Canadian ESG Reporting Standards Overview

ESG refers to environmental, social, and corporate governance factors which are considered non-financial and relevant or material to stakeholders. The term ESG refers not only to the factors included in investment analysis, but also the associated metrics of these factors. ESG began as a strategy used to make investment decisions.

In recent years, Canada has witnessed a significant shift towards sustainability and environmental responsibility. The emphasis on Environmental, Social, and Governance (ESG) reporting has grown as companies strive to meet increasing community and investor expectations.

This guide delves into the critical aspects of ESG reporting in Canada, including the drivers behind it, disclosure requirements, and the various reporting frameworks available. An ESG framework is a set of standards and guidelines that defines the metrics and data to be disclosed in an ESG report. The intent of ESG frameworks is to standardize metrics and reporting on non-financial factors and enable comparisons between companies across industries. However, there is no single ESG governing or regulating body.

ESG reports are published by a company to disclose data explaining the impact and added value in their operations through an ESG lens. There are currently few rules about what needs to be disclosed as part of ESG reporting, with ESG frameworks providing guidance or recommendations. At present, ESG disclosures are voluntary in Canada and the United States, and the information provided varies across companies and sectors.

Just as credit ratings aim to measure a company’s creditworthiness, ESG ratings aim to measure a company’s exposure to non-financial risks and how effectively these risks are managed. Like ESG frameworks and standards, there are also many organizations developing ESG ratings. These organizations use proprietary methods to assign a performance score to a company based on its ESG disclosure, enabling investors or other stakeholders to measure a company’s ESG performance against its peers.

Growing adoption of ESG disclosures: A 2020 survey of the top 100 companies in 52 countries found that 80% report on their sustainability performance.

Key Drivers of ESG Reporting in Canadian Organizations

Several factors are driving the increased focus on ESG reporting in Canadian organizations:

1. Rising Stakeholder and Investor Demands

   Investors are increasingly prioritising companies with robust ESG strategies. Research indicates that 81% of Canadian investors now integrate ESG principles into their investment decisions, while 91% of banks actively monitor ESG compliance. This shift reflects a broader trend where capital providers favour companies committed to sustainability and ethical governance.

2. Regulatory Requirements
   

   Although specific mandates for environmental and social disclosures are not yet fully established under Canadian Securities Legislation, recent guidelines from the Canadian Securities Administrators (CSA) have clarified expectations. Companies must disclose material ESG information in their continuous disclosure documents, which includes both qualitative and quantitative factors. This disclosure is critical for investors who rely on accurate and timely information to make informed decisions.

3. CEO Priorities
   

   CEOs are increasingly focusing on ESG metrics, recognizing their importance in driving long-term growth. According to recent surveys, 55% of CEOs believe that ESG factors are essential for sustainable business development. This emphasis reflects a broader recognition of the strategic value of ESG considerations.

4. Employee Expectations
   

   Employee attitudes towards ESG are shifting as well. A significant 51% of employees prefer to work for companies with strong ESG strategies, and 83% are more committed to employers that allow them to contribute to ESG initiatives. This shift highlights the growing importance of ESG in attracting and retaining talent.

5. Brand Reputation
   

   Consumer behaviour is also influenced by ESG performance. One in three consumers will reconsider their brand choices based on sustainability reports. Furthermore, 70% of customers are willing to pay a premium for environmentally friendly products, underscoring the role of ESG in shaping brand reputation and consumer loyalty.

ESG Disclosure Requirements for Canadian Public Companies

ESG disclosure means a business publicly shares information on how it manages its Environmental, Social, and Governance (ESG) impacts and risks.

1. Mandatory ESG Disclosure

Currently, Canadian Securities Administrators does not enforce specific environmental and social disclosure requirements. However, the CSA has issued guidelines to help issuers determine the necessary ESG information to include in their disclosure documents. Key considerations include:

• Materiality: Issuers must assess the materiality of information, considering its potential impact on investor decisions.
• Contextual Analysis: The timing and magnitude of the impact must be evaluated.
• Comprehensive Disclosure: Both qualitative and quantitative factors should be included.

Issuers are also expected to disclose material ESG information in the Management's Discussion and Analysis (MD&A) section of their reports and describe relevant environmental and social policies in their Annual Information Form (AIF).

2. Voluntary ESG Disclosure

Voluntary ESG reports play a crucial role in providing additional information to stakeholders but do not replace mandatory disclosures. The Canadian Coalition for Good Governance’s Directors E&S Guidebook provides recommendations for effective voluntary ESG reporting:

• Detailed Reporting: Address all relevant aspects of governance, strategy, and risk management with detailed, context-rich information.
• Clarity and Comparability: ESG metrics should be clear, measurable, and comparable across reporting periods.
• Framework Explanation: Companies must describe their chosen reporting framework and its rationale.
• Differentiation from Financial Reporting: Clearly outline how ESG reporting differs from traditional financial reporting.

ESG Reporting Frameworks in Canada

Several ESG reporting frameworks are popular among Canadian companies, each providing unique structures for sustainability reporting:

1. Global Reporting Initiative (GRI)

The GRI framework is widely adopted in Canada, with 43% of companies aligning their reports with GRI standards. This framework helps organisations assess their impacts on various sustainability dimensions, including the environment, economy, and human rights. The GRI system includes Universal Standards, Sector Standards, and Topic Standards.

2. United Nations Sustainable Development Goals (UN SDGs)

The UN SDGs are an internationally recognized framework that 21% of Canadian reports reference. Companies aligning with these goals are expected to support the Ten Principles of the UN Global Compact and the 17 SDGs, reflecting their commitment to global sustainability objectives.

3. Carbon Disclosure Project (CDP)

The CDP is a global voluntary initiative that helps companies report their climate change impacts and responses. This framework supports publicly traded companies in seeking investor support and provides guidance on effective climate-related disclosures.

4. Task Force on Climate-Related Financial Disclosures (TCFD)

Introduced in 2017, the TCFD recommendations guide organisations in providing comprehensive climate-related financial disclosures. The framework focuses on four key areas: governance, strategy, risk management, and metrics and targets. As of June 2019, 36 Canadian companies had adopted these recommendations for voluntary climate-related disclosures.

5. International Integrated Reporting Council (IIRC)

The IIRC framework emphasises integrated reporting, which communicates a company's strategy, governance, performance, and prospects concerning environmental sustainability. This approach aims to provide a holistic view of how ESG factors influence overall business performance.

Moving toward mandatory ESG disclosure: In December 2021, the Prime Minister of Canada sent mandate letters to the Minister of Finance and Minister of Environment and Climate Change. The letters requested action towards a mandatory climate-related financial disclosure system based on the TCFD.

Businesses that fail to comply face multifaceted risks across legal, financial, and reputational domains.

• Regulatory and Legal Risk: The Canadian Securities Administrators (CSA) and the Office of the Superintendent of Financial Institutions (OSFI) are strengthening oversight. The CSA require climate and diversity disclosures for public companies, while OSFI enforces specific climate-risk reporting for federally regulated banks and insurers.
• Financing Barriers: Banks and institutional lenders increasingly incorporate ESG performance into credit evaluations.
• Reputation and Trust Erosion: Stakeholders, including investors, customers, insurers, and supply chain partners, expect publicly verifiable ESG data.
• Operational Blind Spots: ESG reporting requirements force organizations to assess material risks.

Published first voluntary Canadian Sustainability Disclosure Standards (CSDS) in Dec 2024, referencing ISSB and TCFD.

Canada’s mandatory ESG disclosure requirements are targeted, not universal.

Many Canadian organizations still face significant roadblocks in meeting ESG disclosure obligations. Canadian organizations are contending with daily changing mandatory ESG regulations and heightened investor expectations. These challenges highlight the need for a more structured, proactive approach to ESG reporting.

Here are some tips for effective ESG reporting:

1. Use globally recognized standards (TCFD, ISSB’s IFRS S1/S2), and structure reports by Governance, Strategy, Risk Management, and Metrics & Targets.

That said, the Canadian government announced mandatory climate-related disclosures for large, federally incorporated private companies in October 2024.

Many entities will consider their current state of disclosures and compare it to CSDS 1 and CSDS 2. Certain requirements may be challenging to implement. Developing governance is also essential to this process. That means embracing a refined target operating model that clearly defines an entity's short-, medium- and long-term goals. Entities must articulate how functions, capabilities, and supporting elements will be structured to achieve their sustainability vision.

In terms of timing, sustainability-related financial disclosures are due annually at the same time as the related financial statements, after the initial transition relief period. They cover the same period as the related financial statements. Materiality for sustainability-related financial disclosures is defined in a similar way as matter as financial statement materiality: a singular financial materiality approach is followed, as opposed to the double materiality approach under the ESRS.

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