2022 was a seminal year for climate policy, with Canadian and US securities administrators seeking input on proposed regulations1,2, that would require mandatory disclosures of relevant environmental, social, and governance (ESG) information as part of regular corporate filings. The International Financial Reporting Standards (IFRS) furthered the ambition, by not only setting global expectations for climate disclosures through their climate exposure drafts3 but also confirming that Scope 3 emissions disclosures will be required to meet international reporting standards4. With over 800 investor-focused ESG policies tabled across 116 countries (as of 2021)5, it’s hard to tell who is moving faster, as governments, regulators, and investors around the world continue to raise the bar on mandatory carbon disclosures. But one thing is certain – the transition to mandatory disclosures will help foster disclosure of complete, comparable, contextual, and credible data that is critical for investors, and ultimately planet earth. So, for this Earth Day, let’s celebrate four ways that the shift to mandatory disclosure will benefit people, planet, and profit.
#1: Complete: Mandatory disclosure fills in data gaps needed for informed decisions
To make informed decisions, investors need a complete view into climate-related risks and opportunities. Through the leadership of the Task Force on Climate-Related Financial Disclosures (TCFD), Carbon Disclosure Project (CDP), the World Resources Institute (WRI), and the World Business Council for Sustainable Development (WBCSD), voluntary disclosure of corporate emissions has become a fundamental part of good governance. However, more than 20 years after the release of the WRI/WBCSD Greenhouse Gas (GHG) Protocol6, less than 40% of companies voluntarily disclose their Scope 1 and 2 (operational) emissions data and less than 24% report on Scope 3 value chain emissions, where the majority of emissions reside7. Voluntary disclosure has clearly run its course.
In response to investor pressure for greater transparency, both the Canadian Securities Administrators (CSA) and US Securities and Exchange Commission (SEC) have proposed to phase-in mandatory disclosure for issuers through CSA’s National Instrument 51-107, Disclosure of Climate-related Matters8 and SEC’s File S7-10-22, The Enhancement and Standardization of Climate-Related Disclosures for Investors9. If adopted, these proposed instruments will support investors by helping to close the data gap, enabling better evaluation of a company’s operational current and future climate-related risks as part of their investment decisions.
#2 Comparable: Standardized content reduces ambiguity, and is a blow to greenwashing
Mandatory disclosure will also facilitate standardization of how carbon-related information is measured and presented, delivering a blow to selective disclosures, ambiguous targets, and greenwashing. Take the hypothetical company with a target to “reduce emissions by 15%” for example. While BMO Global Asset Management (BMO GAM) has the capability to delve deeper into the data or engage directly with the company, the average investor is left to ask: What does that target mean in absolute terms? How does that target compare to peers? And if their peers are similarly using ambiguous targets, it’s another barrier to informed decision-making. Standardization of emission reporting will provide the necessary structure to reduce ambiguity, present performance in absolute terms, and facilitate peer comparisons. Through our engagements, BMO GAM advocates for the adoption and validation of science-based targets and encourages companies to work with the Science Based Targets Initiative10.
#3 Contextual: Scope 3 emissions contextualizes a company within the real economy
While a typical climate disclosure includes operational (Scope 1 and Scope 2) emissions, companies are often hesitant to disclose their Scope 3 (value chain) emissions due to challenges in obtaining the data, or at times, misinterpreting disclosure of Scope 3 emissions for ownership. Instead, companies should look to measurement of both upstream (supplier) and downstream (customer) value chain emissions for insight into their exposure and reliance on our current carbon-intensive economy.
ISSB’s decision to phase-in Scope 3 as part of their expectations for disclosure will allow investors greater insight into a company’s value chain. And, understanding the anxiety that creates, the ISSB is also developing relief provisions to help companies apply the Scope 3 requirements. In addition to providing relief on the timing of disclosures, the relief provisions are expected to include a phasing in by company size and sector for Scope 3 disclosures, and include ‘safe harbour’ provisions, both of which were recommended by BMO GAM in our response to IFRS’s proposed sustainability-related disclosure standards11.
Changing the dialogue from voluntary disclosure of operational emissions to disclosure of a company’s emissions across their value chain, is a paradigm shift that contextualizes the company’s role and place in the real economy and enables the company to look beyond their own footprint to the “whole economy” solutions needed for a low carbon future.
#4 Credible: Including carbon as part of a company’s financial filings fosters executive accountability and greater assurance
Analysts are careful to assess the credibility and reliability of disclosed data, especially when the current climate disclosure gap is greater than what is voluntarily shared. But assurance of disclosed data has also been lacking. In Fasken’s 2023 ESG Disclosure Study, only 58% of the TSX60 companies disclose some type of ESG-related assurance12. Further to the point – MSCI reports that the emission breakdowns of 30% of companies in the MSCI ACWI Investable Market Index does not add up to total reported footprints13.
Part of the challenge has been that while corporate disclosure expectations have advanced considerably since the formation of the Task Force on Climate-Related Disclosures (TCFD), the role of the chief sustainability officer varies from company to company. But as climate disclosure becomes part of a company’s corporate filings, boards will expect the CEO and CFO to have third party assurance.
Companies where the chief sustainability officer already reports to general counsel, the CFO, CEO, or to board – will have a distinct advantage. And for investors, the shift to assured disclosures will bring about a carbon “credibility revolution”14 in which carbon accounting is simply part of accounting.
Looking ahead
BMO GAM considers material ESG data to be an integral part of investment decision-making for our responsible investment branded funds, and regardless of whether climate-related data is pulled from a financial statement or emissions disclosure, understanding it is part of our fiduciary duty. While mandatory climate disclosure is expected to face legal challenges15 that may shape the nature and/or timeline of disclosure, we support the approaches that both Canadian and US regulators are considering to support implementation. So, this Earth Day, thank your regulator for supporting investors with what we have already known: the journey to a Paris-aligned future begins with a single step, and that step is mandatory climate disclosure.
1 51-107 – Consultation Climate-related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument51-107 Disclosure of Climate-related Matters | OSC
2 Proposed Rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors (sec.gov)
3 IFRS – Exposure Draft and comment letters: Climate-related Disclosures
4 IFRS – ISSB unanimously confirms Scope 3 GHG emissions disclosure requirements with strong application support, among key decisions
5 Regulation database | PRI | Policy (unpri.org)
6 Greenhouse Gas Protocol | (ghgprotocol.org)
7 Carbon Emissions Data for Investors: Closing the Reporting Gap and Future-Proofing Estimations (sustainalytics.com)
8 51-107 – Consultation Climate-related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument 51-107 Disclosure of Climate-related Matters | OSC.
9 Proposed Rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors (sec.gov)
10 Ambitious corporate climate action – Science Based Targets
11 BMO GAM: Response to the ISSB’s Sustainability Disclosure Standards, Exposure Drafts
12 https://www.fasken.com/en/knowledge/2023/01/fasken-esg-disclosure-study
13 https://www.msci.com/www/blog-posts/reported-emission-footprints/03060866159
14 Credibility revolution – Wikipedia
15 Republicans plan legal assault on climate disclosure rules for public companies | Climate crisis | The Guardian
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