Why Climate Reporting for Financial Institutions and Reporting Issuers Matters to You

Climate reporting is becoming mainstream. And soon, everyone will be impacted. As the financial industry seeks to understand climate-related risks and opportunities in their portfolios and capital allocation risks, climate reporting requirements are taking centre stage. 

Regulatory bodies for the financial industry around the world are beginning to address the need for clear, consistent, and mandatory information on climate-related risks. The Canadian banking industry regulator has mandated climate reporting guidelines. Securities regulators in Canada and the United States are in the process of developing similar reporting requirements for reporting issuers.  The EU has already adopted sustainability reporting rules for large multinationals, which has the potential to impact several companies operating in Canada.

Let’s look in more detail on the mandated and potential climate reporting guidelines for Canadian financial institutions and reporting issuers. 

Financial Institutions

The Office of the Superintendent of Financial Institutions (OSFI) requires Canada’s federally regulated financial institutions (FRFI’s) to implement Guideline B-15 on Climate Risk Management beginning in 2024 (or 2025 for some entities). 

OSFI, as Canada’s banking regulator, recognizes that FRFI’s are subject to risk from climate-related physical and transition risks.  Climate-related physical and transition risks are described in Figures 1 and 2.

Figure 1: Physical Risk

Figure 2: Transition Risk

Source: OSFI

The guideline requires FRFI’s to have in place the appropriate governance and risk management approach and climate-related financial disclosures.  FRFI’s are required to describe their governance and accountability practices around climate risk management; risk identification, measurement, management, monitoring and reporting; climate scenario analysis and stress testing; and capital and liquidity adequacy.  

Climate-related financial disclosures are intended to help OSFI protect depositors, creditors, and policy holders and give the public confidence in the Canadian financial system by providing clear, understandable, reliable information on climate risk.  This disclosure supports FRFI’s to attract or retain access to the capital and liquidity necessary for the effectiveness of the Canadian financial system.  Currently, FRFI’s are required to report on Scope 1 and 2 emissions.  Scope 3 emissions reporting is expected to become mandatory in 2025 or 2026.  

While the focus is currently on disclosure of climate-related risks and opportunities, future phases of the guideline contemplate disclosure of the FRFI’s transition plans and resilience of the strategy based on different climate scenarios.  At this time, there is no implementation date assigned to these requirements.

Reporting Issuers

The Canadian Securities Administrators (CSA) is currently in the consultation process for proposed National Instrument 51-107 Disclosure of Climate-related Matters.  The proposed rules have requirements for reporting on a company’s governance, strategy, risk management, metrics, and targets, similar to those outlined in the OSFI requirements.  As the International Financial Reporting Standards (IFRS) Foundation released their climate-related disclosures requirements this year, we can expect the CSA to proceed with their final rule on the proposed National Instrument 51-107 soon.  

In addition to staying on top of national developments in climate reporting, Canadian companies listed on international exchanges need to be aware of and comply with the climate-related reporting requirements in international jurisdictions.  

Implications for All Companies   

If your business isn’t a federally regulated financial institution or a reporting issuer, does climate reporting matter to you?  As banks, insurers, and reporting issuers capture and evaluate their scope 1 and 2 emissions, their next step will be to evaluate their scope 3 emissions, including portfolio investments.  You can expect increasing interest in your company’s climate-related information if you borrow from a bank or require insurance.  If you are a supplier to a reporting issuer, questions about your emissions profile and climate strategy may begin to inform your client’s procurement decisions.  

The concept of materiality is important.  According to IFRS, “information is material if omitting, misstating or obscuring it could reasonably be expected to influence investor decisions”.  While your contract might not be material to your client, your client might be material to you.  Standardized procurement practices requiring climate-related information from bidders may have an impact on your business.  Or it may be a contributing factor to a lending decision or insurance premium.  

It is important to get started on understanding your business’ climate-related risks and opportunities, and collecting data on your emissions so you can be prepared to respond when the questions are asked.  To get to know your emissions profile, SIMSA offers a free custom carbon calculator to all companies – you don’t need to be a member to access the tool.  

Our professionals can help you understand your climate-related risks and opportunities.  Our practical and scaled approach to implementing climate governance, strategy, management, and reporting can help your business address the important climate-related requirements of your stakeholders. 

Karri Howlett