Will mandatory sustainability disclosures strengthen Canada’s capital markets?: ISF Briefing Note

Hidden risks have had terrible consequences for markets, resulting in past crises such as the Enron and Worldcom scandals, and the 2008 global financial crisis. Such events have led to additional financial and governance reporting requirements for public firms.

Many jurisdictions recognize that climate change is a serious risk to global financial systems and are moving ahead with regulations to mandate reporting on climate-related risks and impacts. Meanwhile, Canada has paused its efforts to mandate disclosure and instead relies on a patchwork of mostly voluntary reporting frameworks. Recent policy debates have focused on the potential impacts on Canadian businesses and markets of resuming efforts to mandate climate-related disclosures.

To better inform this discussion, a new Briefing Note from the Institute for Sustainable Finance gathers the evidence to determine that, with the right policy design, Canada can develop an effective mandatory climate-related disclosure regime that mitigates costs, while providing better climate risk oversight and more efficient financial markets.

This briefing note assesses the likely impact of a mandatory sustainability disclosure regime on Canadian capital markets, using (1) early evidence on sustainability reporting mandates and voluntary reporting, and (2) lessons from major historical disclosure reforms (e.g., U.S. Securities Acts Amendments in 1964, the Sarbanes-Oxley Act of 2002, adoption of the International Financial Reporting Standards (IFRS), and the Dodd-Frank Act of 2010).

Across the literature reviewed, the direction of effects is broadly consistent. Canada should expect initial net costs, but also a meaningful structural shift in incentives: firms with strong governance and credible transition strategies are likely to be rewarded over time through improved market confidence and potentially lower financing costs.

The policy challenge for Canada is therefore not whether to mandate disclosure, but how to design a regime that delivers material, comparable information while limiting unnecessary burdens, particularly to smaller firms, and supporting companies in higher emitting sectors that still provide essential goods and services to transition.

“By learning from global experiences, Canada can craft a disclosure regime that mitigates the costs associated with disclosure regulations while achieving the benefits of more transparent climate-related risks and more efficient capital markets,” said ISF Director of Research Yrjö Koskinen.

“A well-designed mandatory disclosure regime would support both more efficient capital allocation and more effective prudential oversight,” said ISF Research Associate Prateek Sood. “It would also complement other climate-risk policy tools, such as sustainable investing guidelines and greenwashing regulation, by providing a more reliable information base for evaluating claims and tracking progress.”

Download and read the briefing note, titled “Will mandatory sustainability disclosures strengthen Canada’s capital markets?”