Corporate sustainability reporting standards in the European Union (EU) could impact over 1,300 Canadian companies, and will put pressure on businesses and governing bodies in this country to meet those regulations, the Institute for Sustainable Finance (ISF) warns.

In EU sustainability reporting requirements: Implications for Canadian business and policy makers, the Queen’s University-based organization looked into how the EU’s Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) will impact Canadian companies operating in Europe.

The Canadian companies most impacted are in the materials sector, which will also resonate strongly in the financial and energy sectors, the report's authors argue.

According to Ryan Riordan, the director of research at the institute and co-author of the report, Canadian companies are significantly behind on corporate sustainability reporting, and must adapt as soon as possible, lest they risk fines or losing access to European markets.

“These types of disclosures, they are going to come, and by dragging our feet in Canada, particularly regulators, I think they’re doing a disservice to firms because they’re leaving this false sense of security that maybe they can avoid having to do this,” he said in an interview with Sustainable Biz Canada.

How the EU’s sustainability regulations could impact Canada

Canada does not yet have a mandatory sustainability reporting requirement, in contrast with the EU.

The CSRD (which took effect in January 2023) and ESRS require companies listed in Europe to disclose environmental information such as carbon emissions, electricity use, impact on nature, water consumption and corporate governance, according to Riordan. Double materiality, a company’s impact on environment and society and how those factors impact its financial performance, must also be reported.

From financial years 2024 to 2028, companies will have to disclose sustainability data in a phased approach. Sector-specific disclosure standards and the rules for non-EU companies will take effect starting June 2026.

The Institute for Sustainable Finance found 1,311 Canadian companies would be impacted by the CSRD, based on data from Refinitiv.

Almost half of the companies in the list are from the materials sector — and an overwhelming majority (94 per cent) of those are from the metals and mining industry. The remaining industries include chemicals, forestry, paper and wood products, containers and packaging, and steel.

Other sectors include consumer staples, energy, health care, technology and real estate.

Though financial firms made up a small portion of affected companies, the sector will be heavily impacted as it makes the most revenue, followed by energy and consumer staples.

“Therefore, the CSRD pressure on financial companies (e.g. banks, insurers and asset managers) can have a downstream effect on the real economy,” the report states.

Canadian companies falling behind on sustainability reporting

While a draft version of the Canadian Sustainability Standards Board’s sustainability reporting blueprint is now public, Riordan said the country is lagging its peers in corporate sustainability transparency. Approximately 75 per cent to 85 per cent of European companies report greenhouse gas emissions, according to Riordan, compared to 72 per cent of companies listed on the S&P/TSX Index.

“Collecting the data, getting it audited and then reporting it, a lot of Canadian firms are behind their European counterparts, and also behind a lot of the U.S. counterparts,” Riordan said.

The U.S. Securities and Exchange Commission has set new rules for Scopes 1 and 2 emissions reporting, which he said will have a “dramatic effect” on Canada as the country does not yet have such a rule. Some Canadian companies will have to comply with the U.S. standards.

“Our regulators are behind regulators in the U.S. and the EU on mandating disclosure. So, Canadian firms are often being forced to disclose based on other operations in other jurisdictions.”

He attributed the inertia to Canada being more risk-averse.

Adapting to the regulations will mean spending on sustainability disclosures and assurance opinions. Without such documentation, companies risk fines or loss of their ability to operate overseas, Riordan said.

Bigger companies will adapt without much issue, he believes, but smaller enterprises may face a financial crunch, leading to difficult decisions. The thin margins for smaller companies may mean having to exit the EU market.

More broadly, Riordan said the regulations are pushing companies to shift their business models and manage their environmental impact. He urges companies that have not begun sustainability disclosures to start now before it is mandatory, so it becomes second nature.

“At some point it’s like a tsunami, it’s gonna be there. It might be too late, it might be chaotic, it’s gonna be more expensive. We should just say, ‘Hey, we have to do it. Other jurisdictions are doing it and we want to export to, and import from, these jurisdictions. If we want to, we have to follow these instructions.’“

The report also recommends development of a made-in-Canada sustainable finance taxonomy to define green and finance activities. Without such expectations, Canadian companies may lose the ability to attract foreign investment from markets that have high sustainability standards.