Climate Disclosures for Federally Regulated Institutions – Canada

ESG regulations requiring Canadian financial institutions to disclose climate-related financial risks within their portfolios

Written by Noah Miller

Reviewed by Kyle Peterdy

What are the New Climate Disclosure Rules for Federally Regulated Institutions?

These regulations state that starting in 2024, federally regulated financial institutions, like banks and insurance companies, will be required to disclose their climate-related risks and exposure.

For example, there are physical risks associated with climate change, such as extreme weather events and water scarcity. These can affect businesses and assets directly, leading to property damage, operational breakdowns, and supply chain disruptions.

These regulations are thematically consistent with other notable regulations, such as the The U.S. SEC’s proposed climate disclosure rules and the U.K. government’s climate-related financial disclosures for companies and LLPs.

Key Highlights

These regulations will require teams at financial services firms to understand climate risks within their portfolios.
These disclosure rules are aligned with recommendations set out by the TCFD.
It’s expected that these disclosure regulations will support Canada’s net-zero commitments.
These regulations will go into effect in 2024.

Important Elements of the New Climate Disclosure Rules

The rules were announced April 7, 2022, in line with the Canadian government’s federal budget. The budget included an $8 billion investment to support projects that reduce the country’s greenhouse gas emissions (GHG).

The New Climate Disclosure regulations were introduced in that budget under Chapter 3, “Clean Air and a Strong Economy.”[1]

Federally regulated institutions must track and report climate-related metrics. The metrics will align with the Task Force on Climate-Related Financial Disclosures (TCFD) framework.[2]

What is the TCFD?

The TCFD is a global initiative to develop a set of voluntary, consistent, climate-related financial disclosures for use by companies, banks, and investors. TCFD is directly used (or significantly influencing the climate risk disclosure regulations) in major economies around the world.

The TCFD recommends 4 core elements of climate-related disclosures for the financial sector:

Governance – the organization’s governance around climate-related risks.
Strategy – the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, processes, and financial planning.
Risk management – the processes used by the organization to identify, assess, and manage climate-related risks.
Metrics and targets – the long-term goals and associated metrics used to demonstrate progress against climate-related risks.

Why are Climate Disclosure Regulations Important?

There are three major areas of importance. These are:

Canada’s emission reduction plan

These regulations are part of the Canadian government’s plan and commitment to become net zero by 2050. They are also a key component in achieving Canada’s 2030 Emissions Reduction Plan to cut GHG emissions by 40-45%.

Given the importance of transition activities in moving towards a net-zero economy, one can expect this regulation to be heavily enforced with significant financial and reputational consequences for firms that take these regulations lightly.

Financial opportunities

With $8 billion dedicated to greenhouse gas emissions reduction projects in Canada’s federal budget, significant financial opportunities could exist for entities that can directly contribute to reducing these GHG emissions — by way of their products, services, or business models.

Companies that can contribute to and actively promote the environmental goals set under these regulations should glean a host of financial, reputational, and strategic opportunities.

Raising the disclosure bar across the private sector

In its current form, these regulations only apply to federally regulated financial institutions. However, once these regulated institutions begin the process of assessing climate risk and emissions data from their clients, the clients will have significant data provision mandates that they’ll be required to meet.

The private sector will indirectly need to develop the strategic and governance capabilities, and internal infrastructure to collect and present this information. This is expected to raise the bar on climate and ESG disclosures across the entirety of the Canadian private sector.

Implications of the New Climate Disclosure Rules for Federally Regulated Institutions

Different stakeholders will be impacted in different ways. The core groups include:

The analyst community – the Climate Disclosure Rules for Federally Regulated Institutions provide critical information about a firm’s climate risks and opportunities. This information helps capital providers make informed decisions about the long-term financial risks associated with their funding decisions.

Additionally, adding ESG and climate risk factors to companies’ reporting means investors must acquire additional capabilities to analyze and assess such factors as they relate to their investment thesis and client expectations.

Management teams – these regulations can help firms identify and manage climate risks and opportunities. By disclosing GHG emissions and other climate-related information, companies can also demonstrate their commitment to sustainability, transparency, and stronger governance functions.
The general public – these regulations require that financial institutions understand essential information about the environmental impacts of their portfolio companies. This in turn creates greater transparency for consumers, too.

By providing clarity around a company’s climate impact(s), the public can decide which companies they want to support, advocate for, and invest in (retail investors).