A year and a half ago, the umbrella group representing Canada’s securities regulators paused its efforts to draft rules that would govern how companies should report and manage climate risk. With work on such rules underway in the U.S. and internationally, it opted to wait for signals from bigger players on how best to proceed. 

But after the U.S. Securities and Exchange Commission broke with the major international standards body on a key sticking point regarding carbon emissions, the Canadian Securities Administrators are left to pick a side, and sustainable finance experts say the result could be watered-down rules for managing corporate Canada’s climate risk.

When the SEC, which regulates securities markets in the U.S., released its long-awaited climate rules earlier this month, it left out earlier recommendations requiring large firms to report emissions across their value chains, known as Scope 3 emissions. 

“The question will be if the Canadian Securities Administrators will abandon Scope 3,” said Andrew MacDougall, a partner at Osler in Toronto, who works with public companies preparing for forthcoming climate-disclosure requirements. 

Scope 3 emissions are a measure of the carbon dioxide emitted from a company’s value chain—everything from the gathering of raw materials to the manufacturing of its products to the shipping required to get them to warehouses, stores and consumers, as well as from consumers’ use of its products. The greenhouse gases your car emits when you drive it would count as Scope 3 emissions for the oil company that produced the fuel in your tank, for example, as would any emissions released when the company transported that fuel to the gas station where you filled up. 

This approach to measuring emissions is meant to give the clearest possible picture of a company’s climate risk—that is, how much it contributes to rising CO2 levels and how vulnerable the company is as the economy transitions away from fossil fuels. It’s information many investors request to help them make better decisions.

It’s also notoriously hard to calculate these emissions accurately, some companies have argued, leading to intense pushback against laws mandating their disclosure. 

The SEC’s decision not to make companies it regulates disclose their Scope 3 emissions pits it against the International Sustainability Standards Board (ISSB)—a Frankfurt-based accounting standards body. Founded by the International Financial Reporting Standards Foundation in 2021, it was launched to influence global policies and business practices on environmental, social and governance issues, and recommends companies disclose Scope 3 emissions starting this year. 

The Canadian Sustainability Standards Board (CSSB), which Financial Reporting and Assurance Standards Canada, a group of domestic standards organizations that oversee fields such as accounting and auditing, launched last year to offer a Canada-specific lens to ISSB recommendations, recently endorsed the international standards, calling for Canadian companies to report Scope 3 but not until 2027. The CSSB is now seeking the public’s feedback on those recommendations. 

In a statement after the SEC announced its break with the international standards body over Scope 3, the CSA said it will consider the CSSB’s draft standards when designing its own rules. At the same time, it said it “continues to monitor and assess international developments in this area, including the [SEC’s] climate-related disclosures rule approved on March 6.” CSA is waiting for CSSB to finish public consultations and finalize its standards before resuming its own consultations on the climate rules. 

Several sustainable finance experts who spoke to The Logic said they doubt the regulator will mandate rules tougher than those adopted by its U.S. counterpart. 

“There’s going to be a particular reluctance to impose a standard that is more onerous on Canadian companies,” said MacDougall. They have to look at it from a North American perspective, he said, making sure the rules in Canada are compatible with those across the border. The requirement could put Canadian firms and the country’s capital markets at a disadvantage relative to the U.S., where the disclosure burden is lighter, he added. 

John McKenzie, CEO of TMX Group, which runs Canada’s main stock exchanges, agreed that Canada’s rules need to be compatible with the U.S. “We work hard to ensure that [tech companies] get listed in Canada and raise capital here,” said McKenzie. “If the effort level is higher for the benefit in the Canadian market, the risk is: do our companies bypass, go straight to the U.S., raise money there [and] IP leaves the country? We’re trying to make sure that policymakers are being thoughtful around unintended consequences of having our market less competitive than the U.S. market.” 

Others argue the opposite—that weaker disclosure standards could make Canadian companies less competitive. 

Milla Craig, the president and CEO of advisory firm Millani, whose services include helping companies report their climate risks, noted that some Canadian firms with revenue and operations in the European Union are already following strict reporting rules the European Commission enacted last year. Those that don’t may risk losing funding from scrupulous investors that may opt to invest in firms with more transparent climate-risk management, she said. “Companies are going to start doing it because their investors are going to say, ‘Unless you give me the data, [we’re] getting a discount,’” said Craig. 

Laura Zizzo, co-founder and CEO of Manifest Climate, which helps firms assess business risks associated with climate change, said that whether or not Canada follows the SEC and rejects Scope 3 requirements, companies aren’t necessarily off the hook for measuring and reporting carbon emissions along their value chains. Under the SEC rules, companies still need to report all “material” risks climate change poses to their business. For some, that could include Scope 3 emissions. “There’s a big argument to say that if Scope 3 is material to your business, it’s required under the SEC rule,” she said. 

The disagreement over Scope 3 underscores the challenges in moving climate reporting from a voluntary to mandatory practice—something championed by Mark Carney, former governor of the Bank of Canada and Bank of England and now Brookfield Asset Management’s chair and head of transition investing. A slew of companies and financial institutions have reneged on recent climate pacts amid mounting concerns that they will be hard to implement and defend against lawsuits. 

Zizzo, who practised environmental law before launching Manifest Climate, said the final SEC rule appears written in such a way to protect the regulator in legal challenges without completely scrapping emissions disclosure requirements. The SEC is already facing a barrage of lawsuits from critics, some of whom say the rules are too strict and others saying they don’t go far enough to protect investors from climate risk. “The SEC rule has to be thought of through the very litigious environment that we are in right now in the U.S.,” said Zizzo, whose clients are based in the U.S. and Canada. “They were trying, in my opinion, to make the rule as defensible through litigation as possible.” 

McKenzie said Canada might consider a tiered system under which companies below a certain size would be encouraged, but not required, to follow ISSB’s disclosure standards while Canada’s largest firms would be required to do so. 

Regardless of where Canada’s securities regulator lands on climate disclosure, investors still want to know how climate change may impact the companies they back, said Craig. “Investors want all the information they can get,” she said. “In the absence of it, they are just making presumptions.”