The Office of the Superintendent of Financial Institutions (OSFI) published new expectations for the management of client-related risks known as Guideline B-15. This Guideline will be effective fiscal-year end 2024 for Domestic Systemically Important Banks (DSIBs) and Internationally Active Insurance Groups (IAIGs) headquartered in Canada.
The International Sustainability Standards Board (ISSB) published its first two sustainability disclosure standards on June 26, 2023, entitled IFRS S1 and IFRS S2. These standards are set to be effective starting January 1, 2024, or thereafter.
The primary objective in implementing these standards is to guarantee that organizations incorporate sustainability details with their financial statement reports. The standards mandate detailed disclosure requirements to enable financial reporting users to determine whether they are properly managing and evaluating sustainability and climate-related risks. The standards incorporate the recommendations of the Task Force on Climate-related Disclosures.
How the new ISSB standards will affect lenders
As these recent developments integrate into the Canadian regulatory framework, it is essential for lenders to assess the intersections between these guidelines with the OSFI standards to evaluate how these new regulations will affect the drafting of loan agreements.
OSFI has expressed their commitment to revise their guideline further as the standards surrounding climate change disclosure evolve, which should include updating their disclosure requirements upon the release of the ISSB publishing their standard climate-related disclosures.
If the ISSB Standards become mandatory or strongly encouraged in Canada, there will be several required disclosures. Some of these disclosures include:
- Publicizing progress made towards reaching certain metrics and targets.
- Disclosure regarding greenhouse gas emissions.
- Disclosure of financed emissions.
According to the ISSB guidelines, companies will have a responsibility to disclose the following:
- Government processes.
- Strategies for managing sustainability and climate opportunities.
- Processes used to identify and monitor climate risks as well as evaluation methods pertaining to various climate-related objectives and targets.
While the ISSB Standards in Canada are currently optional, it is probable that Canadian entities will voluntarily report using these standards. Following the announcement of the new ISSB standards, numerous comments and perspectives were published, indicating broad endorsement for these standards and suggesting a likely integration into routine procedures. Thus, the growing demands and scrutiny on financial institutions to address climate change are expected to put pressure on banks, compelling them to integrate emerging ISSB standards into their lending criteria.
In addition, the Canadian Sustainability Standards Board published a statement confirming that they will be supporting the ISSB standards in Canada and that they will be collaborating with other Canadian regulatory bodies. Following the adoption of these standards, Canadian entities will be required to act with increased transparency regarding their sustainability and climate-related effects on financial reporting.
The new ISSB standards' impact on future loan agreements
General standards such as IFRS are commonly adopted in credit agreements. Similarly, it is foreseeable that the ISSB terms will find their place within these credit agreements as well.
Thus, these new ISSB standards may become an integral component of conventional credit agreement covenants, particularly as DSIBs and IAIGs seek to align with OSFI Guideline B-15. Therefore, lenders should become familiar with these standards now to ensure that they are prepared for their use in future loan agreements.
If you would like to discuss how the new ISSB standards might impact your loan agreements or have any questions, please contact the authors or a member of the Lending Group.