In recent years, there have been critical global and national developments in sustainability reporting, including the creation of the International Sustainability Standards Board (ISSB) under the International Financial Reporting Standards (IFRS) Foundation.
WHY IS THIS RELEVANT FOR CANADA?
An increasing number of entities reporting within Canada provide information on their sustainability performance. As reporting increases and momentum continues toward a global sustainability reporting system, Canadian entities must be familiar with the changing sustainability reporting landscape.
CPAs will need to understand the reporting requirements and be capable of identifying risks and opportunities that exist for their organizations and clients.
Outlined below are key updates from the profession, standard setters and regulators, which will provide you with an understanding of the ongoing developments.
This page captures developments as of May 11, 2023.
The Independent Review Committee on Standard Setting in Canada (IRCSS) and the Canadian Sustainability Standards Board (CSSB)
As part of the IRCSS’ recommendations, the CSSB was formally announced in June 2022 and aims to be operational by April 2023.
A CSSB Implementation Committee will establish the groundwork including instituting the recruitment process for a Chair and Board members, and defining the governance and process-related considerations for the Board. In October 2022, a call was issued for the inaugural Chair of the CSSB.
The review by the IRCSS of the governance and structure for establishing Canadian accounting, auditing, and assurance standards, and to identify what might be needed for the future – including sustainability standards – is now complete. The final report was issued on March 1, 2023.
Canada was appointed as one of 13 jurisdictions and regions from around the world to form the new Sustainability Standards Advisory Forum (SSAF). The SSAF will work with the ISSB towards a comprehensive global baseline of sustainability-related disclosure for capital markets. CPA Canada will serve as the interim Canadian member prior to the establishment of the CSSB.
Updates on the IRCSS in Canada can be accessed on their website.
Updates on the CSSB can be accessed on the Financial Reporting and Assurance Standards (FRAS) Canada website.
ISSB updates on developments toward global sustainability standards
Over 1,400 comment letters were received on the ISSB’s first two exposure drafts:
In February, the ISSB made its final decisions on all the technical content of IFRS S1 and IFRS S2. The ISSB has now entered the drafting and balloting process of the standards ahead of their expected issuance at the end of Q2 2023. Both standards will be effective for annual reporting periods beginning on or after January 1, 2024, with earlier application permitted under certain circumstances. However, there is expected to be transition relief in IFRS S1 that would allow an entity to report on only climate-related risks and opportunities in the first year it applies IFRS S1 and IFRS S2.
Included below is high-level summary of some of the key tentative decisions/developments to date. Additionally, based on feedback received, research will be conducted on incremental enhancements that complement the proposed standards, including relating to natural ecosystems and the human capital aspects of the climate resilience transition (just transition).
IFRS S1: General Requirements for Disclosure of Sustainability-Related Financial Information
- Scalability/proportionality – mechanisms to be identified to make disclosure scalable, when relevant; will provide guidance to assist preparers in applying the standards
- Fundamental concepts – use the same definition of “material” that is used in IFRS Accounting Standards
- Objective – clarify the objective of IFRS S1 by articulating the value creation process and the relationship between value and sustainability
- Illustrative guidance – clarify the distinction between identifying sustainability-related risks and opportunities and material information; provide additional guidance to identify risk and opportunities and material information
- Frequency of reporting – expect sustainability-related financial disclosures at the same time as related financial statements but introduce short-term transitional relief
IFRS S2: Climate-related Disclosures
- Scalability/Proportionality – mechanisms to be identified to make disclosure scalable, when relevant; will provide guidance to assist preparers in applying the standard
- Climate resilience – require an entity to assess its climate resilience using a climate-related scenario analysis method commensurate with its circumstances and that considers all reasonable and supportable information available at the reporting date without undue cost or effort
- Greenhouse gas (GHG) emissions – remove the requirement to disclose GHG emissions intensity; introduce a requirement to disclose why the entity has used specific inputs, assumptions and estimation techniques to measure its GHG emissions
- Scope 3 GHG emissions – proceed with the requirement to disclose Scope 3 GHG emissions; introduce the concept of ‘reasonable and supportable information that is available at the reporting date without undue cost or effort’ to assist companies in applying requirements
- Industry-based requirements – incorporate industry-based requirements in Appendix B into the illustrative guidance
ISSB Consultation on Agenda Priorities
On May 4, 2023, the ISSB published the Request for Information Consultation on Agenda Priorities to seek feedback on its priorities for its next two-year work plan. Based on research into the information needs of investors, the ISSB is seeking feedback on potential research projects focused on:
- sustainability-related risks and opportunities associated with
- biodiversity, ecosystems and ecosystem services
- human capital
- human rights
- how to integrate information in financial reporting beyond the requirements related to connected information in IFRS S1 and IFRS S2
The Request for Information is open for comment until 1 September 2023.
ISSB Exposure Draft on Sustainability Accounting Standards Board (SASB) Standards
On May 11, 2023, the ISSB published for comment an Exposure Draft of Methodology for Enhancing the International Applicability of the SASB Standards and SASB Standards Taxonomy Updates. The Exposure Draft is open for comment until August 9, 2023.
Information on the ISSB, including meeting agendas and papers can be found on its website.
EU sustainability standards
On December 16, 2022, the final text of the Corporate Sustainability Reporting Directive (CSRD) was published in the Official Journal of the European Union. The CSRD will extend to large and listed EU companies. Additionally non-EU entities having at least one subsidiary or branch in the EU and generating net turnover of EUR 150 million in the EU will be subject to the sustainability reporting requirements. The reporting requirements will be phased in over time for different kinds of companies with the first set of companies being required to apply the standards in financial year 2024, for reports published in 2025.
The final CSRD confirmed the role of the European Financial Reporting Advisory Group (EFRAG) as the technical advisor to the European Commission developing draft European Sustainability Reporting Standards (ESRS) along with their basis for conclusion, cost-benefit analysis and guidance for Digital Reporting. The CSRD will require in-scope companies to report on sustainability-related issues based on detailed disclosure standards developed by European Financial Reporting Advisory Group.
In November 2022, EFRAG submitted the first set of draft ESRS to the European Commission (EC). The EC will now consult EU bodies and Member States, before adopting the final standards as delegated acts in June 2023, followed by a scrutiny period by the European Parliament and Council.
In October 2022, the Canadian Securities Administrators (CSA) announced that it is actively considering the impact of international developments and how they may impact or further inform the proposed climate-related disclosure rule which was published in October 2021.
In a recent Staff Notice on its continuous disclosure review program activities for the years ended March 31, 2022 and 2021, CSA staff indicated that they have observed an increase in “greenwashing” in continuous disclosure documents as well as voluntary documents, such as sustainability or ESG reports and public surveys. CSA staff note that when describing current and proposed ESG related activities, issuers should avoid using misleading promotional language. Further, the staff notice highlights that statements regarding carbon neutrality will generally constitute forward-looking information (FLI). The issuer must have a reasonable basis for the FLI, identify the material risks factors that could cause actual results to differ materially, state the material factors or assumptions used to develop the FLI and describe its policies for updating the information.
In April 2023, the CSA announced that it is seeking public comment on proposed amendments to corporate governance disclosure rules and policy relating to the director nomination process, board renewal and diversity. The proposed amendments would require disclosure on aspects of diversity beyond the representation of women, while retaining the current disclosure requirements with respect to women. Comments on the proposals are due by July 12, 2023.
The SEC is considering feedback received on its proposes rules to enhance and standardize climate-related disclosures for investors, which was issued in March 2022. Based on its rule-making agenda for 2023, the SEC plans to finalize the rules in April of this year.
In December 2022, the International Public Sector Accounting Standards Board (IPSASB) confirmed its role in advancing public sector sustainability reporting. It has decided to begin the scoping of three potential public sector specific sustainability reporting projects pending securing the resources needed to begin guidance development. The prioritized research topics for these projects are:
- general requirement for sustainability-related financial disclosure;
- climate-related disclosures;
- natural resources – non-financial disclosures (in parallel with the development of financial reporting guidance proposed in its Consultation Paper, Natural Resources).
ASSURANCE ON SUSTAINABILITY REPORTING
International Auditing and Assurance Standards Board (IAASB)
The IAASB is currently working on a project to develop an overarching standard for assurance on sustainability reporting.
The International Ethics Standards Board for Accountants (IESBA)
In June 2022, the IESBA resolved to take timely action to develop fit-for-purpose, globally applicable ethics and independence standards as a critical part of the regulatory infrastructure to support transparent, relevant and trustworthy sustainability reporting.
In early December 2022, the IESBA approved two new projects that will deliver the following:
- Profession-agnostic independence standards for use by all sustainability assurance practitioners
- Specific ethics provisions relevant to sustainability reporting and assurance
As part of the project, the IESBA will determine the format, structure and packaging of the profession-agnostic ethics and independence standards for sustainability assurance so they not only set a high ethics bar but also can be adopted and applied by assurance providers from any profession.
- Specific ethics and independence provisions addressing the use of experts by organizations as well as in the context of audit and assurance engagements (including sustainability assurance)
The IESBA is aiming to approve the exposure drafts in Q3/Q4 2023 and the final standards in Q4 2024.
Further information can be found in the IESBA’s December 2022 Update.
NOTE: Resources created by external organizations were not reviewed, developed or approved by CPA Canada. CPA Canada accepts no responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on these external resources.