When the Canadian Securities Administrators unveiled a proposed set of rules that would govern how companies in Canada should manage climate risk, it finally joined a growing list of its global peers. The CSA—the umbrella organization that oversees Canada’s provincial and territorial securities regulators—had fallen behind the likes of the U.K., Europe and New Zealand in working to stymie the threat that climate change poses to the economy.

But nearly a year later, Canada’s briefly held position among the leaders on the file is slipping. Larger regulators and standards groups, including the U.S. Securities and Exchange Commission (SEC) and the International Sustainability Standards Board (ISSB)—a new accounting standards body meant to influence global policies on environmental, social and governance issues (ESG)—have tabled their own, more robust rules. Meanwhile, the committee tasked with creating a made-in-Canada system for defining what counts as a “sustainable” asset has stalled over fundamental disagreements among its members.

Curbing global warming and adapting to it is expected to cost more than US$150 trillion in the next three decades, according to a report from the Bank of America. To get there, the United Nations has called for a framework to ensure “every professional financial decision takes climate change into account.” 

This country’s finance and energy sectors have been pushing for a made-in-Canada approach to regulating the energy transition—one that factors in our economic reliance on oil and gas. But with the SEC and other major players now effectively setting the terms for “sustainable finance” for global business, there’s disagreement between those who want Canada to wait and see what the world decides before making its own rules and those who want to see the country in the green-finance vanguard.

 “Canadian actors are getting dragged along rather than showing real leadership in climate disclosure,” said Matt Price, director of corporate engagement at Investors for Paris Compliance in an email to The Logic.

As global warming triggers more frequent and intense calamities, investors, regulators and the public are putting pressure on companies to offer more information about the impact they make on the environment, and the risks climate change poses to their business. Those risks could be physical, like fires and floods, or reflect changes in the market, like a potential decline in consumer demand for an emissions-heavy product. 

The demand for climate-conscious business practices has fuelled a boom in green finance. Investments in Canadian funds that put money into “sustainable” assets hit $34.5 billion by the end of last year, up from $17.4 billion a year earlier, according to a Morningstar report. Sustainable bonds—debt issued to fund social and environmental initiatives—passed US$1 trillion in 2021, a 57 per cent increase from the year before, according to the market-intelligence firm Climate Bonds Initiative. Green bonds made up the bulk of the lending, with nearly US$523 billion issued for debt instruments. 

A host of the world’s largest companies—including Amazon, Coca-Cola and General Motors—have gotten on board with the sustainability movement, pledging to cut carbon and invest in greener processes in a bid to make them more attractive to customers and investors that have set climate targets of their own. 

But measuring the impact of that financing—whether it actually helps ease climate change or adapt to it, for example—is tricky. In Canada and internationally, there aren’t yet broadly accepted standards and regulations against which companies’ commitments can be judged. That means a company’s sustainability claims may simply be greenwashing, rather than an indication of actual climate progress.

Much of the world is scrambling to make formal rules to legitimize what’s broadly known as sustainable finance—a concept popularized in large part by Mark Carney, Canada’s former central bank governor. Large players like the SEC and the ISSB were always expected to set the parameters for how these rules are written. The SEC’s influence comes from its status as the largest securities regulator in the world. And the ISSB—a branch of the International Financial Reporting Standards Foundation, a U.K.-based non-profit that develops global accounting standards followed by 140 countries—was established to guide regulators’ sustainable accounting policies and laws. 

But the organization depends on regulators at the national level to give its guidelines force. “Just because ISSB adopts a series of proposed disclosure doesn’t mean that it is binding on Canadian companies,” said Andrew MacDougall, a partner at Osler in Toronto, who works with public companies preparing for forthcoming climate-disclosure requirements. “It becomes binding if it’s adopted by securities regulators as being their rules for disclosure.”

Some sustainable-finance advocates say they’re frustrated that Canada isn’t pressing forward fast enough with its own rules, and worry the country is compromising its reputation as a leader on climate and financial standards; businesses, they say, could suffer on the global stage as a result.

“We have to move forward on this,” said Laura Zizzo, CEO of Manifest Climate, a software-as-a-service platform that helps clients identify and manage climate risk. “It’s not only about whether the law is on the books here. Time and time again, the world looks to Canada for strong financial regulation, as a best in class,” she said. “We can’t just not take a leadership position.”

Not everyone agrees that Canada ought to hustle to set its own regulations. “I would sincerely hope that our regulators—if they are comfortable that the new rules are going to come out of the ISSB and the SEC—will wait to see what those final rules look like, and then make a decision as to what to adopt for Canada,” said MacDougall. Pushing ahead with regulations too soon, he said, could lead to an unnecessarily cumbersome process in which Canada has to revise its rules later to coordinate with its peers. 

Robert Richardson, head of the ESG and sustainability team at McCarthy Tétrault, said he used to subscribe to the view that Canada didn’t need its own climate disclosure rules. How, he wondered, could the CSA’s rules possibly matter?

He has since changed his mind, arguing that the threat of greenwashing creates urgency for Canada to act. 

“As long as there’s noise for something like that, and the government doesn’t step in and create regulations, there’s a huge risk for greenwashing and manipulation,” he said. “People will come up with their own standards in the absence of legislation and regulation, and they’ll use it to sell investment products or securities to unsuspecting investors who think they’re behaving ethically or on a woke basis.”

The CSA has acknowledged that growth in funds labelled as ESG has “increased potential for ‘greenwashing.’” But critics say the regulator hasn’t done enough to address the threat; the guidance it issued on the topic in January simply clarified that existing securities rules also apply to sustainability funds.

Richardson echoed MacDougall’s belief that Canada needs to be in step with the U.S. and international standards and regulations both on greenwashing and disclosure rules, but said the CSA can always tweak its regulations down the road to fit with global peers’.

Zizzo, too, cautioned against a wait-and-see approach to regulating disclosure. “It does matter from a Canadian company perspective,” she said, since the SEC rules include carve-outs for Canadian companies, under the assumption that they have comparable regulations to follow at home. “In order to keep that privileged position, we have to continue to have fairly equivalent laws on the books.”

There’s reason to believe Canada’s rules would be out of step with international standards and regulations proposed in the U.S.  

The ISSB came out with its draft framework in late March, five months after the board formally launched. The proposed rules are based on the Task Force for Climate Related Financial Disclosure (TCFD)—spearheaded by Carney, and in the absence of formal regulations, its guidelines have become the de facto reporting framework worldwide. 

While Canada’s securities regulator also borrowed heavily from the TCFD in its own draft rules, its recommendations are far less stringent than the ISSB’s. One key difference: while the ISSB asks companies to disclose how they’d be affected under a range of global warming scenarios, and to disclose not just their own carbon emissions but those produced by their supply chains and users of their products, the CSA has floated  a “comply-or-explain” system, which would let companies provide reasons for excluding information about certain emissions. The SEC’s draft rules are likewise stricter than Canada’s, calling for more detailed emissions disclosures than those the CSA has mooted. 

In an email to The Logic, CSA spokesperson Ilana Kelemen said the regulator is reviewing the U.S. and international climate-disclosure proposals “to help inform their recommendations to the various CSA regulators.”  

While MacDougall believes Canada should hold off on new rules to ensure they align with international players, he said regulators at home need to consider factors that are unique to Canada when they do eventually create climate-disclosure laws. “Our oil and gas industry is a big piece of the Canadian economy,” he said, cautioning against relying on disclosure rules set by jurisdictions that may not grasp the complex role energy companies will play shifting Canada’s economy away from fossil fuels.

Prioritizing Canada’s resource sector in the energy transition was a key point made by the federal government’s expert panel on sustainable finance led by Tiff Macklem, now governor of the Bank of Canada. In its 2019 report, the group raised concerns that emerging international rules around defining sustainability in business and finance would exclude industries at home and recommended creating a uniquely Canadian system. 

On the panel’s recommendation, in 2020 the Canadian Standards Association Group—which creates standards, conducts testing and issues certifications for a range of industries across Canada—began work on its own “transition finance taxonomy.” The system would classify operations and products that can be deemed “sustainable”—a proposed solution to greenwashing without alienating Canada’s energy sector as it decarbonizes. The committees creating the taxonomy included representatives from Canada’s largest banks and pension funds, governments, farming associations, mining groups and oil and gas companies. 

However, disagreement between committee members over whether the taxonomy would reduce greenwashing or facilitate it led the group to pause the process. “Based on feedback received throughout the spring, it became clear that fundamental differences of opinion remained among committee members, and consensus on the draft foundations document was not achieved,” group spokesperson Kimberly Gibson told The Logic by email. “CSA Group determined that the committee had progressed its work as far as it could at the time.” 

Lisa French, vice-president of sustainability standards at Financial Reporting and Assurance Standards Canada, a CPA funded organization said Canada is establishing a lead on the file in other ways. Her group is creating a board to lobby the ISSB to consider Canada’s interests as it develops its global sustainability guidelines. “There’s been quite a bit of activity happening in Europe and internationally,” said French. “We need to equip ourselves and be prepared to contribute to those developments, particularly to the developments of the ISSB.” 

The forthcoming Canadian Sustainability Standards Board (CSSB) will provide input to the international counterpart as it develops its framework, said French. “Once those baseline standards have been issued, then the CSSB would review the final standards for their endorsement and application in Canada,” she added.

French said Canada is ahead of nearly all other countries in creating a system to weigh in on the ISSB process. “The only country that I’m aware of that already has a dedicated board in place for sustainability standards is Japan. South Korea is talking about taking that same path,” she said. “I think every country is kind of scrambling because of the pace that’s being set by the ISSB.”

Price, meanwhile, worries initiatives like the transition taxonomy and even the CSSB may accommodate polluters at the expense of climate-change progress. “Canadian interests have reflexively argued for weaker climate-risk disclosure because they think we have something to hide—more emissions,” he told The Logic by email. “But the irony is that this is a tacit admission Canada faces greater climate risks, meaning at a minimum we need stronger disclosure to tackle those risks.” 

Clarification: An earlier version of this article described Lisa French as vice-president of sustainability standards at CPA Canada. In fact, French holds that position at Financial Reporting and Assurance Canada, which is funded by CPA Canada.