A new standard

The reviews are in and the COP26 summit — advance-billed by one U.K. cabinet minister as the planet’s “last, best hope” to avoid catastrophic climate change — was a whopping great disappointment.

The summary document coming out of the Glasgow conference offered no clear path to limiting global warming to 1.5 C. Participating nations couldn’t even get it together on phasing out coal. However good COP26’s intentions were, the diplomatic approach to staving off runaway climate change is still spinning its wheels.

But where politics fails, money might prevail. At Glasgow, the International Financial Reporting Standards (IFRS) Foundation Trustees announced the creation of a new International Sustainability Standards Board (ISSB).

The job of the ISSB is to come up with a set of baseline sustainability standards that can be used by companies around the world in their disclosures to shareholders — consolidating the current patchwork of voluntary environmental, social and governance (ESG) disclosure regimes and giving shareholders a single lens through which to view private firms’ efforts to go green. While Canada lost its bid to host the new ISSB headquarters — that honour went to Frankfurt — Montreal will be home to a secondary ISSB office.

“It’s a really important development,” said Alan Andrews, climate program director at Ecojustice and a specialist in environmental law. “It’s one of the less sexy aspects of the fight against climate change, but it’s still something we have to get right.”

Keeping climate change in check will be extremely expensive. RBC Economics estimates it’ll cost about $2 trillion to put Canada’s economy on a path to net-zero by 2050. It can’t all be government spending; businesses will have to pony up to green their inputs and harden their operations against extreme weather.

They’re unlikely to make those investments unless investors themselves pressure them to do so — and unless they can continue accessing capital to pay for it. “At COP26, 245 financial institutions committed themselves to pursuing net zero,” said Sonia Struthers, a corporate and securities partner with McCarthy Tétrault in Montreal and co-lead of its ESG and sustainability group.

“If they live up to their word, they’re bound to invest more in those companies that can help us get there.”

The ISSB promises to address one major factor frustrating investors and companies alike: the absence of unified standards for disclosure to shareholders. Without them, investors can’t be sure they’re getting what they paid for, and responsible companies can’t be certain their rivals aren’t “greenwashing” their operations to give themselves a competitive advantage.

“If you don’t have a consistent set of standards, it becomes easier for some companies to cherry-pick the things they report to appear to be ahead of their competitors,” said Jeff Bakker, a partner in corporate and securities law at Blakes in Calgary. “So consistency is good for transparency.”

It all sounds promising — but there could be tensions ahead. The ISSB is expected to build upon the work already done by the Sustainability Accounting Standards Board, the Climate Disclosure Standards Board and the Task Force on Climate-Related Financial Disclosures. Drafting global standards means reconciling the needs of very different economies and political climates.

Canada’s economy is highly extraction-dependent; Europe’s is not. That distinction is already playing out in different approaches to ESG disclosure. In Canada, according to a September report by the Montreal-based ESG disclosure consultancy Millani, 71% of the companies listed on the S&P/TSX Composite Index released dedicated ESG reports as of Aug. 31, 2021, up from 58% in the previous year.

Of the 2020 ESG reports examined by Millani, 45% cited “scope 3” emissions — indirect emissions not arising from the consumption of purchased electricity, heat or steam — a substantial improvement over the 36% of reports that covered scope 3 emissions in 2019.

But a new set of measures for climate-related disclosure pitched by the Canadian Securities Administrators back in October may allow companies to withhold both scope 2 and scope 3 disclosure in certain circumstances. (Scope 2 refers to indirect emissions from purchased electricity, heat or steam.)

The CSA regulations also wouldn’t require companies to report “scenario analyses” — evaluations of how their business models would fare under various climate scenarios.

“Those are very difficult to do because they involve forecasting out factors well into the future,” said Bakker. “The Canadian securities administrators have said Canadian companies are not required to do them, but a lot of European firms do already. Early indications are that the ISSB will likely adopt them as a requirement, but that could be a topic for Montreal and Frankfurt to debate and it will be interesting to see how that plays out.”

“The point here is that the rules aren’t going to be set entirely in Europe,” said Milla Craig, founder and CEO of Millani. “Industries that are high emitters play a large role in Canada’s economy. Being at the table means being able to ensure that the perspective of those industries, the need to transition them to a low-carbon economy, is heard and respected. The European experience shows an inclination to completely divest from fossil fuels as quickly as possible.”

For those who believe there’s no path to net zero for Canada that doesn’t include a plan to ease the energy industry into a low-carbon economy, having an ISSB office in Montreal means having a voice in how global ESG rules are shaped.

For Andrews, it’s a reason to feel grateful that Canada lost the head office to Germany.

“It’s probably too early to tell how influential Montreal will be as opposed to Frankfurt or London,” he said. “The big worry was always that Montreal would act as a gateway for the oil and gas industry to influence the development of international standards.

“There are a whole lot of things we need to get right on this. Robust scenario analysis is one of them. Whether having the office in Quebec could insulate the office (from lobbyists), I don’t know. I think the fact that Quebec joined the Beyond Oil and Gas coalition was a very positive sign.”