Steps to prepare your ESG regulatory compliance

Did you know that Canada already has mandatory sustainability reporting requirements, some of which might impact you? While many of these are narrow in nature, such as Canada’s new modern slavery legislation or the Extractive Sector Transparency Measures Act, we’re seeing more regulations around environmental, social and governance (ESG) matters introduced with broader implications. The best current example is the European Union’s Corporate Sustainability Reporting Directive (CSRD), which captures not just companies listed in Europe but also those operating there. For this reason, it’s important to check carefully whether this applies to your entity.

What is currently mandatory for ESG reporting in Canada?

For Canadian listed companies and those who want to prepare for an initial public offering, mandatory reporting is currently required by or for:

Canada’s modern slavery rules, which imposes disclosure requirements for Canadian-linked entities. Officially known as the Fighting Against Forced Labour and Child Labour in Supply Chains Act, this was enacted in 2023 for first reporting in 2024. It requires Canadian-linked entities to publicly report on steps they have taken during the previous year to prevent and reduce the risk of child or forced labour being used at any step in the production of goods it makes or imports.

OSFI’s B-15 guidance (PDF), which mandates disclosure for certain government and Crown organizations as well as federally regulated financial institutions. Affected entities will need to report on climate-related governance and climate risks and opportunities, develop a transition plan, conduct scenario analysis and set net-zero targets.

CSRD requirements for entities with EU subsidiaries or operations. The CSRD requires comprehensive and detailed disclosures on sustainability issues, not only on how they affect a company but also on its impact on environmental and social matters. This approach is known as double materiality.

What are key potential upcoming ESG developments in Canada?

As a Canadian company, you’ll also need to monitor two other developing situations—new SEC climate-related disclosure rules and the creation of new Canadian Sustainability Disclosure Standards. In the United States, the SEC has drafted climate-related disclosure rules for 10-K, 20-F and MJDS (40-F) SEC-filing entities. The new rules include disclosures relating to climate-related risks and risk management as well as the board and management’s governance of such risks. Here in Canada, the Canadian Sustainability Standards Board (CSSB) released draft standards for comment in spring 2024. These drafts largely align with the recently finalized International Sustainability Standards Board (ISSB) standards. The Canadian Securities Administrators said it anticipates seeking comment on a revised rule setting out climate-related disclosure requirements once the CSSB consultation is complete and its standards are finalized.

No-regrets moves for Canadian companies

Canadian companies with a global footprint, including those listed on foreign stock exchanges, will have multiple regulatory regimes to navigate in the next few years. With implementation timelines expected to be short, what are some of the steps to take now to prepare?

Determine and understand your mandatory reporting obligations.

Assess the gaps between current and upcoming reporting and any voluntary commitments your organization has made.

Consider the operational impact of complying with standards, including activities within the organization’s value chain that will impact the data to be gathered and reported and whether double-materiality reporting will be required.

Assess your ESG reporting ambition as well as what’s material to your organization. To what degree are ESG matters embedded within the organization’s strategy and value chain, and to what extent will reporting be focused on describing key value drivers versus compliance?

Assess data-gathering processes and controls and develop non-financial accounting policies.

Evaluate enabling technologies to determine whether they’re optimized for enhanced reporting requirements. One resource that can help is our playbook for technology-enabled ESG reporting, which explores some of the tools to support organizations with their ESG obligations.

Develop a comprehensive timeline and roadmap to comply with both regulatory and voluntary reporting. This process will require identifying interdependencies, common needs and any sequencing issues between the ESG standards being implemented.

The playbook for tech-enabled ESG reporting

Implementing the right ESG reporting software solutions starts with strong ESG data management

Explore the playbook

Creating value through ESG compliance

Sustainability reporting and non-financial disclosures aren’t just a compliance exercise aimed at ticking boxes. If adopted as intended, ESG regulations offer a framework for organizations to successfully address sustainability challenges and opportunities and ensure their strategies and activities are effectively communicated. Reporting allows companies to develop strategies for better governance, reduced risks and improved ESG performance. Reliable reports with metrics and targets can build trust in your company and lead to improved relationships with stakeholders.

Looking ahead, mandatory sustainability reporting is likely to be a permanent fixture of general reporting obligations. And as ESG reporting converges with financial reporting standards globally, the risks of not being compliant will rise given consequences such as monetary penalties, decreased competitiveness, reputational damage and even criminal convictions. With expectations and regulations evolving quickly, Canadian organizations looking to build stakeholder trust and improve ESG performance should be thinking about compiling the information they need to report and preparing to meet future assurance-readiness requirements.