Towards A Shared Understanding: Canada’s New Sustainable Investment Guidelines & Mandated Climate Disclosures – Environmental Law – Environment

On October 9, 2024, the federal government announced progress on
two recent key commitments: development of voluntary
“Made-in-Canada sustainable investment guidelines” (the
“Canadian Taxonomy“) and implementation
of mandatory climate-related financial disclosures for certain
federally incorporated entities. Both initiatives were foreshadowed
in the federal government’s previous policy platforms,
including in the 2023 Fall Economic Statement and Budget 2024.

A Canadian investment taxonomy aims to establish a credible
classification system for investors, lenders and the capital
markets to use when making green and transition investments.

Mandated climate-related disclosures are not new in Canada.
Other jurisdictions, local and international organizations, and a
number of regulators have extensively considered the design and
scope of similar types of mandatory disclosures and investment
guidelines. These serve to inform the current federal initiatives
and their potential impact on businesses.

Climate-Related Disclosures

On October 9, the federal government confirmed that it intends
to introduce amendments to the Canada Business Corporations
Act (the “CBCA“)to mandate
climate-related financial disclosures for large, federally
incorporated private companies. The government intends to launch a
regulatory process to determine the substance of the required
disclosure requirements and the size of private federal
corporations that would be subject to them (e.g., by reference to
number of employees, revenue generated, or asset size).

While further details are not yet available, the government
stated that it will seek to harmonize its regulations with
securities regulatory authorities. This may include the work of the
Canadian Securities Administrators, which earlier this year
welcomed the launch of the Canadian Sustainability Standards
Board’s (“CSSB“) consultation on Canadian
Sustainability Disclosure Standards 1 and 2, noting its
interest in the feedback to inform its own proposed climate-related
disclosure rule (NI 51-107).

In addition, given that the Office of the Superintendent of
Financial Institutions (“OSFI“) requires
as of 2024 federally regulated financial institutions to make
climate-related disclosure, the proposed amendments to the CBCA are
a further step forward toward mandatory disclosures for large
private companies.

The Canadian Taxonomy

The Canadian Taxonomy will follow the principles recommended by
the Sustainable Finance Action Council
(“SFAC“) and will incorporate guidelines
from international organizations and other international climate
investment taxonomy in order to ensure alignment with international
standards. The development of the Canadian Taxonomy will be
overseen by independent arm’s-length organizations.

The Canadian Taxonomy’s classification system will set out
which economic activities will be considered environmentally
sustainable and will set out qualification criteria for both
“Green” and “transition” activities which will
broadly be defined as follows:

• Green Activities – low-or zero-emitting activities
  without material scope 1 and 2 emissions and low or zero downstream
  scope 3 emissions, such as green hydrogen and solar and wind
  generation, and those that enable them. These activities are
  expected to be ones that will sell into or benefit from markets
  expected to grow in the net-zero transition;




• Transition Activities – decarbonizing emission-intensive
  activities central to the energy transformation. These will have
  material scope 1 and 2 emissions but are on a path to making
  significant reductions and have low or zero scope 3 emissions.
  These are activities that are not expected to create carbon lock-in
  and path dependency.

Of particular interest will be the specific activities the
Canadian Taxonomy consider as potentially eligible green or
transition activities. The Canadian Taxonomy will initially focus
on electricity, transportation, buildings agriculture and forestry,
heavy industry manufacturing and heavy industry extractives,
including mineral extraction and processing, and natural gas, but
excluding new natural gas production. The independent third-party
organizations will be charged with releasing a taxonomy for two to
three of these sectors within 12 months of it “beginning its
work” which will effectively result in any such taxonomy being
released in 2026.

Further information on the Canadian Taxonomy is available in the
government’s backgrounder.

Potential Implications

Many companies have already been impacted by initiatives in
other jurisdictions relating to either or both climate-related
disclosures and/or sustainable investment taxonomies.

Numerous companies, especially larger public companies, are
already voluntarily reporting in accordance with adopted
environmental, social and governance frameworks or standards, with
some openly articulating the taxonomy they are using. Many of these
companies disclose greenhouse gas emissions, and a lower (but
increasing) number are also reporting on their Scope 3 emissions
alongside their Scope 1 and Scope 2 emissions. The experience of
these companies can be expected to inform the scope, design,
implementation and exemptions of the Canadian Taxonomy and the
mandatory climate-related disclosures.

Adherence to the principles behind investment taxonomies and
well thought-through disclosure of climate related risks, whether
voluntary at this time or mandatory in the future, will assist
companies in defending misrepresentation claims, including under
the Competition Act, as well as defending ESG-related
litigation and defeating shareholder activist initiatives.

The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.

© McMillan LLP 2024