Coming greenhouse gas emissions accounting it going to be a lot more complex than most might realize. And it won’t be easy.  Photo by Brian Zinchuk

 

The oil and gas industry is under threat like never before from activists, legislation, and now regulatory standards. As if the ridiculous gag order against oil and gas companies talking about their present and future environmental record wasn’t enough, the Canadian Sustainability Standards Board (CSSB) is proposing climate financial disclosures – that’s accounting for the climate and emissions – for all publicly listed companies. There will also be a trickle-down effect to smaller non-listed businesses that provide services to larger companies. What does this mean for those in the oil and gas industry? Unfortunately, the way these standards are written, besides forcing almost every company to try predicting the weather, anticipate every government policy whim, track all the emissions they generate, and account for all the emissions in their value chain, oil and gas companies will be treated more harshly than other companies. Besides the added cost of doing all this, it also likely means investment will be shifted away from any emissions intensive business, like oil and gas companies, to those that have a more positive emissions profile, like wind and solar projects.

If you thought productivity and competitiveness have been lagging in Canada, the proposed sustainability and climate standards will certainly not improve the situation. These standards, centred on the ambiguous and undefined notion of “sustainability” and the uncertain and unsettled science of climate change, will likely raise costs, impede competitiveness, and subject companies to the threat of climate lawfare. They are designed to do nothing less than change Canada’s entire economic system by undermining oil and gas companies and the energy that it is at the heart of our economy.

Where did these standards come from? Currently, companies can voluntarily provide information on their sustainability or environmental, social, and governance (ESG) record and how it affects their operations. But there has been a movement since 2015 to mandate and embed sustainability and climate reporting within financial disclosures, making them legally enforceable under terms of financial compliance. This has been achieved through the work of the International Sustainability Standards Board (ISSB), which released the first global baseline standards last June. The CSSB was created in 2022 to support the adoption of the ISSB standards. In keeping with that commitment, after nine months of targeted outreach with select groups that seem to want climate accounting, the warrior accountants of the CSSB released Canada’s almost verbatim version of sustainability and climate-related financial disclosure standards for public comment. The consultation deadline is June 10th.

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The CSSB standards will initially apply to publicly traded companies, but non-publicly traded businesses may need to comply with certain elements of the standards if they are part of a larger company’s supply chain. The CSSB can only recommend the use of the standards, it is up to regulators or governments to decide if they will be mandatory. Therefore, the standards will initially be voluntary until mandated by regulators like the Canadian Securities Administrators (CSA), which has said it will consider incorporating the standards into a mandatory rule in the near future.

Supporters argue that mandatory climate disclosures will provide investors with comparable standardized emissions and other data across all businesses. This will allow investors to shift investments in support of the transition to net-zero emissions by 2050, excluding or denying capital to businesses considered not in alignment with net-zero. Winners and losers will be chosen based on emission profiles rather than profitability. It seems to be all about the wants of the large institutional investors and asset managers and not about the businesses. The comprehensive nature of these disclosures, integrated into financial statements, represents immense but little-understood risks for Canadian businesses. These risks include the financial burden of compliance, the competitive disadvantage compared to Canada’s major trading partners, and the potential for legal liability.

The CSSB standards put climate at the centre of every business decision rather than profitability. The standards mandate an array of information and data gathering such as transition plans based on climate scenario analysis, internal emissions accounting, and Scope 3 emissions accounting (that is all indirect emissions within a supply chain upstream and downstream classified into 15 categories including transportation, distribution, processing, use, disposal).

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It’s important to note that transition plans are meant to show how a business will get its emissions down lower and lower every year until it hits net-zero by 2050 and the risks and opportunities in achieving those targets. Those risks and opportunities are based on costly and time-consuming climate scenario analyses, where companies must meticulously explain how they will predict and plan for future government policy changes, global developments, and weather events – and then be held accountable for those decisions based on gross uncertainties. Hindsight will be a golden goose for lawyers! Additionally, the standards compel companies to commit to the arbitrary Paris Agreement emissions targets, making them liable for failing to meet these unrealistic goals, while removing responsibility from the governments that set them.

Furthermore, the new metrics seem to demonize and penalize any company with any emissions whatsoever. The CSSB standards only account for gross emissions, with no clear way to quantify net emissions in relation to gross emissions. Even if a company utilizes carbon capture technology to achieve net-zero emissions, there appears to be no way to report this in the required disclosures in a meaningful way.

Dr. Tammy Nemeth, touring Boundary Dam Unit 3. Photo by Brian Zinchuk

 

Crucially, the standards mandate the reporting of all Scope 1 (direct), Scope 2 (indirect from acquired energy), and most significantly, Scope 3 (all other indirect) emissions. This requires companies to account for emissions across fifteen different areas, including how their products are used, without any provisions to address the duplication of accounting. For example, a small business that supplies four different large companies will have to provide its absolute emissions data to all four of the larger companies, meaning the one small company will have its emissions counted at least four times and probably more.

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In addition, despite claiming that the standards will enable a fair comparison of companies, not all industries are treated equally in the standards. Wind projects don’t have to account for the foundation of the wind turbine nor its transportation to the site in calculating their embedded emissions, only the materials for the nacelle, blades, and column are counted. In contrast, oil and gas companies will not only have to account for the emissions in the using of their products, which is part of Scope 3 – that means accounting for the emissions from you driving your half ton or operating your diesel equipment or any other type of combustion, they must also account for the emissions embedded in their oil and gas reserves. Previously, having those reserves was considered an asset for a company, now reserves will be considered a liability. In essence, the standards effectively reward businesses that don’t actually produce anything tangible or serve people who use hydrocarbons in any way, as they will have lower reported emissions.

How much does it cost to carry out all this transition planning, climate scenario analysis, and emissions accounting? Surprisingly, the CSSB has not conducted a cost-benefit analysis of implementing the standards. Instead, the CSSB board members have pointed to a cost impact analysis of the ISSB standards by the Australian government. Converted into Canadian dollars, for publicly listed companies with at least 100 employees and $50 million in annual turnover, the average initial cost of compliance is approximately $1.1 million, with annual recurring costs around $641,000.

What accounts for these expenses? Data gathering software will have to be purchased, usually through a costly subscription. Employees will have to be hired and trained to use the software, collect, and report on this information, or an outside party will have to be engaged to do so. Estimates for climate scenarios run between $100,000 and $400,000 depending on the size of company and detail required. This redirection of funds could otherwise be used to improve products and services or distribute profits to investors, but instead, a significant portion will be directed to climate consulting and law firms, many of which appear to support the standards for self-serving reasons. Then there is the requirement for mandatory Scope 3 emissions data collection and analysis which is still in its infancy and can be expensive. It’s the Scope 3 emissions accounting that pulls in smaller businesses that will be asked for their gross emissions by whomever they sell to or buy from. It is unclear if companies in other jurisdictions, especially the US, will agree to provide that information. Which raises the question: What are our biggest trading partners doing?

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In March of this year, the US Securities and Exchange Commission (SEC) attempted to introduce something similar through a climate disclosure rule. The rule has been stayed indefinitely until the outcome of several legal challenges have been resolved. Even if the rule is upheld, not only do certain key aspects of it remain voluntary, such as transition plans, climate scenario analysis, and Scope 3 emissions accounting, but the rule also includes safe harbour provisions, which lower legal and liability costs for companies. Safe harbour is defined as “protection from liability if certain conditions are met…to give peace of mind to good-faith actors who might otherwise violate the law on technicalities beyond their reasonable control.” There are no such provisions in the CSSB standards, which expose companies, and small operations that report to them, to potential liability and litigation. How?

The CSSB standards leave Canadian companies legally vulnerable to uncertainties in their statements, data, and projections because they require extensive forward-looking information and reporting on matters outside a company’s direct control, such as transition planning, climate scenario analysis, and Scope 3 emissions accounting. Since the disclosures are part of financial statements there is a legal requirement concerning accuracy and verifiability. Second-guessing decisions could become a lucrative area for litigious activists seeking to bleed a company dry if there are no safe harbour protections.  The complexity of measuring and reporting sustainability metrics cannot be overstated.  Therefore, once mandatory, the CSSB standards could put Canadian businesses at a competitive disadvantage, as they may face added financial, regulatory, and legal burdens that their North American counterparts do not. Canada should prioritize alignment with our Canada-US-Mexico trading partners rather than focusing on other countries with whom our trade is minimal. Instead, the CSSB standards seem to align with the European Union (EU). It is worth noting that only 8% of our export trade goes to the EU, whereas 78% of our export trade goes to the US.

Advocates for the standards argue that widespread and detailed data gathering and meticulous monitoring of company performance, with a focus on climate rather than profitability, will bring significant benefits to society. What those benefits might be and the actual impact of these efforts remains to be seen, but one thing is certain: mandating sustainability and climate-related financial disclosure standards will deeply transform our economic system. Yet, few are aware of these developments because they have been taking place in the usually dull realm of accountancy and appointed industry standards setters. The profound implications of these standards on our economy and society underscore the need for an open and honest public conversation, rather than relying on unelected appointed standard-setting bodies to make those decisions. Now is the time to engage in that conversation and shape those standards before they are set. The deadline for comments is June 10th. Let your MLA and MP know what you think too!

 

Tammy Nemeth is an energy analyst based in the UK.

 

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