CSDS 2 explained: Climate-related disclosure requirements in Canada
The Canadian Sustainability Disclosure Standards (CSDS) 2 focuses specifically on climate-related disclosures, providing detailed guidance for Canadian companies on reporting climate risks, opportunities and their financial implications. CSDS 2 focuses on climate-specific financial disclosures, mirroring the structure of CSDS 1 but tailored to address climate risks and opportunities. This standard represents a critical component of Canada's approach to climate transparency and corporate accountability.
Building upon the foundation established by CSDS 1, CSDS 2 requires companies to provide comprehensive information about their climate-related risks and opportunities. Objective and Scope: Details on climate-related physical and transition risks, as well as opportunities affecting organisational prospects. This includes both immediate and long-term climate impacts that could affect business operations, financial performance and strategic planning.
The structure of CSDS 2 follows the internationally recognised Task Force on Climate-related Financial Disclosures (TCFD) framework organised around four key pillars. CSDS 2 provides specific guidance for climate-related disclosures, aligning closely with the TCFD recommendations. It addresses the following four key pillars: Governance: Companies must disclose the governance structures for overseeing climate-related risks and opportunities. This alignment ensures that Canadian companies can leverage existing TCFD reporting experience while meeting the enhanced requirements of CSDS 2.
Governance disclosures under CSDS 2 require detailed information about board oversight and management responsibilities for climate-related issues. This includes detailing the board's role and the management's responsibilities in addressing climate issues. Companies must describe how climate considerations are integrated into governance processes, including the frequency of climate discussions, the qualifications of board members and management for climate oversight and the connection between climate performance and executive compensation.
The strategy component of CSDS 2 demands comprehensive disclosure about the actual and potential impacts of climate-related risks and opportunities on business operations and financial planning. Strategy: Businesses are required to outline the actual and potential impacts of climate-related risks and opportunities on their business models, strategies and financial planning over short, medium and long-term horizons. This includes scenario analysis and resilience planning that demonstrates how organisations prepare for different climate futures.
Risk management disclosures under CSDS 2 require detailed information about how companies identify, assess and manage climate-related risks. Risk management: The standard mandates comprehensive disclosures on how organisations identify, assess and manage climate-related risks. This involves integrating climate risks into existing enterprise risk management frameworks. This integration ensures that climate considerations are not treated as separate issues but are embedded in overall business risk management.
One of the most challenging aspects of CSDS 2 is the requirement for greenhouse gas (GHG) emissions reporting across all three scopes. Greenhouse Gas Emissions Reporting: Divides emissions into Scope 1, 2 and 3, compelling companies to quantify their carbon footprint throughout their value chain. This comprehensive approach requires companies to account for direct emissions, purchased energy and value chain emissions, presenting significant data collection and verification challenges.
The Scope 3 emissions reporting requirement under CSDS 2 has received particular attention due to its complexity and potential impact on Canadian businesses. CSDS 2 requires companies to disclose not only their absolute Scope 3 greenhouse gas (GHG) emissions (which must be measured in accordance with the Green House Gas Protocol), but also intensity metrics and targets for emissions reduction. The CSSB has provided transition relief for Scope 3 reporting, recognising the challenges companies face in collecting this data.
Technology investment is crucial for successful CSDS 2 implementation, particularly for emissions tracking and climate risk assessment. Companies need sophisticated environmental management systems capable of monitoring and reporting GHG emissions across their entire value chain. This includes carbon accounting software, supply chain management platforms and environmental monitoring systems that can provide real-time data on climate-related metrics.
Climate scenario analysis, a key requirement of CSDS 2, demands advanced modeling capabilities and analytical tools. Climate resilience & scenario analysis: Companies must conduct scenario analyses to assess climate resilience. Organisations must invest in climate modeling software, risk assessment platforms and scenario planning tools that can help them understand potential climate impacts under different warming scenarios and develop appropriate adaptation strategies.
The metrics and targets pillar of CSDS 2 requires companies to disclose specific climate-related metrics and their progress toward climate targets. Metrics and targets: Companies must report the metrics they use to measure and monitor climate-related risks and opportunities, as well as disclose targets for climate performance improvement. This includes both quantitative metrics such as emissions levels and qualitative indicators such as climate resilience measures.
Data management and verification present significant challenges for CSDS 2 compliance. Companies must establish robust systems for collecting, processing and verifying climate-related data from multiple sources, including internal operations, supply chain partners and third-party providers. This requires investment in data integration platforms, automated monitoring systems and verification tools that can ensure data accuracy and reliability.
The transition relief provisions in CSDS 2 provide companies with additional time to develop the necessary capabilities for full compliance. Recognising the challenges businesses face in tracking Scope 3 emissions (indirect emissions in the value chain), the CSSB has extended the transition period from two to three years. This extended timeline allows organisations to build their data collection and reporting capabilities gradually while maintaining compliance with the standard.
As companies prepare for CSDS 2 implementation, they must consider the interconnected nature of climate reporting with their overall sustainability strategy. The standard requires organisations to think holistically about their climate impact and develop comprehensive strategies for managing climate-related risks and opportunities. This includes investing in technology solutions that can support both current reporting requirements and future climate initiatives.
The business benefits of CSDS 2 compliance extend beyond regulatory requirements. Companies that effectively implement these standards often experience improved operational efficiency, enhanced stakeholder relationships and better access to climate-related financing. The structured approach of CSDS 2 helps organisations identify climate-related risks and opportunities that might otherwise go unnoticed, enabling more informed strategic decision-making and improved climate resilience.
