Towards a Shared Understanding: Canada’s New Sustainable Investment Guidelines & Mandated Climate Disclosures

Towards a Shared Understanding: Canada’s New Sustainable Investment Guidelines & Mandated Climate Disclosures

On October 9, 2024, the federal government announced progress on two recent key commitments: development of voluntary “Made-in-Canada sustainable investment guidelines” (the “Canadian Taxonomy”) and implementation of mandatory climate-related financial disclosures for certain federally incorporated entities. Both initiatives were foreshadowed in the federal government’s previous policy platforms, including in the 2023 Fall Economic Statement and Budget 2024.

A Canadian investment taxonomy aims to establish a credible classification system for investors, lenders and the capital markets to use when making green and transition investments.

Mandated climate-related disclosures are not new in Canada. Other jurisdictions, local and international organizations, and a number of regulators have extensively considered the design and scope of similar types of mandatory disclosures and investment guidelines. These serve to inform the current federal initiatives and their potential impact on businesses.

Climate-Related Disclosures

On October 9, the federal government confirmed that it intends to introduce amendments to the Canada Business Corporations Act (the “CBCA”) to mandate climate-related financial disclosures for large, federally incorporated private companies. The government intends to launch a regulatory process to determine the substance of the required disclosure requirements and the size of private federal corporations that would be subject to them (e.g., by reference to number of employees, revenue generated, or asset size).

While further details are not yet available, the government stated that it will seek to harmonize its regulations with securities regulatory authorities. This may include the work of the Canadian Securities Administrators, which earlier this year welcomed the launch of the Canadian Sustainability Standards Board’s (“CSSB”) consultation on Canadian Sustainability Disclosure Standards 1 and 2, noting its interest in the feedback to inform its own proposed climate-related disclosure rule (NI 51-107).

In addition, given that the Office of the Superintendent of Financial Institutions (“OSFI”) requires as of 2024 federally regulated financial institutions to make climate-related disclosure, the proposed amendments to the CBCA are a further step forward toward mandatory disclosures for large private companies.

The Canadian Taxonomy

The Canadian Taxonomy will follow the principles recommended by the Sustainable Finance Action Council (“SFAC”) and will incorporate guidelines from international organizations and other international climate investment taxonomy in order to ensure alignment with international standards. The development of the Canadian Taxonomy will be overseen by independent arm’s-length organizations.

The Canadian Taxonomy’s classification system will set out which economic activities will be considered environmentally sustainable and will set out qualification criteria for both “Green” and “transition” activities which will broadly be defined as follows:

• Green Activities – low-or zero-emitting activities without material scope 1 and 2 emissions and low or zero downstream scope 3 emissions, such as green hydrogen and solar and wind generation, and those that enable them. These activities are expected to be ones that will sell into or benefit from markets expected to grow in the net-zero transition;
• Transition Activities – decarbonizing emission-intensive activities central to the energy transformation. These will have material scope 1 and 2 emissions but are on a path to making significant reductions and have low or zero scope 3 emissions. These are activities that are not expected to create carbon lock-in and path dependency.

Of particular interest will be the specific activities the Canadian Taxonomy consider as potentially eligible green or transition activities. The Canadian Taxonomy will initially focus on electricity, transportation, buildings agriculture and forestry, heavy industry manufacturing and heavy industry extractives, including mineral extraction and processing, and natural gas, but excluding new natural gas production.  The independent third-party organizations will be charged with releasing a taxonomy for two to three of these sectors within 12 months of it “beginning its work” which will effectively result in any such taxonomy being released in 2026.

Further information on the Canadian Taxonomy is available in the government’s backgrounder.

Potential Implications

Many companies have already been impacted by initiatives in other jurisdictions relating to either or both climate-related disclosures and/or sustainable investment taxonomies.

Numerous companies, especially larger public companies, are already voluntarily reporting in accordance with adopted environmental, social and governance frameworks or standards, with some openly articulating the taxonomy they are using. Many of these companies disclose greenhouse gas emissions, and a lower (but increasing) number are also reporting on their Scope 3 emissions alongside their Scope 1 and Scope 2 emissions. The experience of these companies can be expected to inform the scope, design, implementation and exemptions of the Canadian Taxonomy and the mandatory climate-related disclosures.

Adherence to the principles behind investment taxonomies and well thought-through disclosure of climate related risks, whether voluntary at this time or mandatory in the future, will assist companies in defending misrepresentation claims, including under the Competition Act, as well as defending ESG-related litigation and defeating shareholder activist initiatives.

For assistance with preparation to adopt the proposed Canadian Taxonomy or for any other ESG-related questions or business needs, please contact Radha Curpen, Sharon Singh, Jason Haley, Sandra Zhao, Ralph Cuervo-Lorens, or your McMillan relationship partner.

by Sharon Singh, Radha Curpen, Jason Haley, Sandra Zhao, Ralph Cuervo-Lorens, and Rhythm Jethi, Articling Student

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2024