Canada’s top public companies seem to be heeding calls for more transparency around their carbon footprints and plans to cut emissions, according to a new report.

Financial-consulting firm Millani found that 71 per cent of companies on the S&P/TSX Composite Index published sustainability reports for their 2020 fiscal year, up from just 58 per cent a year earlier. The trend was even higher among the largest companies on the index, with 92 per cent of the S&P/TSX 60 publishing reports on their environmental, social and governance (ESG) records and strategies.

The report compared ESG disclosures in 11 sectors on the index. It found that seven of the 11 sectors had at least 90 per cent of companies publishing ESG reports, compared to four sectors meeting that benchmark in 2019. Companies in the mining and energy sectors had some of the highest rates of disclosure. Finance and infrastructure firms also ranked above average, with 79 per cent and 74 per cent of firms in the respective sectors publishing sustainability reports, while 53 per cent of tech firms and just 25 per cent of health-care firms published reports. 

The 22 per cent rise in overall disclosure from fiscal 2019 to 2020 follows mounting calls from institutional investors for portfolio companies to open up about their impact on the climate and society and how they plan to curb it. 

In November 2020, eight of Canada’s largest pension funds representing $1.6 trillion in assets under management urged companies to use two sets of standards—from the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures (TCFD)—to report risks related to climate change and other sustainability factors. BlackRock CEO Larry Fink made the same recommendation in January, and also called on the CEOs of its portfolio companies to publish reports detailing how their businesses would operate in a net-zero-carbon economy by 2050. 

“To date, there has been good dialogue and collaboration between institutional investors and companies in moving the bar towards more consistent ESG disclosures,” said Sarah Takaki, senior director of sustainable investing at the Healthcare of Ontario Pension Plan—one of the investors that signed the joint letter last year—in an email to The Logic. Takaki did not directly answer whether the pension fund has seen an increase or improvement in ESG reporting among portfolio firms since its call to action. She added, however, that there’s “increased urgency to further improve the information flow” between investors and firms, and reinforced that “companies should produce financially relevant and industry-specific ESG disclosures that are consistent and comparable.”

Jennifer Coulson, vice-president of ESG in public markets at the British Columbia Investment Management Corporation, said the fund is also seeing a noticeable increase in ESG disclosures that “allow BCI to strengthen our investment decision-making on behalf of our clients.” Coulson attributed the uptick to “strong shareholder demand and the expanding regulation.” 

Millani founder and president Milla Craig agrees that investor pressure and companies’ response to it is preempting a deluge of regulations as the financial markets’ role in the climate crisis comes into stark relief.  

“There are many jurisdictions where climate-risk reporting is now becoming mandatory,” Craig noted in an interview with The Logic. New Zealand was the first to announce plans for mandatory reporting last September, when it unveiled that about 90 per cent of assets under management in the country would be forced to follow TCFD guidelines starting 2023. The U.K. followed with similar requirements to be phased in by 2025. China and the EU are among other jurisdictions moving toward mandatory reporting. And in the U.S., the Securities and Exchange Commission is preparing potential new rules on mandatory disclosure, which are expected by the end of the year. “Nothing’s official yet, but there’s growing anticipation that we will see mandatory disclosure from the SEC,” said Craig. “That will be a very significant shift.” 

While Craig said the response to regulatory and investor pressure is a good sign, she’s hesitant to celebrate the onslaught of ESG reports with too much enthusiasm. She said there’s still a lot of inconsistency between information firms are disclosing, and that most reports lack details many shareholders consider material to their investment decisions. “We’re seeing more disclosure, but it’s not necessarily hitting the mark. We continue to hear [from investors], ‘We’re still not getting what we need,’” she said. “It’s all good, directionally, but there’s more work to do, for sure.”

In a June report, Millani noted that the majority of companies listed on the S&P/TSX hadn’t sufficiently disclosed how they were preparing for the federal government’s 45 per cent emission-reduction target, or its plan for a $170-per-tonne carbon tax by 2030, “nor the global developments around climate-related policy and physical risks.”

The more recent report found that just 13 per cent of firms that complied with elements of the TCFD disclosed climate-scenario analysis information. Meanwhile, 45 per cent of reports that aligned with the TCFD disclosed Scope 3 emissions, which include greenhouse gases a firm produces indirectly, for example, through its supply chain. Of those that disclosed Scope 3 emissions, four per cent set reduction targets for them. While Craig said some companies may omit Scope 3 emissions for competitive reasons, she expects that number to rise after they begin consistently reporting Scope 1 and 2 emissions—those produced by the organization itself or by sources within its control. “Just getting [a] strategy set on this energy transition, we’ve set that as the expectation over the next couple of years,” she said. “Scope 3 will be expected, but right now there’s patience around it.”

Rachel Samson, a research director at the Canadian Institute for Climate Choices, noted another caveat around the rise in ESG reports: they can essentially be whatever a firm wants them to be. “There are a lot of labels that are thrown around—ESG, TCFD—and they don’t all have the same definition. That is going to be increasingly an issue,” said Samson. “People are investing lots of money in things that have these labels, and it’s not always clear what criteria is used and the results aren’t always what you would expect with that type of label.”

The Millani report also analyzed disclosure around social issues, like diversity and inclusion and Indigenous relations. It found that 91 per cent of ESG reports disclosed their gender diversity while 37 per cent of firms reported on diversity metrics beyond gender, a 106 per cent increase over 2019. Meanwhile, 40 per cent of firms with sustainability reports disclosed their approach to Indigenous relations; it was the first year Millani assessed the topic.