Canada has a stark choice to make: match tough new U.S. climate disclosure rules or shield companies from full greenhouse gas emissions reporting.
Sweeping U.S. corporate climate-transparency proposals, released March 21 by the U.S. Securities and Exchange Commission (SEC), fulfill a campaign pledge by President Joe Biden to mandate corporate reporting on climate change.
The package would force companies listed on American stock exchanges to report the full scope of their CO2 emissions, in contrast to recent Canadian proposals that would permit companies to opt out of full greenhouse gas disclosure.
If implemented, the SEC proposals would put pressure on Canadian companies trading on U.S. exchanges to meet the stiffer standards in order to satisfy American investor expectations. Currently, 234 Canadian companies trade on the New York Stock Exchange or other U.S. exchanges, most cross-listed with the Toronto Stock Exchange (TSX).
While this is only a fraction of the 1,600 companies listed on the TSX, the Canadian companies trading in the United States include many of Canada’s most problematic fossil fuel producers and distributors. Among these are Canadian Natural Resources, Suncor, Cenovus and Imperial Oil in the oil and gas sector and pipeline companies Enbridge, TC Energy and Pembina.
“The SEC proposals are certainly a big announcement in the market,” says Sara Alvarado, executive director of the Institute for Sustainable Finance, a national think tank based at Queen’s University.
The SEC rules come at a crucial moment. Many countries are grappling with the need to quickly reduce oil and gas consumption in the aftermath of the Russian invasion of Ukraine, and the Canadian government just released its emissions reduction plan, outlining how Canada can meet its target of lowering emissions by 40% below 2005 levels by 2030.
Achieving this ambitious target will take concerted effort by governments but will also require the investment community to reallocate capital to companies and sectors in line with the climate transition. For this to happen, companies will need to start publicly disclosing their emissions and climate risks. Many companies already report under the voluntary Task Force on Climate-Related Financial Disclosures (TCFD) or climate-related accounting guidelines, but studies show that voluntary reporting isn’t sufficient. In addition to Canada and the United States, the United Kingdom and New Zealand are now proposing mandatory climate-related disclosures.
The proposed SEC rules, now out for public comment before their expected finalization later this year, are more stringent than similar proposals released in October by the Canadian Securities Administrators (CSA), the umbrella organization for provincial securities commissions.
The two sets of proposals are similar when it comes to disclosure of climate governance, strategy and risk management but differ in the scope of required emissions reporting.
The draft SEC rules require companies to disclose annually CO2 releases from their own operations (known as Scope 1 emissions under the global GHG Protocol) and their energy consumption (Scope 2). They also require reporting on Scope 3 emissions, generated from company supply chains or customer end uses, so long as they are considered material to the business of the company.
Some critics worry that requiring a company to disclose Scope 3 emissions only when they’re considered material may provide a loophole that companies could exploit. But while there is some debate about what material emissions would include, it is widely agreed that Scope 3 emissions would be material for oil and gas, the sector most affected by the new rules, since nearly 90% of oil and gas releases are Scope 3 emissions produced from combustion of fossil fuel products.
By contrast, CSA has proposed that Scope 1, 2 and 3 emissions should be disclosed, unless companies publish “their reasons for not doing so.” The CSA has also proposed a possible alternative rule requiring companies to disclose Scope 1 emissions only, but with no opt-out provision.
The “reasons for not doing so” is a “comply or explain” option that regulators sometimes include in reporting rules based on the principle that management knows better than regulators what information is practically available and materially important to their companies.
In its response to the CSA proposals, the Canadian Association of Petroleum Producers (CAPP), the umbrella group for Canada’s oil and gas industry, argued that disclosure of Scope 3 emissions “will prove difficult to provide in a timely manner.” CAPP and major oil and gas producers also argued against a CSA proposal for mandatory “scenario planning,” which would require companies to publish regulatory and physical risks from climate change, according to an investigation by The Narwhal. The investigation also found that two-thirds of respondents that submitted comments in a consultation process were opposed to CSA’s proposed reforms.
In an approach similar to the SEC proposals, Ontario’s $10-billion University Pension Plan (UPP) argued that Scope 1 and 2 emissions should be mandatory and Scope 3 emissions should be reported if they are material to the company, reflecting comments from many investors and climate policy advocates.
The CSA proposals will leave investors “without information that is critical for our investment, risk and stewardship capabilities and our ability to establish and achieve meaningful climate-related targets,” says UPP CEO Barbara Zvan.
If the CSA goes ahead with its own proposals, cross-listed companies will likely default to the tougher SEC rules, says Sarah Powell, a lawyer with the Bay Street law firm Davies, even though this wouldn’t be required under cross-border reporting agreements.
But Alvarado says some large CO2 emitters could continue business as usual in Canada or even set up shop here to avoid investor scrutiny, creating a “sort of reporting arbitrage.”
Republican lawmakers and industry groups in the United States say they will challenge the proposals, but Biden appointees who control the SEC are expected to approve the package. By contrast, in Canada, Alberta is a strong voice for oil industry accommodation in the CSA, and the fossil fuel industry is lobbying against tougher reporting requirements.
CSA now has a distinct choice to make. It can decide to move forward with its weaker framework or propose stronger rules consistent with the SEC proposals. “Timing of this process has not yet been finalized and we’ll be in touch when there is an update to share,” CSA said in an email statement, noting that its comment period ended in February.
Eugene Ellmen writes on sustainable business and finance.