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Tammy Nemeth: Buckle up, businesses. Even more climate standards could be coming to drive up your costs

Commentary
People participate in a climate protest on Parliament Hill in Ottawa on Friday, Sept. 15, 2023. Sean Kilpatrick/The Canadian Press.

Businesses, take note: mandatory sustainability and climate-related financial disclosure standards are on the horizon. If you thought productivity and competitiveness have been lagging in Canada, the Canadian Sustainability Standards Board (CSSB) sustainability and climate-related disclosures will hardly improve the situation.

These standards, which revolve around the vague and undefined concept of “sustainability” and the shifting science of climate change, have the potential to increase costs, hinder competitiveness, and expose companies to the risk of climate lawfare. They are designed to do nothing less than change the entire economic system.

Last year, the International Sustainability Standards Board issued standards that are under consideration for endorsement by the CSSB, which was created in 2022 to support the adoption of the ISSB standards. After nine months of consideration, the warrior accountants of the CSSB released Canada’s carbon copy version of sustainability and climate-related financial disclosure standards for public comment. The consultation deadline is June 10th.

The CSSB standards will apply to publicly traded companies, but non-publicly traded businesses may need to comply with aspects of the standards if they are part of a larger company’s supply chain. The standards will initially be voluntary until mandated by regulators like the Canadian Securities Administrators (CSA), which has said it will consider incorporating the standards into a mandatory rule in the near future.

Supporters argue that mandatory climate disclosures will enable investors to gather the same data from every business and then use that to shift investment in order to support the transition to net-zero emissions by 2050. However, the comprehensive nature of these disclosures, integrated into financial statements, presents significant but little-understood risks for Canadian businesses. These risks include the financial burden of compliance, the competitive disadvantage compared to Canada’s major trading partners, and the potential for legal liability.

The CSSB standards mandate an array of information and data gathering such as transition plans based on climate scenario analysis, internal emissions accounting, and Scope 3 emissions accounting (that is all indirect emissions within a supply chain upstream and downstream—classified into 15 categories including transportation, distribution, processing, use, disposal). Surprisingly, the CSSB has not conducted a cost-benefit analysis of implementing the standards. Instead, board members have referenced a cost-impact analysis of the ISSB standards by the Australian government. Converted into Canadian dollars, for publicly listed companies with at least 100 employees and $50 million in annual turnover, the average initial cost of compliance is approximately $1.1 million, with annual recurring costs around $641,000.

What accounts for these expenses? Employees will have to be hired and trained to collect and report on this information, or an outside party will have to be engaged to do so. Estimates for climate scenarios run between $100,000 and $400,000 depending on the size of company and detail required. Subscriptions for data gathering software can also be pricey, not to mention the requirement for mandatory Scope 3 emissions data collection and analysis. This redirection of funds could otherwise be used to improve products and services or distribute profits to investors, but instead, a significant portion will be directed to climate consulting and law firms, many of which appear to support the standards for self-serving reasons.

Canada should prioritize alignment with our Canada-U.S.-Mexico trading partners rather than focusing on other countries with whom our trade is minimal. Instead, the CSSB standards seem to align with the European Union. It is worth noting that only 8 percent of our export trade goes to the EU, whereas 78 percent of our export trade goes to the U.S. Although the U.S. Securities and Exchange Commission (SEC) has introduced a climate disclosure rule, it has been indefinitely stayed pending legal challenges.

Even if the rule is upheld, not only do certain key aspects of it remain voluntary, such as climate scenario analysis, Scope 3 emissions accounting, and transition plans, but the rule also includes safe harbour provisions, which lower legal and liability costs for companies. Safe harbour is defined as “protection from liability if certain conditions are met…to give peace of mind to good-faith actors who might otherwise violate the law on technicalities beyond their reasonable control.” There are no such provisions in the CSSB standards. Once mandatory, the CSSB standards could put Canadian manufacturers, resource companies, and food producers at a competitive disadvantage, as they may face added financial or regulatory burdens that their North American counterparts do not.

The integration of CSSB disclosure standards into financial statements has legal implications. The CSSB standards expose companies, and those reporting to them like small or individual operations, to potential liability and litigation through several provisions. The standards require extensive forward-looking information and reporting on matters outside a company’s direct control, such as Scope 3 emissions accounting, climate scenario analysis, and transition planning.

The complexity of measuring and reporting sustainability metrics cannot be overstated. In contrast to traditional financial reporting, sustainability and climate financial reporting involve a mix of qualitative and quantitative data, often subject to interpretation and manipulation. Potential liabilities could be mitigated with safe harbour provisions, but the CSSB standards do not offer such protections. Even though other jurisdictions like Australia and the U.S. do provide such safe harbours for Scope 3 emissions, climate scenario analysis, and transition plans, the CSSB standards leave Canadian companies legally vulnerable to uncertainties in their statements, data, and projections.

Advocates for the standards argue that extensive data gathering and meticulous monitoring of company performance, with a focus on climate rather than profitability, will bring significant benefits to society. The actual impact of these efforts remains to be seen, but one thing is certain: mandating sustainability and climate-related financial disclosure standards will deeply transform our economic system.

Yet, few are aware of these developments because they have been taking place in the enigmatic realm of accountancy and appointed industry standards setters. The profound implications of these standards on our economy and society underscore the need for a robust and broad public conversation, rather than relying solely on unelected standard-setting bodies to make those decisions. Now is the time to engage in that conversation and shape those standards before they are set. The deadline for comments is June 10th.

Douglas Porter: It’s time for the Bank of Canada to pull the trigger on an interest rate cut

Commentary
Bank of Canada Governor Tiff Macklem and Carolyn Rogers, Senior Deputy Governor hold a press conference at the Bank of Canada in Ottawa on Wednesday, March 6, 2024. Sean Kilpatrick/The Canadian Press

We have now reached a moment of truth for at least two major central banks. With the Federal Reserve all but certain to keep rates steady at the June federal open market committee meeting, and most likely into late July as well, the European Central Bank (ECB) and the Bank of Canada (BoC) must now decide whether to essentially go it alone at rate decisions tomorrow.

There actually doesn’t seem to be all that much debate at the ECB. Even with a mild upside disappointment in the early read on Euro area May inflation— both headline and core Consumer Price Index (CPI) came in a tick high at 2.6 percent and 2.9 percent, respectively— officials have heavily signalled a rate cut is coming on Thursday. Following the earlier lead of first Switzerland, then Sweden, the ECB is widely expected to clip its refinance rate 25 basis points to 4.25 percent, nearly two years after first lifting it from zero.

The picture for the Bank of Canada is much less clear-cut. With its much tighter linkages to the U.S. economy, it’s a much bigger decision for Canada to carve out a quasi-independent policy path. But, unlike the U.S. experience so far in 2024, Canada has seen a run of better-than-expected inflation results, cutting all major measures of core inflation to below a 3 percent annual pace, and below a 2 percent trend in the past three months.

And the final piece of the Bank of Canada’s puzzle—Q1 real GDP—came in much lighter than expected at 1.7 percent growth, on the heels of a big downward revision to the prior quarter to just 0.1 percent (from 1.0 percent). Even with a rebound in April, the bigger picture is that GDP is up less than one percent in the past year, compared with almost 3 percent year-over-year U.S. growth over the same period.

Graphic credit: Janice Nelson

In other words, the U.S. economy has outpaced Canada’s by more than 2 percent in the past year, a very wide gap indeed. The U.S. core consumer price index is running at 3.6 percent year-over-year, almost a full point above the comparable measure in Canada. And, the U.S., unemployment rate has nudged up a half point in the past year to a still-low 3.9 percent, while Canada’s jobless rate has jumped a full point to 6.1 percent. Reinforcing that message, the job vacancy rate in Canada has fallen all the way back to pre-pandemic levels at 3.4 percent. Pulling all these threads together, there is a very good case for the Fed to remain patient, but there is an equally good case for the Bank of Canada to begin trimming rates, forthwith.