In this podcast episode EY's Vicki Corker, CPA, shares with CPABC's president and CEO, Lori Mathison, FCPA, FCGA, some key updates on the Canadian and global sustainability reporting landscape, with a focus on ESG. Part of our Coffee Chats with CPABC podcast series.
With standards, requirements, and deadlines in the ESG and sustainability reporting space taking effect at a rapid pace, it’s an excellent time to answer the top questions members have in this area. To that end, I recently spoke with Vicki Corker, CPA, an associate partner, financial accounting advisory services at EY who shared her extensive knowledge of the Canadian and global sustainability reporting landscape.
We began our conversation by reflecting on how viewing your organisation through an ESG lens can help CPAs to identify the sustainability risks and opportunities that are material to your organisation and how this, in turn, can help you to make the best decisions to influence long-term business performance and value creation.
We also considered the accounting profession’s opportunity to lead when it comes to ESG, as early adopters will be well positioned to meet new developments, particularly as jurisdictions make ESG-related standards mandatory. CPAs have a vital role to play in helping organisations to address ESG-related risks, challenges, and opportunities, and to connect both the strategic and the financial pieces when it comes to quantifying and disclosing ESG risks and opportunities.
The International Sustainability Standards Board’s (ISSB) IFRS 1 and IFRS 2 are effective for annual reporting periods beginning on or after January 1, 2024. For companies situated in Canada, there is currently no mandatory requirement to comply with the ISSB standards. However, the government of Canada and various regulatory and professional agencies have expressed support for the ISSB and efforts towards mandatory and standardized climate-related financial disclosures. The Canadian Sustainability Standards Board (CSSB) is also working with the ISSB to support the uptake of ISSB standards in Canada, and they're working to highlight key issues for the Canadian context and to facilitate interoperability between ISSB standards and any future CSSB standards.
Lori: Could you elaborate on the environment here around sustainability standards, both in Canada as well as the ISSB standards?
Vicki: IFRS S1 sets out general requirements for disclosure of sustainability-related financial information. That standard proposes overall requirements for an entity to disclose information about its sustainability-related risks and opportunities. It's a base framework upon which other standards can be added, and the first of those standards is IFRS S2, which is climate focused, as in climate-related disclosures.
Included in IFRS S1, to highlight that climate focus, is an introduction of a transition relief that will allow an entity to report on climate related risks and opportunities – those in IFRS S2 – in the first year it applies these standards. Entities will be required to provide other information about other sustainability-related risks and opportunities in the second year that you apply these two standards.
This highlights the ISSB's initial focus on climate first, given the systemic nature of this topic and the amount of investor awareness on this issue. I mention investors intentionally; different sustainability reporting frameworks are designed for different users, but these ISSB standards focus specifically on the needs of investors and financial and capital markets.
The effective dates of these standards is January 1, 2024, but we don't yet know if and when they will be adopted in Canada. Despite this, I am seeing many corporates, particularly public companies, already beginning to prepare for these standards.
This is in part because we've seen the sustainability reporting landscape move rapidly. It took a little over 18 months from the launch of the ISSB, back in November 2021 to the publication of the standards in June 2023. We've also seen the CSSB welcome the ISSB standards, they're working to support the uptake in Canada, and they're also considering what those standards might look like from a Canadian context. And we do see an intention to consult, likely in 2024.
From a public company perspective, the CSA has also similarly welcomed the standards and they've indicated their intention to undertake further consultation. And internationally, IOSCO, the International Organisation of Securities Commissions, did endorse these ISSB standards in July 2023, which I think is a clear signal to the market, to public companies internationally.
With all this momentum, many believe the adoption of sustainability disclosure standards in Canada is not an ‘if,’ but a ‘when.’ The reality is, a lot of Canadian companies are already producing some level of sustainability reporting on a voluntary basis. Therefore, companies are keen to understand what the incremental effort will be for S1 and S2 when they do become or potentially become mandatory.
Finally, the close process for sustainability reporting is a concern for many of the companies I talk to. Typically for voluntary reporting, that's usually issued about five to seven months after year end. But the intention of S1 and S2 is that the information will be published alongside the annual financial statements. That will move up those timelines by several months.
Lori: Another question that members are asking is: ‘Are there any requirements or rules in Canada that require any form of ESG reporting?’
Vicki: It depends on your sector, but I do see some mandatory sustainability reporting here in Canada, particularly as it relates to climate. For example, large Canadian government organisations (those with more than a billion dollars in assets) already had to publish climate disclosures in 2022, and all other federal crown corporations are expected to report, according to the Task Force on Climate-Related Financial Disclosures (TCFD) framework, by 2024.
Also, the Office of the Superintendent of Financial Institutions (OSFI) has published their climate risk management guidance. The draft was issued in May 2022 and the first iteration of the final guideline, B15, was published in March 2023. It outlines the expectations for federally regulated financial institutions (FRFIs) management of climate related risks. In addition to the required governance and risk management processes, FRFIs are also required to dispose information aligned with the TCFD framework.
Lori: How about from a global perspective, what's going on in other markets that might be relevant for Canadian companies?
Vicki: We are seeing a lot of global developments with influence in Canada and that have compliance impacts on some Canadian companies in certain contexts. For example, the EU's Corporate Sustainability Reporting Directive (CSRD) came into effect in January 2023. This is a big area of focus for Canadian companies with operations or a corporate structure that includes subsidiaries in Europe, because CSRD is broader than just EU-headquartered businesses. It can apply to Canadian businesses, including private companies. That's based on testing thresholds.
They apply to determine if a company is caught by these regulations. The determination is very complex, so if you do have operations in Europe, I’d recommend talking to legal and compliance teams. For example, large EU companies that are not listed, including subsidiaries of non-EU parents (so Canadian companies) will be required to report under the CSRD if they meet certain revenue, assets, and employee thresholds.
Those thresholds are currently €25 million euros in assets, €50 million euros in turnover, and 250 employees. Meeting two of those three criteria would generally mean you have to comply with the regulations for annual periods beginning on or after January 1, 2025.
Additionally, non-EU parent companies – so Canadian parent companies with a turnover in Europe of €150 million euros for the last two consecutive financial years that also have subsidiary in scope of these regulations or an EU branch with certain amounts of revenue – they’ll need to report for periods beginning on or after January 1, 2028.
If you do have large subsidiaries in Europe, or debt or equity listings or operations in Europe, take a look at these regulations quite quickly to see if you’re caught and when you’ll have to report. These regulations are quite extensive too. While the ISSB has two standards, CSRD has 12 standards – European Sustainability Reporting Standards (ESRS) 1 to 12. They cover topics like climate change, pollution, biodiversity and ecosystems, and water. So whereas S1 does cover all material sustainability-related risks and opportunities, across these 12 standards, there’s much more detail and much more specificity.
The EU isn’t expected to stop there. We think they’ll have sector-specific standards planned and standards for small and medium enterprises. They also have this concept of double materiality, which means that when you’re applying these standards, you have to consider the impact of ESG on the organisation, and also the impact of the organisation on society.
The US is a bit of a different story. The Securities and Exchange Commission’s (SEC) exposure draft was published in March 2022, but it hasn’t been finalized. However, there is some movement on climate disclosure in the US. California Governor Gavin Newsom signed several bills into law back in October – SB 261, which addresses greenhouse gases (GHG) and climate-related financial risk, and SB 253, the Climate Corporate Data Accountability Act. Both are effective in 2026. We also have the California Voluntary Carbon Market Disclosures Bill, AB 1305, which will come into effect January 1, 2024.
Why is this important for Canadian companies? SB 261 and 253 apply to US-based businesses doing business in California. But there’s no exemption for US-based subsidiaries of non-U.S. parents, so Canadian companies with US subsidiaries could be caught. To highlight some relevant pieces of this legislation, 261 requires companies with annual revenue of $500 million USD who do business in California to report on climate-related financial risks and disclosure measures to reduce that risk.
Reporting uses the TCFD framework, and it has to describe any measures to reduce climate-related financial risks or adapt to disclosed risks as well. SB 253 is for larger companies; it requires companies with annual revenues of $1 billion USD to provide annual quantitative disclosures of scope 1, 2, and 3 emissions – that is, GHG emissions, using a framework called the GHG Protocol.
It requires some limited assurance initially over that for the scope 1 and scope 2 emissions, and additional assurance requirements and scope 3 emissions reporting is phased in over a longer period. It’s important to note the revenue thresholds are not revenues in California, they’re total revenues of the entity in scope for the regulations.
Finally, AB 1305 requires entities operating in California that make a net zero emission claim, carbon neutral claim, or a carbon neutral product claim, or have significant GHG reduction claims, must disclose information about those claims, as well as the purchase or use of voluntary carbon offsets to achieve those claims.
Lori: Members have been asking for examples of social and governance topics and/or areas for sustainability reporting. What key social and governance areas are you seeing clients focus on for their reporting and corporate initiatives?
Vicki: Recently, I’ve seen clients focusing on their diversity, equity and inclusion programs and looking at their wider, holistic strategy rather than individual initiatives. Particularly post-pandemic, DEI strategies are in need of a refresh to fit our very different working worlds. That’s also echoed in governance, so board diversity continues to be a major focus. For many, we’ve seen return to the office mandates following the pandemic; that brings with it an employee health and safety focus, which is another element of the social pillar of ESG. With that, I’m also seeing a focus on physical and mental well-being in terms of health and safety.
Social and governance initiatives do also encompass privacy, cyber, and data security, which is always top of mind across all industries, but is particularly of concern to technology and software as a service businesses. There is very much a sector component to the social and governance pillars. Whereas our mining companies may have a focus on employee health and safety, and the impact on local communities that their businesses have, our technology and telecommunications businesses might focus more on digital inclusion and digital skill sets.
There’s also a compliance component. We’ve talked a lot about regulations and the social aspect of ESG is no different. The most broadly applicable change I’d highlight relates to Bill S211 – that’s the Fighting Against Forced Labour and Child Labor in the Supply Chains Act. It aims to address modern slavery, both here in Canada and globally. It applies to both public and private companies and the thresholds for applicability are not that high.
The law applies to entities listed on a stock exchange in Canada, but it also applies to organisations that have a place of business in Canada, those that do business in Canada, or have assets in Canada, and meet two of three criteria in at least one of the last two financial years. Those criteria are: $20 million in assets, $40 million in revenue, and 250 employees.
This law comes into effect January 1, 2024 and it imposes annual reporting obligations on corporations, trusts, partnerships, other unincorporated organisations where your activities include producing, selling, or distributing goods in Canada or elsewhere, importing goods into Canada, or if you control an entity engaged in those activities as well.
Those affected will need to file reports electronically by May 31, 2024 and those reports have to be published on the organisation’s website. They will also need to provide a copy to shareholders alongside the financial statements. Failure to comply can be costly and includes fines of up to $250,000 and liability for directors, officers, and individuals who do knowingly make false or misleading statements and attest to the report.
Lori: Another question we hear from members: ‘Is ESG reporting really just for large or public companies? And further to that, why would a private company want or need to report on ESG items?’
Vicki: I'm commonly asked by private companies, especially those that use IFRS, if IFRS S1 and S2 will apply to them. And the short answer is ‘no.’ Using IFRS as your accounting framework doesn't mean you're caught by the ISSB standards. In fact, those ISSB standards, despite having IFRS in the name, are GAAP agnostic, so they can be used with any accounting framework. Jurisdictions can choose how they adopt these standards, and we haven't yet seen any movement to adopt them for private companies in Canada. It is worth noting that some other jurisdictions haven't limited their sustainability reporting regulations to public companies. It isn't a ‘never’ from a Canadian perspective; there just isn't a plan at this stage.
Having said that, I talked about a few areas where private companies may have some sustainability reporting requirements. We've just talked about Bill S211 – that can apply to private companies. We've also talked about some of the overseas regulations where private companies may find themselves caught by local laws and regulations. But investors and regulators are not the only stakeholders in play here. As a private company, you may find your corporate customers, suppliers, financiers are asking you for sustainability-related information for their own reporting and compliance reasons.
A great example of that would be scope 3 GHG emissions. If one of your customers is reporting their scope 3 emissions, they may be looking to you, their supplier, to provide some of that information to allow them to estimate their own scope 3 emissions. Private companies may also wish to voluntarily report some of this information; it might depend on your strategy, sector, peer reporting, and so on. And if you have future IPO plans or fundraising plans, it might be useful to produce a sustainability report for future investors.
Lori: Can you speak a bit more to reporting and controls? What are you seeing other organisations put in place and what are the results?
Vicki: Of interest to CPAs, the IASB published some educational material on the effects of climate change matters on financial statements in November 2020 and refreshed this in July 2023. Some examples might be the impact of climate on the useful lives of assets, on your impairment testing, or on the obsolescence of inventory. I'm working with finance teams now as they start to think through those impacts on their own financial statements of climate change.
In terms of controls, CPAs will be familiar with the COSO internal control integrated framework and internal controls over financial reporting more generally. These are captured under NI 52-109 in Canada and the Sarbanes-Oxley Act (SOX) in the US.
In March 2023, COSO published supplemental guidance achieving effective Internal Control over Sustainability Reporting (ICSR). ICSR guidance is intended to support organisations in their journey to build trust and confidence in sustainability reporting, both for internal and external decision making. Companies that have well-established sustainability reporting processes are starting to think about how they can apply ICSR, and that might be for a few processes on a trial basis, perhaps starting with scope 1 and scope 2 GHG emissions. As a result, more and more I'm finding that internal audit is being tasked with playing a role in sustainability reporting.
Lori: What are some of the key roles that you see fellow CPAs taking on in the ESG space?
Vicki: Some might ask why ESG is landing on the desks of CPAs – the reality is, ESG has been a focus in the market in recent years and it impacts access to, and the cost of, capital. One of the most recent investor surveys I saw said that 98% of investors are evaluating ESG performance using corporate disclosures. Additionally, climate change and ESG risks and opportunities also impact the long-term financial performance and the long-term value of our clients’ businesses. Essentially, ESG non-financial data is being translated into financial data.
As well, ESG KPIs are being translated into business impacts and financial statement impacts, really in that core skill set of CPAs. In the nearer term, there are also risks related to the current voluntary sustainability reporting model, for example, the threat of greenwashing. Thinking through how accurate and balanced is the information that's being reported, what risk management activities do we need to undertake? That's where CPAs’ skills in process, controls, and data can support with these challenges. We also have green tax credits that can potentially be claimed in Canada. Whatever your role as a CPA, chances are that ESG touches one of your key areas of focus.
And how am I seeing CPAs using their skills? What are we doing now? Some key areas of focus are: addressing the immediate compliance and risk management actions; seeing CPAs using their skills to understand the current state of sustainability reporting in an organisation by focusing on accuracy, timeliness, standardization, and data management; leveraging our years of experience in financial reporting and disclosure to apply that to a sustainability lens; understanding sustainability reporting processes and controls; assessing the quality of the data being used; and thinking through materiality considerations, because the ISSB definition of materiality is not dissimilar to IFRS.
In terms of the future state of reporting, gap assessments, and CPAs getting their organisation where they want to be, we should be thinking about an implementation roadmap. In some cases, I'm seeing CPAs beginning to own sustainability reporting and in other cases, supporting subject matter experts on reporting matters. CPAs are really great at bringing together cross-functional teams to work through all of these issues.
What will be next on the agenda? In the next 18 months, I think more strategically, ESG will become part of the target finance operating model. It'll become part of enterprise performance management if it isn't already, in terms of budgeting, forecasting, and KPIs.
The next step in the journey is also to begin alignment of the strategic vision of the organisation to the long-term value, to think about how we can continuously improve and start to upskill talent, and upskill resources with ESG information. We're also starting to think about digital and technology usage for ESG and finance.
Beyond this, longer term, what will we see? I see the role of finance as a catalyst. So improving efficiency, creating value, developing predictive data and analytics, inputting into strategic decision making, and integrating financial and non-financial data.
Lori: If members would like to learn more about the topics we've discussed, what resources would you recommend?
Vicki: For a deeper dive on IFRS S1 and S2, I'd recommend EY's on-demand Financial Reporting Developments Fall series for sustainability reporting. That webcast also includes an interview with Janice Anderson, CPA, CA, one of the board members of the CSSB, so it’s great for a bit more Canadian context. We also have a Beyond the Bottom Line series for CFOs and finance teams on the changing role of finance and sustainability. EY also just published the guide, Applying IFRS – Introduction to IFRS S1 and IFRS S2.
Finally, CPA Canada has a CPD course called A New Frontier: Sustainability and ESG for CPAs and Business Professionals, which may be of interest to members looking to get into the details.
Note: This interview was recorded on December 8, 2023. As information, standards, regulations, and deadlines change rapidly, information in this article may no longer be current. Please check the sources mentioned for the most up-to-date information.
Lori Mathison, FCPA, FCGA, LLB is the president and CEO for the Chartered Professional Accountants of British Columbia (CPABC).