporting package. We request flexibility in location to avoid a reporting period mismatch between quarterly financial reporting information and annual sustainability information, which would be confusing for statement users if presented in the same location.
We appreciate the flexibility provided in paragraph B19 of CSDS 2 to use a different reporting period from an entity’s own reporting period in relation to reporting of GHG emissions for entities in its value chain. We suggest this flexibility be extended to apply more broadly across all sustainability-related metrics as challenges also exist in the availability of data used for other sustainability-related metrics beyond GHG emissions in the value chain. We are concerned that using estimates for missing critical data elements, such as energy usage data, will provide distorted results that could mislead a reader in understanding a reporting entity's sustainability performance. Allowing for the lag would help to maximize the use of actual data, which we believe would serve the best interests of the primary users. Banks will make their best efforts to use the most recent and relevant data to apply in their calculations.
However, if the reporting period of sustainability disclosures must align to the financial reporting periods even when the underlying critical data are not yet available, we request the CSSB provide further implementation guidance, including consultation with the ISSB.
Organizations from different jurisdictions may follow different sets of classification systems (e.g., North American Industry Classification System (NAICS), Standard Industrial Classification (SIC), Nomenclature of Economic Activities (NACE), Global Industry Classification Standard (GICS), etc.). We recommend that the CSSB allow Canadian entities to continue using local industry classification codes rather than mandating a switch to GICS. We strongly recommend the use of NAICS, as any other alternatives will be highly challenging and costly for banks to implement. This would align with the principles outlined by the CSSB in its, paragraph 2 which notes that the CSSB may consider amendments to the IFRS Sustainability Disclosure Standards for jurisdictional practices.
OSFI has required the use of NAICS for banks for their various climate risk disclosures and programs including Guideline B-15, the Climate Risk Returns, and the Standardized Climate Scenario Exercise (SCSE). OSFI supports the use of NAICS as both Statistics Canada and the United States Census Bureau frequently maintain NAICS codes to ensure they maintain their relevance and suitability. The codes are coordinated and standardized across both systems. The codes are also freely available to the public, along with detailed descriptions and technical information which facilitates their use.[4] In addition, the Basel Committee on Banking Supervision (BCBS) also allows jurisdictions to apply local industry classification codes as it is their view that it does not materially impact global comparability of banks reporting. Canadian banks use NAICS for all BCBS reporting.
It should be noted that GICS is not as granular as NAICS, especially in key transition sensitive sectors. There is no separation of oil from gas in GICS. Classification system granularity is important given the use of industry sectors in determining the financial risk adjustments.
Safe harbour
We strongly encourage the CSSB to work with the CSA to consider climate-related safe harbour protections, which are under its purview. Existing safe harbour protections for forward-looking information under securities legislation are very limited in scope and would not cover most climate-related disclosures. Climate-related safe harbour protections would be beneficial in encouraging robust climate-related disclosures, even in cases where methodologies are less clear, and data is imperfect.
For example, for draft CSDS 2, it is necessary to recognize that relevant climate science, data, standards, methodologies and regulatory guidance are still developing and include longer time horizons than traditional forward-looking information; and employ third-party standards and methodologies which may be based on estimates and which may be of poor quality. Consequently, we request that the CSSB reiterate to the CSA the current challenges in producing climate-related disclosures, to encourage meaningful liability safe harbour provisions with respect to disclosures for: (1) Scope 1, 2 and 3 GHG emissions, (2) climate-related scenario analysis, (3) internal carbon pricing; (4) climate-related transition plans, (5) targets and goals, (6) financial effects of climate-related risks and opportunities, and (7) entities’ determination with respect to the materiality of climate-related disclosures.
We also support the CSSB working with the CSA to provide a safe harbour provision for any individual (e.g., director), board, committee, or equivalent body identified as having climate-related skills and competencies, similar to the one provided to other “expert” directors in some jurisdictions (e.g., financial experts who are members of audit committees), in order to avoid hindering an entity’s ability to recruit and retain such experts.
Climate resilience