May 6, 2022
Canadian Standard Setting needs to keep up with the rapidly evolving ESG issues and long-term public interests must be at the foundation of its development
The recent release of a consultation paper by the Independent Review Committee on Standard Setting in Canada came at an important juncture for standard setting in Canada, particularly in the context of sustainability disclosure standards. The committee set out to conduct a review of the current governance and structure for establishing Canadian accounting and assurance standards and to what extent they were fit for the future.
The committee’s approach was to focus on the public interest, diversity, equity and inclusion, and Indigenous rights. Its efforts to undertake such a complex and overdue task are to be applauded. Of the questions posed by the committee in its public consultation process, two warrant special attention – the establishment of a common public interest framework and the issue of whether a Canadian Sustainability Standards Board needs to be established.
The committee calls for a common public interest framework as a potentially helpful tool against which the Canadian standard-setting process can be evaluated. It is important to establish a conceptual framework to avoid getting pulled in competing directions by different stakeholders and to avoid the risk of capture -or the perception thereof- by those stakeholders who benefit from more standards not better performance on material issues.
Moreover, given the dynamic materiality of many environmental, social and governance (ESG) issues, a conceptual approach, as opposed to a prescriptive one, would allow for more flexibility in standard setting. The traditional standard setting process cannot keep pace with the rapidly evolving nature of ESG issues. For example, science-based targets keep changing to reflect evolving scientific understanding of the climate threat, and so do awareness, industry norms and stakeholder concerns. The risk of future pandemics as we further encroach on nature might also rise, requiring more corporate resilience and disclosure on such issues. Populism, social unrest, involuntary migration, and now heightened risks of reigniting a great power cold war at best or hot war at worst, have further shifted the realities that most businesses confront, thus requiring an adaptive approach to standard setting that supports investors’ interest in disclosure on corporate resilience.
It was helpful to see the committee’s nod to the recent establishment by the International Financial Reporting Standards (IFRS) Foundation of the International Sustainability Standards Board (ISSB) in recognition of the increased demand by investors and other stakeholders for information about companies’ ESG performance. The ISSB was formally launched in November 2021 with co-headquarters in Frankfurt and Montréal. Its mandate is to release a set of common ESG disclosure standards that corporate issuers around the world can adopt in order to standardize ESG reporting and facilitate comparison among reporting companies. The ISSB released the first draft of its recommendations in late March this year for a 120-day public comment period.
The committee raises the question of whether a Canadian Sustainability Standards Board (CSSB) should be independently established to work alongside Canada’s existing accounting and assurance boards and liaise with the ISSB. It is unclear whether a separate standards board is necessary given the added layer of bureaucracy it would entail and the current standard setting structure that already includes a two-tier system. Three standard-setting boards in Canada establish and maintain accounting and assurance standards to serve the public interest. They are, in turn, overseen by two oversight councils that appoint board members and oversee and provide input into the boards’ activities. There is no reason why this structure cannot handle the incorporation of the ISSB standards, especially given CPA Canada’s intimate involvement with both the current process and the ISSB.
It is also noteworthy that a committee set up in 2019 to develop a Canadian sustainable finance taxonomy has been gridlocked for months and has missed numerous deadlines for releasing its work. The concern about setting up a CSSB is that it might face similar obstacles and be subject to potential regulatory capture and competing influence from stakeholders with conflicting interests. Ultimately, an independent ISSB is likely best placed to develop reporting and assurance standards that address the long-term interests of a diverse range of stakeholders with minimal undue influence from local jurisdictions.