In the midst of Canada’s contentious political debate over the carbon tax, a major sustainability initiative is quietly taking shape: the development of a new rule requiring firms to report on the sustainability dimensions of their activities. This move aims to empower investors to make more informed decisions in the age of ecological crisis. Here, I contend that this initiative, which frames sustainability as a financial risk and portrays the ecological crisis as a matter of financial invisibility and market failure, warrants a thorough politicization.
In March 2024, the Canadian Sustainability Disclosure Standards Board, an entity created in 2022, unveiled its proposed Sustainability Disclosure Standards for public consultation. This initiative mirrors a global trend aimed at bridging the “data gap” in assessing firms’ sustainability and fostering more sustainable investment practices.
Sustainability disclosure emerged in the early 2000s with a series of private voluntary initiatives endeavouring to encapsulate the social, environmental, and governance aspects of firms’ operations, which are absent from their conventional financial reports. Two decades later, these voluntary standards have not only courted controversy—with accusations of “cherry-picking” indicators and criticisms of greenwashing becoming commonplace—but have also proliferated to the point of dilution. This proliferation of initiatives, largely driven by market actors, has paradoxically undermined their original intent: to standardize sustainability information.
Since the early 2020s, various jurisdictions have embarked on regulatory journeys to establish their own sustainability disclosure standards. The European Union, China, and—not without important political controversies—the United States, are among those leading this charge. Conversely, countries like Canada, along with sixteen others at the time of writing have opted to adopt standards formulated by a private entity—the International Financial Reporting Standards Foundation (IFRS). The IFRS Foundation is a private organization created in the early 2000s to establish financial reporting standards that Canada applies.
While financial governance typically operates discreetly in the background, environmental governance often unfolds amidst grand narratives, and political contention—much like the ongoing debates in Canada regarding the carbon tax. These political debates, by focusing on specific environmental policies, often run the risk of overlooking other possible solutions and diverting attention from other conversations. However, the absence of such debates, as might be seen with Canada’s sustainability disclosure standards, exacerbates the risk of alternative environmental policies being sidelined. I contend that with environmental concerns increasingly intertwined with financial governance, there is an imminent danger of relegating these crucial issues to the realm of technocracy rather than engaging in robust political debate.
As mentioned above, the Canadian standards almost entirely mirror those developed by the IFRS Foundation, focusing initially on climate change, before considering extending them to biodiversity loss and other environmental concerns. Emulating its approach to financial reporting, the IFRS Foundation applies core financial concepts and principles to sustainability reporting. Central to this approach is the notion of “financial materiality”, whereby only sustainability information deemed relevant to investors is required to be disclosed by firms. However, this narrow focus neglects broader societal and ecological impacts. In this context, it is crucial to acknowledge that not all consequences of climate change directly impact investors—consider, for instance, sea-level rise in regions where the financial repercussions may be minimal or non-existent. This “financial materiality” perspective can yield further challenges in reporting not only on climate change but also on biodiversity, the next frontier of concern for the IFRS Foundation. While biodiversity loss poses a tangible risk to investors, its impacts pale in comparison to the existential threat it poses to local populations reliant on it for means of subsistence. Unfortunately, unless these biodiversity impacts directly translate into tangible financial ramifications, they risk being overlooked and disregarded.
The underlying rationale behind this approach is supposedly pragmatic, positing that investors will only act upon the ecological crisis if its impacts are quantified on balance sheets, and made visible in financial terms. However, this perspective perpetuates a longstanding notion of the ecological crisis as a market failure addressable through the provision of information—rooted in conventional economic theory. Furthermore, it presupposes that investors will respond to this information by reallocating investments to less risky ventures—an assumption that may be overly optimistic, or termed as “wishful thinking”. This means that firms would have to count and disclose their environmental impacts—for now, essentially their greenhouse gas emissions—but not reduce them, which will be dependent on the incentive provided by investors’ decisions.
In summary, both the political process surrounding the setting of sustainability standards and the information they will provide lead to compounding and accumulating ignorance.
If the content of these standards is subject to criticism, the political (or anti-political) process behind their development and global adoption warrants careful examination. Crafted primarily by major private financial players within the IFRS Foundation, these standards are now positioned as a so-called “global baseline”, leaving little room for deviation for those who choose to adopt them. However, alternative approaches abound, ranging from embracing a “double-materiality perspective” that accounts for environmental impacts on both investors and the broader public—close to strategies adopted by the European Union and China—to positioning sustainability disclosure standards as integral components of a broader regulatory framework addressing finance’s role in facilitating the green transition. Such standards offer a potential avenue to catalyze a political dialogue regarding the role of Canadian financial actors in confronting the global ecological crisis.
In summary, both the political process surrounding the setting of sustainability standards and the information they will provide lead to compounding and accumulating ignorance. The former overlooks alternative environmental policy pathways for finance, while the latter disregards environmental impacts beyond those considered relevant to investors.
The Canadian sustainability standards process is still in its infancy, with the initial consultation slated to conclude in June 2024. Before becoming mandatory, these standards must be incorporated into a Canadian Securities Administrators rule—a process that may take considerable time. Thus, there remains ample opportunity to foster public debate, ensuring that the regulation of finance in the age of ecological crisis and the debates around it are not entirely captured by the very actors currently implicated in its perpetuation.
