Climate Impact Disclosure Gets Real

|

New regulations and accounting standards will give investors a truer picture of corporate sustainability

Illustration: smoke and emissions from pipes
shutterstock/Svetlana Avv

Even head-in-the-sand denialists must admit: cascading storms, wildfires and floods are making climate change very real. And for those organizations dragging their heels on sustainability, the regulatory and marketplace demands are now very real as well.  

In January 2024, Canadian-regulated financial institutions will need to collect data on their greenhouse gas (GHG) emissions and climate risks for annual disclosure beginning in 2025. This will affect not only banks, trust companies and insurance companies. To meet the requirements, financial institutions will also have to ask their clients — businesses seeking a loan or insurance policy, for example — to disclose their own carbon emissions and climate risks.  

Up to now, laggard firms that were not motivated to report on their carbon footprint could hide behind the welter of environmental, social and governance (ESG) metrics and disclosure frameworks. This chaotic reporting environment was described by one global accounting leader as “redundant and overlapping with gaps.”  

Businesses can no longer throw up their hands and say it is all too confusing. In June, the International Sustainability Standards Board (ISSB) for the global accounting profession launched a single standard for ESG reporting by public firms. The framework will create an “accounting-based language” and global baseline for sustainability reporting.   

The ISSB standards are effective for annual reporting periods beginning in January 2024. Though they have not yet been mandated by the Canadian Securities Administrators, they received immediate and strong support from CEOs of 11 of Canada’s leading pension plan investment managers. The reaction reflects investor frustration at the bewildering array of corporate sustainability disclosure systems.   

“Capital is flowing away from firms that don’t appear to be doing a good job at tackling emissions or don’t appear to be serious about targets,” said Ryan Riordan, director of research for the Institute for Sustainable Finance (ISF), at a conference on the transition to net zero. “And lenders are considering the risks associated with firms that might be regulated away or might not have a business model in 15 years. The other is financial regulation. Increasingly regulators have a small appetite for firms that have a lot of climate risk associated with them.”  

ISF report of emissions disclosure  

Riordan has a prime view of the state of emission reporting in Canada. He and ISF colleagues Simon Martin and Sean Cleary updated a report, first published in 2021, on GHG emissions, disclosures and target setting by large Canadian firms. They analyzed the sustainability reports released during 2022 by the 236 firms in the S&P/TSX Composite Index.   

They found:  

  • Seventy-two per cent of firms in the index reported their greenhouse gas emissions and 57 per cent disclosed GHG reduction targets.  
  • Only 13 per cent of firms with targets provided detailed plans on how reductions would be achieved.  

Clearly, there is room for improvement, particularly in the disclosure of value chain or Scope 3 emissions. To date, most disclosure has been limited to Scope 1 emissions (created directly by a company’s operations) and Scope 2 (caused indirectly by the energy a business consumes). Scope 3 refers to emissions from a company’s upstream and downstream activities — goods and services purchased from suppliers, business travel, waste disposal, product distribution and the like.  

A Climate of Disclosure
Readers Also Enjoyed A Climate of Disclosure

According to the latest ISF report, only 30 of the 236 firms in the S&P/TSX Composite Index had a Scope 3 target in their 2022 sustainability reports. Similarly, the Canadian Climate Institute found that only 20, or one-third, of TSX60 companies disclosed their most material Scope 3 categories in their latest reporting year.   

This is a significant shortcoming. Scope 3 emissions are on average 11 times higher than Scope 1 emissions. By not disclosing their Scope 3 impact, businesses provide a misleading picture of their commitment to sustainability.   

A recently published study showed how misleading that could be. It found that companies that voluntarily disclosed their carbon emissions had lower Scope 1 emissions on average than similar companies that did not report emissions. The kicker: disclosing companies tended to have more upstream Scope 3 emissions. As a result, total emissions of disclosing companies were 7.5 per cent higher on average than those of comparable non-disclosing companies.  

Given the regulatory winds and new accounting standards, Riordan is hoping for big improvements when the ISF next updates its GHG disclosure report.  

“Thanks to the emergence of global standards for emissions reporting and regulatory requirements for climate-related disclosures, we can expect to see significant improvement in the next few years,” said Riordan. “We may be seeing the last days of the Wild West in climate reporting in Canada.”