As we addressed here, the Canadian Sustainability Standards Board issued for comment its first two proposed standards.

These are proposed Canadian Sustainability Disclosure Standard (CSDS) 1 General Requirements for Disclosure of Sustainability-related Financial Information  and CSDS 2 Climate-related Disclosures, built on the pre-existing IFRS S1 and S2. As we’ve previously noted, the key decision on whether and how these standards, or some version of them, will be made by Canadian securities regulators, not by the CSSB. But various commenters on the exposure draft made observations on aspects of this, not least the TMX Group Limited, the entity that operates Canada’s most prominent stock exchanges (for non-Canadian readers, the term “venture issuers” applies to companies listed on the smaller of its two main exchanges, referred to below as the TSXV);

• The majority of venture company investors are retail investors, investing on their own behalf with objectives and mandates that differ from those of institutional investors, and may not require complex and elaborate disclosures as contemplated by the Draft Standards. TSXV conducted an investor survey in late 2022 to better understand the types of disclosures they considered most valuable. “ESG and sustainability reporting” was ranked lowest by venture market investors, out of nine factors. Rather than a complete lack of regard for sustainability-related disclosures, the results reflected a fact well understood in the venture community – that the primary focus for early stage companies is on deploying their scarce resources to maintain critical operations and meet fundamental financial reporting disclosure requirements, and that costs associated with meeting additional disclosure requirements would negatively impact growth early in their lifecycle. While some venture issuers will voluntarily comply with new rules (and may very well adapt their business models to accommodate if requested by their investors), for the large majority of venture issuers, existing Canadian securities laws that require the disclosure of material risks (including those relating to climate) will continue to satisfy the needs of venture-focused retail investors.

The TMX Group therefore believes it “appropriate and necessary to provide an exemption to venture issuers from the mandatory application of the disclosures contemplated by the Draft Standards.”

That’s not the only available way of carving the population up of course. Financial Executives International Canada said the “mandated CSDS disclosure requirements should apply only to TSX reporting issuers” but then added: “An alternative to the above distinction between TSX and non-TSX reporting issuers could be a size test. We recommend the Canadian equivalent to the size test applied in the UK for certain regulations for reporting issuers, i.e. Market cap greater than 200 million Euros plus annual turnover greater than 750 million pounds plus number of employees greater than 750.” In a similar vein, ESG Global Advisors reported on consultation roundtables in which preparers suggested that the CSSB consider the following thresholds:

• Exchange listing – e.g., TSX vs. TSX Venture similar to existing securities regulation;
• Employee headcount given important connection to human capital resource availability and a suggestion to define small, medium and large companies consistent with the federal government’s existing definitions;
• Revenue with due consideration given to pre-revenue companies;
• Carbon intensity to take a “materiality” approach and ensure that from a risk/opportunity perspective the most significant emitters by sector are required to report in the near term and smaller companies with less significant emissions are provided further relief.

A further complexity is the number of Canadian entities listed on US markets and thereby subject to the differing rules issued by the SEC (if and when implemented). As Enbridge Inc. pointed out: “The CSDS do not currently contain a mechanism to allow interlisted issuers to follow either the Canadian or the U.S. rules (as opposed to being subject to two conflicting sets of requirements). Failure to include such a mechanism would result in unnecessary complexity, inconsistency, and diminished comparability for investors, as well as significant additional cost to issuers. We therefore recommend that the CSSB consider alternatives to allow companies to follow a single set of disclosure rules (such as) an exemption provision for companies that comply with the rules of other jurisdictions.”

Anyway, the main virtue of defining exemption thresholds, at least initially, with reference to the exchanges on which entities are listed is simply that it’s easy to apply (this for example is how Canadian regulators distinguish between companies required to file their audited financial statements within 90 versus 120 days of the end of the financial period); the other suggestions set out above would all require greater interpretation, with a possibly greater risk of anomalous results. It’s certainly true that some venture companies may be (in the words of that last bullet point above) more significant emitters than many entities on the senior exchange, suggesting a public interest in obtaining more detailed disclosure from those companies as well. But probably not yet…

The opinions expressed are solely those of the author.