On March 21, 2022, the United States Securities and Exchange Commission (the “SEC”) published its proposed climate-related disclosure rules – The Enhancement and Standardization of Climate-Related Disclosures for Investors (the “SEC Rules”) – which, if adopted, would require public companies and foreign private issuers (other than exempt Canadian issuers) to disclose extensive climate-related risk information in their filings with the SEC. Earlier, and in a similar move, the Canadian Securities Administrators (the “CSA”), the umbrella organization for all provincial and territorial securities regulators, also published for comment its proposed National Instrument 51-107 – Disclosure of Climate-related Matters (the “Canadian Rules”) and its related companion policy, which aim at increasing the consistency and comparability of climate-related disclosure among Canadian reporting issuers. This Securities Practice Note will provide an overview of some of the key differences between the SEC Rules and the Canadian Rules and the implications of such climate-related disclosure rules for Canadian issuers.
Summary Comparative Overview
The SEC Rules adopt a prescriptive-based disclosure regime, representing a landmark shift from the SEC’s traditional principles and materiality-based reporting frameworks.
The foundations of both the SEC Rules and the Canadian Rules are built upon the recommendations of the Task Force on Climate-related Financial Disclosures (the “TCFD”) and the Greenhouse Gas Protocol. However, the SEC Rules are much more ambitious with respect to the level of disclosure they require of U.S. issuers.
Recommended Disclosure pursuant to the TCFD
In line with the TCFD recommendations, both the SEC Rules and the Canadian Rules broadly require issuers to disclose information about:
- corporate governance: the organization’s governance around climate-related risks, including descriptions of board oversight and management’s role in assessing risks and climate-related opportunities;
- strategy: the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material;
- risk management: how the organization identifies, assesses, and manages climate-related risks; and
- metrics and targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
Despite both the SEC Rules and the Canadian Rules requiring disclosure around the same four areas in a general sense, the level of prescriptive detail required under the SEC Rules goes beyond what the Canadian Rules mandate. Specifically, the SEC Rules require:
- mandatory greenhouse gas (“GHG”) emissions reporting, and an assurances attestation from an external party with respect to the emissions disclosed;
- more extensive reporting on corporate governance strategy both at the board and management levels, compared to what is required under the Canadian Rules;
- mandatory disclosure of climate-related risks within the footnotes of audited financial statements; and
- disclosure of climate transition plans to achieve net-zero emissions adopted by the issuer if publicly announced, including progress against stated plans, targets and goals. In addition, the issuer must disclose if it uses scenario analysis or if it uses internal carbon pricing.
The Notable Differences between the SEC Rules and the Canadian Rules
1. Scope of GHG Emissions Reporting
The SEC Rules mandate disclosure of greenhouse gas emissions metrics and an attestation by a third party of such GHG emissions disclosure, while there are no such requirements under the Canadian Rules. This is the most notable difference between the two proposals, especially considering that GHG emissions are a critical metric that investors and other stakeholders rely on to understand an issuer’s exposure to climate-related risks and make their investment decisions.
Under the SEC Rules, U.S. issuers would need to disclose their direct GHG emissions from owned or controlled sources (a.k.a. Scope 1 emissions) and indirect GHG emissions generated from the purchase of energy (a.k.a. Scope 2 emissions). Also, under the SEC Rules, a U.S. issuer would be required to disclose all other indirect emissions that occur in its value chain, such as upstream and downstream GHG emissions (a.k.a. Scope 3 emissions) if they are material or if the issuer has set GHG emissions reduction targets inclusive of Scope 3.
In contrast to the SEC Rules, the Canadian Rules use a “comply and explain” approach whereby Canadian issuers may opt out of disclosing their Scope 1, 2, and 3 emissions, provided they give a public explanation in their filings as to why they have chosen to do so. In an alternative proposal, the CSA has suggested mandatory Scope 1 emissions disclosure, while keeping in place the “comply or explain” approach for Scope 2 and Scope 3 emissions.
The second significant difference between the two proposals is that under the SEC Rules, accelerated filers would be required to obtain attestation reports from an independent third party on their Scope 1 and 2 emissions. Of note, the CSA also asked the public for comment on whether it should require some form of assurance from Canadian issuers with respect to disclosed GHG emissions, consequently it is possible that such a requirement could be added to the final version of the Canadian Rules.
2. Scope of Corporate Governance Reporting
While both sets of rules mandate issuer disclosure on the oversight and governance of climate-related risks in line with the TCFD recommendations, the SEC Rules require extensive reporting on both board oversight and management activities. For example, under the rules, an issuer would be required to disclose whether management is responsible for assessing and managing climate-related risks, and if they are, the issuer would need to identify the managers responsible for assessing such risks and list their relevant qualifications. In addition, an issuer would be required to disclose the processes by which managers monitor climate-related risks, and the frequency that managers report to the board.
The SEC Rules also require boards to identify and disclose board members who have climate-related risk expertise (if applicable). Of note, the SEC Rules do not include a “safe harbour” provision limiting such board member’s liability because of such designation as an expert. This is the case, for example, with identified audit committee financial experts under relevant SEC rules. This silence is significant, considering that it is possible that such experts may incur greater liability with respect to decisions made relative to climate-related disclosure.
While an expert identifying provision has not been incorporated in the Canadian Rules, the SEC Rules emphasize the need for Canadian issuers and their boards to appropriately manage climate-related risk disclosure to avoid potential liability.
3. Scope of Financial Statement Disclosure
Under the SEC Rules, U.S. issuers would be required to identify the positive and negative financial impacts of climate-related events (such as severe weather events, floods or extreme temperatures etc.,) and organizational transition activities (such as efforts to reduce GHG emissions) on each line item of an issuer’s consolidated financial statements. Issuers would also be required to describe the financial estimates and assumptions used to identify such impacts. The requirement to disclose the impacts of climate-related risks on each specific line item (such as plant and equipment, revenue, and inventories) within the notes of the issuer’s financial statements is triggered if the aggregated positive and negative impact of a climate-related event or transition activity is greater than 1% of the total line item for the relevant fiscal year. Of note, such financial statements metrics disclosure will be subject to an audit.
This contrasts to the Canadian Rules that require disclosure of information related to the issuer’s climate-risk strategy, risk management process, and metrics and targets used to assess and manage climate-related risks, only when that information is considered material as a whole for the issuer’s business. The Canadian Rules also direct the disclosure to be made within the issuer’s proxy soliciting management information circular or in its annual information form (“AIF”) or, in the absence of an AIF, in the issuer’s Management Discussion & Analysis (MD&A) document. As such, disclosure would not be included within the notes to the issuer’s financial statements.
4. Disclosure of Climate Targets and Scenario Analyses
Under the SEC Rules, any climate-related targets or goals set by an issuer would need to be disclosed. Therefore, U.S. issuers who have publicly announced climate-related commitments – such as achieving net-zero emissions by a specific year – would be required to provide a description of the scope of activities and emissions included in the target and information on carbon offsets or renewable energy credits in the plan. An issuer would also be required to describe how they intend to deliver on their targets, and disclose, on an annual basis, the progress they have made with respect to meeting their stated goals. There is no such requirement under the Canadian Rules.
U.S. issuers that internally rely on scenario analysis to determine the resilience of their climate-related strategies would also be required to disclose this in their filings under the SEC rules. Specifically, they would be required to provide all the details of the assumptions and projections they made, as well as the projected principal financial impacts on that issuer’s business strategy under each scenario used. By contrast, under the Canadian Rules, issuers are not required to disclose the resiliency of their strategies using scenario analysis, even if they already do so internally.
The level of detailed information mandated by the SEC Rules on the matters above is likely far more extensive than what issuers usually disclose to the public. While Canadian issuers would not be mandated to disclose this type of information under the Canadian Rules, if a Canadian issuer has made a net zero commitment, then providing comprehensive and transparent disclosure on goal progress could help eschew investor and environmental group concerns over increasing instances of corporate greenwashing. More and more, class actions are being filed by environmental groups against issuer greenwashing practices. Therefore, providing accurate disclosure will likely help reduce climate-related disclosure litigation that may arise from inadequate reporting or climate commitment misrepresentations.
The Road Ahead
The unveiling of the SEC Rules signifies a landmark development with far-reaching implications for both U.S. domestic and non-domestic issuers. Considering that one of the principal goals of the Canadian Rules is to improve Canadian “issuer’s access to global capital markets by aligning Canadian disclosure standards with expectations of international investors,” it is likely that the SEC’s proposal will have an impact on the direction in which the Canadian Rules develop.
In our view, a key development to watch is whether GHG emissions reporting will be mandatory under the Canadian Rules. A recent report by the Canada Climate Law Initiative analyzing the comments received on the Canadian Rules found that a majority of submissions supported mandatory disclosure for Scope 1 and 2 emissions, in addition to disclosure of Scope 3 emissions if material. Considering this, it is highly likely that the final version of the Canadian Rules will include some form of mandatory GHG reporting, and possibly an assurance requirement. However, it remains to be determined if Scope 2 and/or Scope 3 emissions reporting will be mandatory. What the CSA ultimately decides will have important implications for Canadian issuers in terms of compliance costs, considering the depth and rigour of the data required to properly report on Scope 3 emissions.
Barring any significant delays, both the Canadian Rules and the SEC Rules are expected to be phased in after December 31, 2022. In preparation for this, Canadian issuers should be taking proactive steps to prepare for the adoption of the Canadian Rules with the goal to reduce any liability that may result from inaccurate climate-related disclosure.
Canadian issuer access to U.S. and global capital markets may be hampered if Canadian climate-related disclosure rules are viewed by investors as both quantitatively and qualitatively inferior to the level of disclosure mandated by the SEC within the U.S. Likewise, capital market access for Canadian issuers may also be restricted if investors perceive a misalignment between the Canadian and U.S. climate-related disclosure rules. For these reasons, the unveiling of the SEC Rules will certainly have an impact on the direction in which the Canadian Rules develop.
If you have any questions with respect to this legal update, please contact Bruno Caron (firstname.lastname@example.org) or any other member of our Capital Markets & Securities Group.
 For a detailed explanation of the Canadian Rules, please refer to our article “CSA Propose Standardized and More Comprehensive Climate-Related Disclosure,” Securities Law Newsletter, January 2022.
 SEC rules traditionally mandate principles-based disclosure grounded on materiality, which means that issuers will disclose information that is material for investors relative to their business, industry, and/or sector. By contrast, under a prescriptive-based regime, all issuers are required to disclose specific and detailed information directly prescribed within the rules that may be immaterial for that particular issuer and/or its investors.
 The TCFD recommendations encompass an internationally accepted voluntary disclosure framework that is supported by over 3,000 organizations internationally, which have a combined market capitalization of over $27.2 trillion. In addition to the CSA and the SEC, regulators in the EU, Singapore, Japan, New Zealand, and the United Kingdom have also incorporated the TCFD recommendations within their respective legislation and regulations. For more information, consult the TCFD website.
 Note, this contrasts to the SEC’s cybersecurity proposal, which includes such a safe harbour provision (see item 407(j)(2) of the proposed Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure).
 The SEC Rules provide examples, which include “changes to revenue or costs from disruptions to business operations or supply chains” (a climate-related event) and “changes to revenue or cost due to new emissions pricing or regulations resulting in the loss of a sales contract” (a transition activity), see Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors at page 124.
 See CSA consultation publication entitled “Climate-related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument 51-107 – Disclosure of Climate-related Matters,” at page 2.