What could that look like in practice?
The ISSB was issued IFRS S1 and S2 on June 26, 2023 — an unprecedentedly rapid timeline from the March 31, 2022 exposure draft to finalization. IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, proposes overall requirements for an entity to disclose financial information about its sustainability-related risks and opportunities. Included in IFRS S1 is the introduction of a transition relief that would allow an entity to report on climate-related risks and opportunities — as set out in IFRS S2 Climate-related Disclosures — in the first year it applies IFRS S1 and IFRS S2. Entities would also be required to provide information about other sustainability-related risks and opportunities in the second year it applies the two standards.” This is key: it highlights the ISSB’s initial focus on climate as investors’ main priority.
These developments come on the heels of the US Securities and Exchange Commission’s (SEC’s) proposed enhancement and standardization of climate-related disclosures for investors in March 2022. Applicable to US-listed Canadian entities, the proposals remain draft and may evolve based on the feedback gathered during the public consultation period. Even so, companies should seek to understand what’s been suggested so far, particularly as it compares with the ISSB standards and NI 51-107, to ensure they have a well-rounded compliance roadmap for both jurisdictions.
Internationally, the European Union (EU) has taken the lead in not only climate but full environmental, social and governance (ESG) disclosures. The Corporate Sustainability Reporting Directive (CSRD) came into force in January 2023, requiring companies subject to the CSRD to report according to European Sustainability Reporting Standards (ESRS), which are currently at the exposure draft stage and closed for comment on July 7th, 2023.
Initially for fiscal year 2024, only those companies subject to the existing EU Non-Financial Reporting Directive (NFRD), which addresses ESG elements, will be in scope of the CSRD. Important to note, however, Canadian entities must keep in mind that for fiscal year 2025, the CSRD will also apply to listed entities and to large undertakings in the EU, including subsidiaries of non-EU businesses. The threshold to be considered a large entity is relatively low — entities must meet two of the following criteria:
- Balance sheet total exceeding €20m
- Net turnover exceeding €40m
- In excess of 250 employees on average during the financial year
Then, starting in fiscal year 2028, the requirements will expand to all non-EU undertakings that generate a net turnover of more than €150m in the EU and have an EU branch office with a net turnover of at least €40m in the EU or a large/listed EU subsidiary. Canadian entities with significant operations in the EU should be closely monitoring developments in these jurisdictions, and those with large subsidiaries in an EU country should begin preparations for compliance with the requirements of the CSRD now.
New reporting and disclosures mean new internal controls around climate
Of course, with new reporting and disclosure always come new processes and controls. Climate and other ESG disclosures are no different. In March 2023, the Committee Sponsoring Organizations of the Treadway Commission (COSO) issued a new report introducing the term "internal control over sustainability reporting" (ICSR) for the very first time. This addition to the reporting lexicon shows the control landscape spanning ESG disclosures is starting to crystallize, too. Canadian organizations must have the right internal controls, policies and processes in house to comply appropriately as these changes come to life.
Emerging green tax incentives hold promise for Canadian tech businesses
On federal budget day in March 2023, the government introduced a “Made in Canada” plan for clean energy. The goal? Invite green investment and reshape the Canadian supply chain. Although the details are still emerging, newly introduced tax credits are expected to support and advance net-zero efforts. For example, hydrogen, solar and geothermal energy producers will have access to tax credits ranging from 15% to 40%.
But it’s not just the manufacturers that will be able to access this capital. Organizations that support the manufacturing process along the value chain and those implementing these clean technologies to meet their sustainability targets will benefit, too. Whether a company manufactures zero-emission equipment, components and storage, recycling-related products, convert equipment — just some of the applicable uses for incentives like the refundable investment tax credit — or simply invests in technologies aimed at reducing emissions, there will be more and more opportunities for different industries to get involved from here on out.
What’s more, it’s expected the Canada Revenue Agency will audit these new incentives to ensure investments are meeting the government’s defined objectives. Proper documentation will be important to ensure you’re capturing available incentives.
How can Canadian TMT businesses make the most of this scenario?
Companies across Canada have good reason to explore green investments and determine how to make the most of the incentives on offer now. While on the surface it might seem like these incentives are targeting manufacturers of clean technologies, incentives are also available for businesses aiming to meet their own internal sustainability targets. That said, the earlier a business begins adapting to regulatory change, the better. No organization wants to be rushing to get controls, teams, policies or programs in place at the 11th hour.
Taking a big-picture view can help TMT organizations build out a green investment strategy while simultaneously refreshing reporting frameworks, internal controls, policies and resources to ensure they’re ready to communicate on this front clearly and transparently.
While a great deal remains in flux, organizations that take action now have a good amount of time to refresh their strategy. Canadian companies should take advantage of that runway. Don’t wait for the CSSB’s recommendations and resulting approvals from the Canadian and provincial securities commissions to start preparing for climate-related disclosures. Begin now. How?
- Carry out a detailed analysis of green capital expenses. It’s important to know which green incentives align best with your strategic vision for the business. If you’re going to invest in green — whether that means solar panels on the roof or new product and service offerings — you want to do so in ways that allow you to access the greatest possible benefits. Strategic tax planning and cost segregation analysis can help you align goals and available tax credits to help you get the most out of every green investment made. This helps you capture eligible costs, optimize deductions, track tax depreciation and increase available tax credits.
- Establish which global climate disclosure rules will apply to your organization. Regulations are changing domestically and internationally. Not all of them will be applicable to your specific business. Gather the right team and tools — and tap into a knowledgeable global network — to get a firm grasp of real-time updates on mandatory climate reporting. Both NI 51-107 and IFRS S2, as well as the SEC proposals, are based on the recommendations published by the Task Force for Climate-related Disclosures (TCFD) which provides a solid foundation for getting disclosure ready. Carrying out a gap assessment now can help you identify what you’ll need to disclose once rules are finalized and build a roadmap to get there. With that strategy in place, you can start implementing internal changes now to reach your target future state on time.
- Evaluate what information you’re already publishing. Many entities now publish sustainability or ESG reports. From the Chief Finance Officer to the broader finance team: this group must understand what information is already being captured and disclosed. Go beyond gathering that insight to assess how current reports align to various frameworks, how information is currently derived and what controls are used to manage it. Determine how you’ll track and capture information tied to new tax credits and green investments. This can be layered into your gap assessment to help you understand current state and available information sources.
- Design and implement an operating model to support future success. Once you understand where your organization’s internal controls and climate disclosure capabilities stand today, you’re better positioned to assess existing operating models — and design systems that are more conducive to future reporting requirements. You’ll need the right mix of capacity, technology, processes and skills to respond to climate disclosure requirements in the near term.
Keep the big picture in mind, too. Climate and ESG reporting requirements are only likely to increase over the next 10 years. From our perspective, organizations are increasingly interested in processes and controls, particularly in the wake of the COSO report. Unlike new financial reporting standards, climate disclosures are unusual in that entities may already be publishing some of the required information outside of existing financial statements in a host of formats and varying degrees of accuracy and materiality. Including a controls assessment as part of your overall operating model overhaul is a good way to ensure there’s enough rigour around existing reporting processes that you carry over into future state, too.
