Overview and Key Practical Takeaways
ESG-related disclosures in Initial Public Offerings (IPOs) prospectuses in Canada have become increasingly common in recent years, especially for larger capital raises. While such disclosure has been made based on general securities law principles, this may soon change, as the new climate-related disclosure rules expected this year are anticipated to require such disclosure in long-form prospectuses.
In this two-part series, we address the following two questions:
- What disclosure of ESG issues in IPOs is currently mandated by Canadian securities law, and how is this expected to change?
- How have public issuers in Canada approached the disclosure of ESG issues in IPOs under current regulations, and how might market practice evolve as the law does?
The Canadian Securities Administrators (CSA) are expected to soon publish their new rules on climate-related disclosure – National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107). Given the CSA has been monitoring international developments to guide its work, we also compare the Canadian context with the evolving approach to ESG disclosure in IPOs being taken by the U.S., European Union and UK.
Our key practical takeaways for public issuers in Canada are:
- NI 51-107 will be a significant development that will propel ESG-related disclosure from the realm of general securities law principles and voluntary disclosure into the realm of more prescriptive and detailed disclosure — although the extent of the requirements remains to be seen.
- While NI 51-107 is expected to follow the standards of the ISSB (as adapted to the Canadian context by the CSSB), outstanding questions include:
- Whether the disclosure mandated by NI 51-107 will apply to prospectuses prepared in the IPO context.
- Whether mandatory climate-related disclosure for IPO prospectuses will:
- Impose a less demanding standard on smaller issuers.
- Benefit from either a phased-in implementation process or a delayed implementation process.
- Benefit from protection against potential liability for misrepresentations in forward-looking disclosure.
- Amongst the questions raised by developments in the U.S, European Union and UK is whether, when and to what degree Canadian securities regulators might impose mandatory ESG disclosure requirements to IPO prospectuses beyond disclosure relating to climate change, e.g. to sustainability issues more broadly.
Our more detailed analysis and commentary follows. For additional related information, see Fasken’s guide to IPOs and Going Public in Canada. For Fasken’s other capital markets thought leadership, visit our Capital Markets and M&A Knowledge Centre.
The Current Law in Canada: CSA Staff Notice 51-358
The CSA’s current guidance regarding ESG-related disclosure in IPO prospectuses, found in CSA Staff Notice 51-358, provides that material facts disclosed in prospectuses may include environmental matters if their omission or misstatement would likely influence an investor’s decision.
That said, Staff Notice 51-358 explains that an issuer should not limit its materiality assessment to near-term risks. Rather, a matter meeting the materiality test should be disclosed even if it may only crystallize over the medium-term or long-term and even if there is uncertainty whether it will ever actually occur.
In this context, and as will be further discussed in part two of this series, ESG-related disclosure in IPO prospectuses in Canada has become more common over recent years, particularly for larger capital raises.[1] Stated differently, Canadian reporting issuers have been disclosing ESG-related issues based on the general principle that a prospectus must contain full, true and plain disclosure of all material facts relating to the securities issued, and on regulatory guidance indicating that such material facts can include environmental matters.
The question now is how mandatory disclosure of ESG-related issues in IPO prospectuses will change and how issuer market practice will evolve as a result.
The Next Phase: NI 51-107 Disclosure of Climate-Related Matters
NI 51-107 is expected to follow the standards of the International Sustainability Standards Board (ISSB), as adapted to the Canadian context by the Canadian Sustainability Standards Board (CSSB). The ISSB standards require disclosure in the areas of governance, strategy, climate-related risks and opportunities, direct and indirect greenhouse gas emissions (i.e. Scope 1, 2 and 3), climate resilience, climate-related metrics and targets, and others.
When issuing NI 51-107 for public comment in 2021, the CSA specifically asked whether the disclosure mandated by the rules should apply to long-form prospectuses prepared in the IPO context. The vast majority (more than 80%) of respondents that expressed a view on the matter answered affirmatively. This evidences two noteworthy points. First, that the respondents generally view climate-related disclosure as enabling more informed investor decision-making. Second, that mandatory climate-related disclosure in long-form prospectuses in Canada can reasonably be expected once NI 51-107 is finalized.
That said, many respondents also recommended that mandatory climate-related disclosure requirements for prospectuses impose a less demanding standard on smaller issuers. Regarding the timing of the application of mandatory climate-related disclosure requirements for prospectuses, the majority of respondents advocated for a phased-in implementation. A minority of respondents supported a delayed implementation process.
Other respondents requested that any required climate-related forward-looking disclosure be protected under a safe harbour regime. Current Canadian securities laws limit an issuer’s liability for forward-looking disclosure except when provided in the context of an IPO, meaning that mandated forward-looking climate-related disclosure in IPO prospectuses could expose the issuer to potential litigation for misrepresentation.
The CSA indicated in a market update issued in December 2024 that its revised draft rules will consider the needs and capabilities of issuers of different sizes and that it anticipates consulting on concerns regarding liability.
Comparisons With the U.S. – The New (But Paused) SEC Rule
The Securities and Exchange Commission (SEC) published its final rule on mandatory climate disclosure risk (the "SEC Rule") in March 2024. However, implementation of the SEC Rule has been paused due to ongoing lawsuits contesting its validity (e.g., for potentially being ultra vires). The fate of the SEC Rule is now in the hands of the new U.S. presidential administration that took office in January 2025.
The SEC Rule requires registrants to disclose certain climate-related information in registration statements (the equivalent of a prospectus) and in annual reports.[2] The SEC Rule requires that registration statements address climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition.[3] The SEC Rule also requires that registration statements include sustainability-related information covering topics such as governance, strategy, risk management, targets and goals, greenhouse gas emission metrics, and attestation of scope 1 and scope 2 emissions disclosure.[4]
Echoing a similar concern expressed by Canadian respondents to Draft NI 51-107, the SEC Rule includes a safe harbour regime whereby potential civil liability for certain types of disclosure is precluded, including disclosure relating to the issuer’s transition plans, scenario analysis, internal carbon pricing, and targets and goals. By contrast, potential civil liability for disclosure relating to historical facts is not precluded.
Comparisons With the EU – The ESMA Public Statement, NFRD and CSRD
European regulators have taken several steps toward mandatory disclosure of ESG-related issues in prospectuses.
In a public statement published by the European Securities and Markets Authority (ESMA) in July, 2023 (the "ESMA Public Statement"), ESMA acknowledged the absence of normative rules mandating sustainability-related disclosure in equity prospectuses. However, ESMA also specifically reminded issuers to consider sustainability-related matters when preparing prospectuses to the extent such matters may have a material impact.[5] ESMA further clarified that if sustainability reporting under the existing Non-Financial Reporting Directive (NFRD)[6] and the Corporate Sustainability Reporting Directive (CSRD)[7] are material in the context of the European Prospectus Regulation, issuers should include those disclosures in equity prospectuses.[8]
The ESMA Public Statement was not the first time European Union securities regulators addressed sustainability-related public disclosure. When the European Prospectus Regulation was first enacted in June 2017, its Recitals indicated that its materiality-based assessment applied equally to sustainability-related disclosures as it did for disclosures of other kinds.[9]
Comparisons With the UK – The FCA’s Prospectus Reforms
In the United Kingdom, the prospectus regime is undergoing profound reforms, including as involves ESG-related disclosure.
In its latest consultation paper dated July 26, 2024 (the "UK Consultation Paper"), the UK’s Financial Conduct Authority (FCA)[10] proposed a flexible approach whereby additional disclosure requirements in prospectuses would only apply if the information is material.[11] The proposed requirements include:
- The disclosure of the issuer’s management of sustainability-related risks and opportunities, aligning with the high-level categories of the ISSB Standards and the Task Force on Climate-related Financial Disclosure (TCFD) Recommendations, i.e., governance, strategy, risk management, and metrics and targets. However, such disclosure is limited to climate-related matters, the FCA having stated it considers it premature to introduce any minimum content requirements for issuers on sustainability-related information beyond climate at this time.
- The disclosure of key information about an issuer’s transition plan if such plan has already been made public and, where this information is material, focussing on financial materiality. Disclosure regarding transition plans is eligible to be forward-looking statements for which potential civil liability is excluded.
Concluding Comments
How best to approach the mandatory disclosure of ESG-related issues in IPO prospectuses highlights the difficult legislative balancing act between (1) providing investors with access to sufficient issuer information, and (2) promoting the efficiency and cost-effectiveness of capital raising for public issuers.
The CSA has been vocal about its desire to make public markets more attractive, and recent regulatory developments have leaned toward flexibility and disclosure relief rather than rigidity and additional onerous obligations.
It is therefore no surprise that Canadian securities regulators have been proceeding cautiously and it is reasonable to assume that Canadian securities regulators will continue to look to the actions of their counterparts in the U.S., European Union and UK for guidance as to potential next steps.
[1] As we will discuss in part 2 of this series, close to 55% of prospectuses issued in IPOs on the TSX or TSX-V over 2020 to 2024 included substantial discussion of ESG-related issues.
[2] See Securities Exchange Commission, Rule 33-11275 - The Enhancement and Standardization of Climate-Related Disclosures for Investors, p.1. Requiring climate-related disclosure in an IPO registration statement is a major development for U.S. capital markets given that, unlike in the European Union and Canada, U.S. securities laws do not require all material information to be disclosed to investors in the issuer’s prospectus, but rather focus on specified information that must be disclosed under SEC regulations. See Marc I. STEINBERG, A Look at US Prospectus Liability, Faculty of Law Blogs – University of Oxford, April 12, 2023, online. As the federal appellate court stated in Cooperman v. Individual, Inc., 171 F.3d 43, 49-50 (1st Cir. 1999) "[a]lthough in the context of a public offering there is a strong affirmative duty of disclosure, it is clear that an issuer owes no absolute duty to disclose all material information."
[3] Securities Exchange Commission, 33-11275 Fact Sheet, p.2.
[4] Subpart 1500 of Regulation S-K, 17 CFR 229.1500 through 229.1507 – Listed in Rule 33-11275 at p.850-869.
[5] European Securities and Markets Authority, Sustainability disclosure in prospectuses Public Statement, July 11, 2023 , p.2.
[6] Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups (OJ L 330, 15.11.2014, p. 1).
[7] Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 as regards corporate sustainability reporting (OJ L 322, 16.12.2022, p. 15). Article 5 of the CSRD envisages a phase-in period for the application of the new sustainability reporting requirements starting from January 1, 2024 for large undertakings with more than 500 employees up until 2028 for certain disclosures related to third-country undertakings.
[8] European Securities and Markets Authority, Sustainability disclosure in prospectuses Public Statement, July 11, 2023 , p.3. The CSRD requirements will apply to companies listed on the EU regulated markets as well as certain non-EU companies with substantial activity in the EU market and which have at least one subsidiary or branch in the EU.
[9] The European Prospectus Regulation also provides that a "prospectus shall contain the necessary information which is material to an investor for making an informed assessment of: (a) the assets and liabilities, profits and losses, financial position, and prospects of the issuer and any guarantor; (b) the rights attaching to the securities; and (c) the reasons for the issuance and its impact on the issuer." See Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC, Article 6(1) (current version (emphasis added).
[10] Consultation on the new Public Offers and Admissions to Trading Regulations regime (POATRs), Consultation paper CP24/12, July 2024.
[11] A point specifically raised by the UK consultation Paper for consideration by market participants is whether energy companies should be required to provide disclosure regarding the potential impact of future changes in government policy driven by national and international climate goals, including whether such changes could adversely impact the company’s ability to extract its reserves in a financially viable manner or otherwise impose a risk of "stranded assets".
