Evolving ESG reporting regulations call for co-ordinated executive action in Canada

As the global transition to a low-carbon and socially responsible economy continues to reshape investment portfolios, Canadian sustainability reporting is evolving rapidly. According to a recent KPMG survey, 79 per cent of Canadian sustainability leaders rank increased or frequently changing regulations as the top barrier in achieving their environmental, social, and governance (ESG) goals.

Overcoming this challenge requires effective collaboration across organizational functions. That’s essential to understanding regulatory and reporting obligations and adhering to them diligently, says Anthony Buonaiuto, Partner and National ESG Transformation Leader at KPMG in Canada.

Organizations must align with the best practices of national and global bodies such as the Canadian Sustainability Standards Board (CSSB) and International Sustainability Standards Board (ISSB). New standards aim to enforce transparency and accountability. This reporting landscape not only requires compliance but also a fundamental change in how companies approach ESG performance. Investors need clear and useful information to make informed decisions, direct investments towards the energy transition, manage new risks and find opportunities aligned with ESG principles.

“We’re seeing a big shift from a reporting regime for sustainability that was voluntary, to this new world that’s investor-driven and more deeply connected to financial reporting and regulations,” says Mr. Buonaiuto.

The range of reporting and disclosure standards makes the task tougher. Canadian organizations of all sizes may be affected by various, evolving national and global standards from multiple jurisdictions, including the U.S., EU and Australia. While reporting requirements have some overlap, there are important distinctions in definitions, scope of organizations impacted and technical requirements.

KPMG found that 78 per cent of Canadian sustainability leaders say existing and proposed Canadian ESG regulations and disclosure rules are a significant investment driver over the next three years.

In March, the CSSB revealed its first draft of the proposed Canadian Sustainability Disclosure Standards. These largely align to the standards set by the ISSB and are based on IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and S2 (Climate-related Disclosures).

The CSSB standards are expected to be finalized by the end of 2024, and it will then be up to the Canadian Securities Administration (CSA) and other legislators and regulators to create disclosure rules.

Already, public and certain private Canadian companies are required to report on the diversity of their boards and senior management. Starting this year, Canada’s Fighting Forced Labour and Child Labour in Supply Chains Act required certain entities to disclose the steps they are taking to reduce to risk of forced labour and child labour in their supply chains.

A recent KPMG in Canada report shows that 90 per cent of the nearly 6,000 companies that submitted their 2024 reports have publicly committed to implementing additional measures to address modern slavery in supply chains.

Other rules potentially impacting certain Canadian companies include the EU’s Corporate Sustainability Reporting Directive (CSRD), and California’s climate disclosure rules.

“The sustainability disclosure landscape is changing in a growing number of markets across the world,” says Katie Dunphy, Partner and National ESG Reporting Transformation Leader at KPMG in Canada. “If your business has global ties, you’re likely dealing with a lot of complexity navigating the different emerging requirements. A common theme in response to these changes is the need for enhanced sustainability reporting governance, processes and controls.”

She foresees much more focus on how reports are being prepared, in addition to what new information is needed to meet these regulations. “With rising regulatory pressure and expectations from investors, lenders and even customers, the imperative to get reporting right has never been stronger.”

To build robust and meaningful sustainability reporting, companies must work cross-functionally across teams including sustainability, finance, risk, IT, legal and compliance. A range of skill sets and insights is required to plan the path to producing reports that meet regulatory obligations and investor expectations.

“Building a reporting plan takes collaboration to get it right,” says Ms. Dunphy. “Companies will need to consider the timing and scope of different rules to be phased in. This will feed into a roadmap for compliance, which might include identifying what information is material, where to source it and when reporting needs to start. Once you have a handle on the ‘what’, the ‘where’ and the ‘when’, then you can start focusing on the ‘how’.”

Mr. Buonaiuto, who assists companies through the operational phase once a reporting plan has been put in place, says there is another layer of complexity to the issue of timing which will require further effort. Sustainability reports will increasingly be expected to arrive alongside or as part of financial reporting.

“Right now, it usually takes four to six months to produce a sustainability report after closing the financial books. This is another important challenge to address as part of the reporting transformation,” he says.

Bridging the gap between sustainability objectives and financial reporting is no small feat. It requires not only the collaboration of various departments but also the integration of complex data and regulatory requirements.

As Mr. Buonaiuto and Ms. Dunphy highlight, the journey involves meticulous planning, identifying material information, and understanding the intricate timelines involved. Companies that can develop robust sustainability reports – ones that satisfy both regulatory standards and investor demands – are poised to be successful amidst Canada’s sustainability reporting transition.