Canada ESG regulation; Bridging the gap

July 11, 2023

Canada ESG regulation has work to do. Canada has risen to the top of its G7 counterparts as a dependable destination for foreign direct investment (FDI), but this looser, low-regulation environment has slowed Environment, Social, Governance (ESG) behind the nation’s EU counterparts. While the importance of taking action on ESG matters like climate change is growing, there has been a gap between the level of concern and actions taken so far. This is set to change significantly from 2024 onward, with a recent announcement that new rules come into effect for some business entities including eligible banks, insurance companies, and federally regulated institutions will need to provide ESG disclosures on the financial impact of their climate-related risks.

Investor interest

In terms of attractiveness to investors, Canada is well above average. In 2021, Canada’s combined federal-provincial statutory corporate income tax rate was 26.2%, one of the lowest in the G7, with the tax treatment for new business investment, at 13.2%, the lowest in the G7 and below the OECD average.
The regulatory environment also supports ESG and technology innovation, offering one of the most generous tax and grant funding incentives in the G7 to encourage businesses to conduct research and development in Canada.

Tax incentives for foreign-owned corporations in particular, receive up to 38% of qualified labour expenditures, in most cases as a combination of both refundable and non-refundable investment tax credits, through the federally administered Scientific Research and Experimental Development (SR&ED) tax incentive program. The SR&ED tax incentive program funds over $3 billion annually and there is no funding cap. In addition, there are more than 150 initiatives and grant incentive programs available from both federal and provincial governments. Manufacturers can benefit from programs targeting streamlining the supply chain through automation, adopting clean technologies, and increasing energy efficiency.

According to the Economist Intelligence Unit, Canada will be the top country for business in the G20 for the years 2022 to 2026, a position it has consistently held over the last 5 years. Canada is also ranked third among G7 countries for ease of starting a business and is likely to attract the most investments over the next three years.

In 2021, Canada’s economy grew at an estimated rate of 4.6%, the highest growth rate among the G7 economies. This year, despite global economic strain due to the Ukraine conflict and the Pandemic, Canada’s economy is anticipated to grow by 2.8%.

Light-touch regulation

This proactive approach to attracting investment has clearly made a positive impact on the economy, but a side-effect of this light-touch regulation means that ESG regulation for businesses has fallen behind where it needs to be to keep up with its EU counterparts. Canadian legislation enables, and at times necessitates, the pursuit of sustainability-oriented investments for financial returns and asset protection, according to the latest Legal Framework for Impact (LFI) report. However, the pursuit of positive sustainability impacts as a primary objective is limited under Canadian law.
In a major policy shift from 2024 onwards, Canada’s regulatory bodies have instigated several key ESG reporting standards, rules, and requirements, which will significantly impact the nation’s investment landscape.

Corporations Canada, for instance, now mandates annual diversity reporting for corporations’ boards of directors and senior management, focusing on the representation of women, Indigenous peoples, persons with disabilities, and visible minorities.

2024 – new ESG regulations

The Canadian Securities Administrators (CSA) is set to enforce mandatory ESG reporting from large banks, insurance companies, and federally regulated financial institutions, starting in 2024. Additionally, ESG disclosure guidelines for investment funds, which may have ESG as a core strategy, are now in place.
In addition, the Government of Canada now requires large federal contractors to disclose their greenhouse gas (GHG) emissions and provide plans to reduce these emissions, applicable to federal procurements greater than $25 million.

The Sustainable Finance Action Council, under the Department of Finance Canada, has launched the Canadian Green and Transition Financial Taxonomy, a system intended to standardise definitions of climate-compatible investments, focusing on “Green” and “Transition” projects. The policy is driven by the urgency to fill an estimated annual climate investment gap of up to $115 billion to achieve a net-zero economy by 2050.

Overall, while these new regulations may seem daunting for corporations and investors alike, experts suggest a proactive approach will yield significant benefits. Careful attention to board structure, materiality assessments, comprehensive knowledge of securities laws, efficient ESG data systems and processes, and continuous learning are recommended next steps to successfully navigate this new regulatory landscape and better prepare Canadian businesses for expansion into EU countries.

If you need advice on the 2024 ESG regulations, get in touch.