Trump has Made Regulatory Harmonization Unworkable; Canada Must Carve its Own Path

Regulators for Canada’s capital markets have traditionally looked south to align our regulatory environment as much as possible with that of the United States. That has made sense historically, given the extent to which our economies are intertwined and the general exposure of Canadian issuers and investors to the US markets.

But as the standard disclaimer says, “past results are no guarantee of future performance,” especially when the regulatory environment south of the border is as chaotic as the one unfolding under a second Donald Trump presidency. 

Should Canadian regulators, therefore, carve their own path to provide a more predictable and rational approach to capital markets regulation? 

Climate Disclosure as a Test Case

That question is front and centre now as Canadian Securities Administrators debate the adoption of new disclosure requirements for Canadian companies related to climate change risk. But let’s face it: this dilemma will arise again and again over the next four years as regulators consider other questions, such as our approach to cryptocurrency regulation, fund manager transparency and long-established corporate governance rules. 

These are all areas in which a highly politicized environment, legal actions and emboldened lobbyists are affecting US regulations, including the rules that govern capital markets.  

Prudential regulation has already taken a hit in the US, for example, as the Securities Exchange Commission (SEC) appears to have abandoned its own plans for climate-related disclosure rules for corporate issuers under a Trump-appointed acting chair.

That backsliding is dangerous. Whatever its opponents may say, the entire purpose of climate-related disclosure is to provide a company’s investors with decision-useful information about how that firm is addressing a clear financial risk for those investors. The SEC’s inability to secure that disclosure puts investors at a disadvantage and investor dollars at heightened risk.

Interdependence vs. Subjugation

Our interdependence with US markets does make this a difficult decision. Approximately 200 Canadian companies are cross-listed in the US, and American investors are major participants in Canadian capital markets. Harmonization between the two systems would be ideal. 

But let’s unpack that interdependence a bit before we feel compelled to subjugate Canadian markets to the decisions being made south of the border. 

First, although harmonization between jurisdictions is a noble pursuit, we have already adopted differing standards where it meets our needs. Canadian accounting standards, for instance, are aligned with the International Financial Reporting Standard (IFRS) rather than the US GAAP system, and we’ve managed to use those differing standards without impoverishing Canadian issuers. Similarly, Canadian banks have had different capital requirements and regulatory standards than those in the US, and those added protections, rather than being an impediment, have provided for a more resilient banking system.

Second, the short-term implementation cost to Canadian firms vis-à-vis their US counterparts is indeed a competitive question. But let’s remember what’s being asked regarding climate disclosures: a requirement to assess and disclose a material financial risk. That’s a smart business exercise for any company that does the work. It pays off. 

Further, as other essential markets for Canadian firms adopt better standards, our companies’ access to those markets already depends on doing this work. An estimated 1,700 Canadian companies, for instance, are expected to report climate-related data under the European Union’s Corporate Sustainability Reporting Directive (CSRD). 

Third, for capital markets regulators there’s another question at work here that is more fundamental to their role: What do we need to do to attract investment in those Canadian firms?

Clear Regulations Drive Investment 

When consulted directly by securities regulators in 2022, Canadian investors were overwhelmingly in favour of new rules for climate-related disclosures. But US and international investors are, if anything, even more clear in their desire for climate-related disclosure rules than Canadians. 

The largest foreign ownership stakes in Canadian publicly listed companies are shares held by the world’s largest asset management firms and index funds. 

Blackrock, State Street, Vanguard and Fidelity—the four largest US-based equities managers—are already seeking better climate-related disclosures from their investee companies and are on record favouring regulatory intervention. 

When the SEC was considering climate-related disclosures, all four of those firms advocated for the adoption of mandatory reporting in line with global standards, as did the overwhelming majority of investors who submitted comments on the SEC’s regulatory proposal. In Canada, Blackrock told our regulators that assessment of climate-related considerations is an essential part of its investment process, arguing that “More complete, consistent and comparable climate-related disclosures, including both qualitative and quantitative metrics, are in both issuers’ and investors’ interests and clear regulatory expectations are very welcome at this stage.”

The signals from investors outside the US are even clearer: the availability of comparable, material disclosures on climate-related risks has become imperative in global markets. The US is the outlier here. A recent PWC survey of global investors—82% of which were outside of North America—found that 72% consider how a company manages sustainability-related risks and opportunities as an important factor in investment decision-making. Of those, 29% cited Canada as a top five destination for investment. In a 2022 survey by RBC, 50% of European investors said that regulators should take the lead in securing better disclosures from issuers, with 70% ranking climate risk as the top priority. 

Canada’s Path Forward

At the end of the day, Canada needs more inward-bound capital to grow its economic potential. Attracting that global investment necessitates a regulatory environment that makes our markets more attractive than others. If the smaller Canadian capital markets are trying to compete for investment using the same playbook as the US, we will forever lag in attracting new investment to our markets. Our competitive advantage is not our scale but our quality.

That’s why Canadian regulators must seize this moment to make our markets more attractive to global investors, to Canadian investors, and even to large US investors. 

There’s a lot to be done to create a more resilient and productive economy. But one place to start is by adopting standardized global disclosure rules that make Canada a safer haven for investor dollars.