An investor’s guide to ESG reporting in Canada

There are some challenges that come with this newly defined investment territory, though: knowing who to trust, and how to compare various investment options in the ESG world. “It’s a bit of a wild west,” says Tim Nash, founder of Good Investing, a Toronto firm that offers research and coaching to support DIY sustainable investors. “It’s really hard for individual people to navigate.”

But “hard” doesn’t mean “impossible,” and as new reporting standards emerge, the landscape is becoming more transparent and easier to understand. Here are some things to know when it comes to ESG reporting and disclosure, and what to watch for in the future.

Why does ESG reporting and disclosure matter?

Imagine for a moment you’re parenting a pair of teenagers. “How’s school going?” you might ask them. Turns out, one is getting an A in math, and the other is at the top of their class in French. Sounds excellent—pat yourself on the back.

But, of course, what you’re getting here is cherry-picking: a report that highlights only the best results and doesn’t mention anything that might not be going well. You’ve also got results that are hard to compare. What does “top of the class” mean versus an A grade? Is one a better student than the other? Plus, this information is self-reported—how do you know it’s true?

This is the kind of situation investors face when it comes to ESG reporting and disclosure. While the requirements for public companies to report quarterly earnings, cash flow, long- and short-term debt, and other financial information are well established, the guidelines for ESG reporting are still a work in progress. Reporting can be as general as listing strengths and weaknesses, or as complex as disclosing carbon emissions, energy and water consumption, and waste, as well as social indicators (human rights, inclusion stats, etc.) and other ESG metrics. And this makes it difficult for investors to compare ESG investments. Without a standardized framework, it’s been a challenge to analyze and compare the value of companies and their funds. 

That doesn’t mean the ESG reporting you’ve seen is necessarily false, any more than your kids are necessarily going to lie about their grades. It just means that there’s room for improvement to make it easier for everyone to choose investments that truly reflect their goals and values.

Is ESG reporting and disclosure mandatory in Canada?

No, reporting on ESG performance is not mandatory in Canada, with the exception of federally regulated financial institutions (banks and insurance companies), which will have to start reporting in fiscal year 2024. Despite that, the practice of ESG reporting and disclosure is becoming more common across Canada’s financial landscape. 

“The challenge is that there haven’t been any universal global mandatory standards for companies or investors in relation to ESG,” says Sarah Keyes, chief executive officer of ESG Global Advisors in Toronto. “Yet given the desire for this information, we’ve seen a lot of voluntary reporting under way by both [large-scale] investors and companies.”

That said, even though companies might not technically have to report things like their greenhouse gas emissions or how much they pollute the planet, they may be under pressure to do so. “Companies are sort of being voluntold to do this,” Nash says. “They know if they don’t do it, it’s going to be harder to attract capital.”

Keyes points out that some companies are already using industry-specific reporting frameworks, such as the Sustainability Accounting Standards Board (SASB) Standards. “Most companies are supportive of a harmonized global baseline for sustainability reporting,” she says.  

Right now, though, the reality of who’s reporting and how varies from sector to sector and framework to framework. As of the end of 2022, for instance, there were 5,319 signatories worldwide to the United Nations–supported Principles for Responsible Investment (PRI), representing USD$121 trillion of assets under management. This includes a number of Canadian organizations, such as the United Church of Canada Pension Plan and Sun Life Assurance Company of Canada. These signatories have committed to principles including seeking disclosure on ESG issues from the companies they invest in and asking for standardized reporting on ESG issues. But, in general, there are no specific rules in place.

What ESG standards can companies follow?

Companies that want to start or improve their ESG reporting can tap into many sources of guidance, including international standards and frameworks. 

One of these, Nash says, is the Global Reporting Initiative (GRI), which provides reporting standards for sustainability that include everything from biodiversity to waste. Companies and organizations can follow GRI standards, including sector-specific ones, to create standalone or integrated ESG reports for their stakeholders.

Another framework that companies, asset managers and asset owners can adopt is the Task Force on Climate-related Financial Disclosures (TCFD) recommendations created by the Financial Stability Board, an international body established after the G20 summit in 2009. These recommendations help organizations and investors understand the financial implications of climate-related risks and opportunities. 

Here at home in Canada, there’s also the new Responsible Investment Identification Framework, put out by the Canadian Investment Funds Standards Committee (CIFSC). “They’ve standardized the different types of approaches used when it comes to responsible investing,” Nash says. You can download a spreadsheet that lists 383 funds, from Canadian to global and conservative to high-growth, and identifies which responsible investing methods they align with, things like exclusions (leaving out particular types of investments) and thematic investing (like a focus on clean energy). It’s not a super-detailed resource, but it’s a start.

Where to find ESG information from companies and funds

Rewind the tape a few years, and you might recall that before ESG was the abbreviation of the moment, companies wanting to brag about their non-monetary achievements were all about CSR, or corporate social responsibility. 

At some point, the investment industry began to pay attention, and it realized that “some of these issues are actually very material or relevant to a company’s bottom line,” Nash says. This attention—as well as demand for more-ethical investing options—drove a need for standardization that a number of organizations are still working on solving today. 

“What started as a marketing exercise for a lot of these companies is now squarely inside investor relations,” he says. “Companies are going out of their way to record, report and publish this ESG data, and investors are increasingly hungry for it.” 

To view this information, Nash suggests finding the “investor relations” or “for investors” section on a company’s website, then looking for a report labelled “sustainability,” “ESG” or “corporate responsibility.” Occasionally, ESG data will be rolled into a company’s annual report. And sometimes, you might not be able to find it at all—though that’s a good opportunity to let the company know you’d like to see it. 

Data from ESG research firms

In response to the demand for ESG information, a number of research companies began specializing in this area, compiling and analyzing data and then selling it to investors. “As soon as investors started catching on to this, that really started to drive the train,” Nash says. “Because money talks.”

There are now two firms that dominate in providing this information: Morningstar and MSCI. Both of these investment research services are U.S.-based but have global reach, and each has its own way of analyzing and presenting ESG data. “They take probably over 500 different key performance indicators across environmental, social and governance categories,” Nash says, then aggregate and score them. “At that point, it’s very easy to rank them.” 

You can explore their data on individual companies yourself, he adds, via Morningstar’s ESG Screener and MSCI’s ESG Ratings & Climate Search Tool. What’s available to the average investor is useful but unfortunately limited. 

A word of warning: In a lot of ways, these rankings are comparing apples with oranges. Plus, the impact of specific KPIs can vary between industries. “The methodology does vary sector by sector,” Nash says. “It’s really hard to compare companies across different sectors based on their ESG score.” Rankings also don’t take into account the products or services a company actually sells, he adds. The oil company Suncor, for instance, could have a better ranking than Tesla, which primarily sells electric vehicles (EVs). “That’s not what they look at,” he says. “Instead, they’re looking at the policies, the practices and the performance of these corporations.”

Another thing to keep in mind is that research companies make their money by selling reports, which means there may be potential for conflict of interest. (Nash is clear that he doesn’t know of any specific issues, just that it’s a good environment for them to arise.) In addition, full information is only available to those with subscriptions, which are priced way out of reach for the everyday investor. “They really are geared for investment firms, not regular people like you and I.” 

What changes are coming to ESG reporting?

“When reporting is voluntary, there’s a higher risk of greenwashing and cherry-picking,” Keyes says. “That’s because unlike financial reporting, to date, voluntary sustainability reporting doesn’t always require a balanced narrative, like not emphasizing only the positive and downplaying the negative.” 

“Greenwashing” is when a company makes itself out to be more environmentally responsible than it actually is. That can be a problem for investors in more ways than one. “In addition to leading investors to invest in funds that do not meet their objectives or needs, greenwashing may also have the effect of causing investor confusion and negatively impacting investor confidence in ESG investing,” wrote the Canadian Securities Administration (CSA) in a notice sent to fund managers in 2022.

Luckily, change is on the way. And it’s not just coming from governments, though there is some action happening at those levels. “The private sector is further ahead of the government in Canada,” Nash says. “The investment community is pushing forward and requiring these things from companies. And anything the government does is going to be about playing catch-up.”

One organization that’s on board with the need for new regulations is the International Financial Reporting Standards (IFRS) Foundation, which launched its International Sustainability Standards Board (ISSB) in late 2021. Its goal: “a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets.” The ISSB published two draft standards in March 2022, proposing requirements like consistent reporting and disclosure of climate-related risks and opportunities. The documents are currently being finalized and are scheduled to be released in mid-2023.

Keyes mentions the CSA as another organization that’s proposing new regulations for public companies’ climate–-related disclosures. Another is the Office of the Superintendent of Financial Institutions, or OSFI, which recently published a document on expectations for federally regulated financial institutions like banks and pension plans around managing climate change–related risks. “The reason these regulations are developing is in response to greenwashing, which has been a by-product of voluntary reporting,” Keyes says.

As for ESG-related investment funds, the CSA last year outlined the disclosure it would like to see. “They issued guidance,” Keyes says. “What that means in regulatory terms is more like a warning about a slap on the wrist than actually even slapping on the wrist, if that makes sense.” She sees this, coupled with the use of the CFA Institute’s Global Standards for ESG Investment Products, as a first step toward eventual rules around disclosure for investment funds that want to label their products ESG. 

The good news, Keyes adds, is that new regulations in Canada are “aligning and harmonizing around the same frameworks—specifically, the SASB Standards and TCFD recommendations—that we’re seeing on a global scale.” 

She anticipates that new international sustainability reporting standards will also be adopted in Canada, especially given the launch of the Canadian Sustainability Standards Board (CSSB)—its chair and initial members were appointed in April 2023. “The positive thing here is they’re all trying to move at the same time and to leverage what voluntary frameworks the markets have already coalesced around as best practice.”

What Keyes is really looking forward to is the eventual shift from a focus on reporting to a focus on action: encouraging organizations to push to boost their ESG performance through improvements in how they do business. “I think that once we address some of the challenges we’ve had in inconsistent reporting and the absence of standards, the next iteration is going to be about improving performance,” she says. “That’s where things get more exciting.”

How should responsible investors proceed?

With all this in mind, responsible or sustainable investing still comes down to the basics that are relevant to all investors: Know what you want, both socially/environmentally and in terms of risks and rewards, and look for products that will get you there. “It’s important to understand the investment objectives that you’re trying to achieve, and to select investments that align with those objectives,” Keyes says.

When you’re considering specific funds, like an ETF labelled ESG, Nash cautions that you should research what that fund invests in before committing. “Oftentimes clients will open up a fund that is marketed as responsible or sustainable, and they’ll be very surprised with some of the holdings that are inside of it,” he says.

As for those holdings—that is, specific companies—there are a couple of things he looks for on top of the obvious potential for financial growth. First, where they’re headed, or their goals. And second, whether they’re getting there. For instance, “net zero targets are great,” he says. “But I need to see year-by-year reporting that shows me the company is on track to meet those targets.” 

Nash admits that he’s biased, but he’s a big proponent of working with a financial advisor or planner to help choose responsible investments that fit your needs and goals. (His company, Good Investing, offers an online course, as well as for-fee coaching and portfolio review services, all geared toward investors who want to feel good not just about their returns, but about what they’re invested in.)

“It starts with opening up a conversation with your advisor, and seeing how they respond,” he says. And if you do want to DIY, don’t skimp on the research—read financial reports, fund prospectuses, press releases, analyst reports, media coverage and more. “There are so many options, which is amazing,” Nash says. “But it is really important for the investor to look under the hood.”

Read more about ethical investing:

• 5 ways to invest sustainably for Canadian investors
• The cost of socially responsible investing
• Earth Day: How you can invest in our planet
• Why sustainable investing is important

About Kat Tancock

Kat Tancock is a writer, editor, translator and content strategist based in B.C. She writes for publications including The Globe and Mail, Chatelaine and Asparagus.

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