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E-MailAaron A. Dhir is an Associate Professor at Osgoode Hall Law School of York University. This post first appeared (in modified form) in The Lawyers Weekly, published by LexisNexis Canada Inc.
Whether the issue is climate change, biodiversity, labour and supply chains, or human rights, corporate sustainability disclosure is of increasing relevance to shareholders. In a recent report submitted to Ontario, Canada’s minister of finance, the Ontario Securities Commission (OSC) made various recommendations regarding corporate reporting that may be controversial to some, but are a step in the right direction.
The report follows the Ontario Legislature’s unanimous approval of a private member’s resolution calling on the province to review existing reporting requirements and issuers’ compliance.
The resolution asked the OSC to undertake a broad consultation in order to “establish best practice corporate social responsibility…and environmental, social and governance…reporting standards”. In response, the OSC – supported by the Hennick Centre for Business and Law at York University – convened a multi-stakeholder roundtable and held various consultations with interested parties.
The reporting of material environmental, social and governance (ESG) information should be viewed as an integral part of a businesses’ overall risk management strategy. With this information, shareholders are in a better position to assess financial risks and to allocate capital to firms best suited to mitigate these risks. Disclosure also encourages stakeholder dialogue. This dialogue, over time, informs internal decision-making and provides a critical framework for identifying both risks and opportunities. This, in turn, can drive performance, enhance an organization’s reputation and strengthen the core elements of its relationships with stakeholders.
A range of international studies, including reports by the Asset Management Working Group of the United Nations Environment Programme Finance Initiative, have put forth persuasive evidence that such information may impact long and short-term shareholder value – and is thus material to investors.
Stakeholders are certainly seeking this information. Last October, a coalition of investors (representing CDN $79.6 billion in assets under management), environmental groups and lawyers petitioned the OSC to pursue several actions aimed at increasing mandatory disclosure of climate change-related risks in securities filings.
This is not the first time the OSC has entered into the ESG reporting sphere and the results have been controversial. In 2008, it released Staff Notice 51-716 which found that many issuers were providing “insufficient” boilerplate articulations of environmental liabilities, with little to no analysis. While the reaction to the OSC’s findings from particular quarters was hostile, the reality is the OSC did not create new disclosure burdens for Canadian organizations. On the contrary, the legal requirement to report material ESG information already exists. The reality, however, is many companies are not living up to their obligations.
In its report to the minister, the OSC makes two key recommendations. First, that the OSC should conduct further continuous disclosure reviews (such as 51-716) in order to assess corporate compliance; in particular, in the area of governance. Second, that it should continue to provide educational outreach to issuers including additional guidance on existing environmental disclosure requirements.
Both recommendations are sound and represent important steps in the right direction. Compliance reviews are valuable, especially when they present illustrations of successful disclosures. Publishing these examples can assist other companies in compiling their filings and actively validates the disclosure of the cited issuer. Many business people do not realize how ESG information can materially affect the value of a company, so educational outreach is clearly needed.
The report makes it clear that the OSC is not proposing new disclosure provisions. Existing requirements are seen as generally adequate and comparable to those in other countries.
While I agree that sufficient legal basis currently exists to require the disclosure of material ESG information, there is also room for improvement in the law.
For example, current provisions require public companies to report on any social or environmental policies that are fundamental to operations, including policies on human rights and the communities where the issuer conducts business. If, however, no such policies exist, the issuer is not obliged to disclose that fact or to explain the reasons for the omission. Contrast this with U.K. law. Under the U.K. Companies Act 2006, if the prescribed information is not revealed (including policies on environmental, labour and social/community issues), there must be an explicit statement of what has been omitted.
In addition, current provisions ask Canadian issuers to describe steps taken to implement any social policies. However, they do not require an evaluation of their success. Again, the Canadian instrument is out of step with the U.K. equivalent, which requires consideration of the policies’ effectiveness.
Moving away from the law to a process level, when regulators conduct periodic reviews of continuous disclosure and identify problems, these problems are brought to the issuer’s attention via a comment letter. The letter asks the issuer to address the error or to submit a reply explaining why corrective action is not necessary. If a resolution cannot be reached, enforcement action is considered. In the U.S., the Government Accountability Office recently recommended that all comment letters, and the responses of issuers, be made fully available to the public in the form of a searchable electronic database. The Securities and Exchange Commission complied.
In Ontario, only a summary of the deficiency is made available, as well as the issuer’s post-correction press release. Posting actual comment letters, and any response, would help ensure that investors, the public and other companies fully understand the substance and conclusions of regulatory continuous disclosure reviews and would assist civil society and academia in conducting more meaningful reviews and evaluations of corporate disclosure.
These are but a few examples of enhancements that, while modest, would strengthen the current disclosure landscape and bring Canada in line with emerging best practices in comparable jurisdictions. I would hope that the minister of finance will consider these, and other suggestions made by relevant stakeholders, in deciding the future direction of sustainability reporting.
One Comment
This is a well written report and summary but lacks the policy signposts and recommendations that might apply across Canada and across industry sectors.
There is no clear distinction, as far as I can tell, whether the policy development should be a prescriptive or a principles based regulation in style
That said, achieving regulatory co-ordination is not the minefield (no pun intended) that might be imagined.
For example, in the 1990’s after a series of well publicised regulatory failures in technical disclosure standards in the mining industry, the Canadian securities regulators, exchange regulators, professional regulators and the mining industry itself, developed national Canadian standards for technical reports and information disclosure.
These standards (NI 43-101) went far to address public interest needs and have since become almost a global model for mining technical disclosure standards. Despite the problems of multiple regulators and some industry resistance in Canada, the diverse agents were able to co-operate because of the coincidence of private and public interest.
The new OSC report provides a good base.
But I am far more interested in how the proposed social and environmental disclosure standards might be applied across Canada and across sectors.
This is not a small matter. For example, in Canada, the Toronto Stock Exchange Group (TSX group) accounts for the majority of global mining finance and global mineral exploration and development funding so standards developed for social and environmental disclosure become nearly global in scope. Of course, the corollary is that if the standards are too prescriptive, some of the Canadian mining competitive advantage might vanish.
I would look for some analysis of how, at least in the case of mining and oil/ gas technical disclosure standards in Canada, existing disclosure standards might be interwoven with soclal and environmental disclosure.
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