A Brief Survey of Environmental, Social, and Governance Disclosure in Canada

Ravipal S. Bains is an associate at McMillan LLP. This post is based on a McMillan memorandum by Mr. Bains. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

  • Regulators, investors, and other stakeholders have increased their expectations of board oversight and disclosure on environmental, social and governance (ESG) matters.
  • Quality of ESG disclosure will be a factor in recommendations by proxy advisory firms.
  • Enhancing ESG disclosure (particularly, climate-related risks) should be a management priority.

As 2018 draws to a close, certain recent developments, including new policy prescriptions from regulators, guidance from stakeholders, and adoption of environmental accounting frameworks, call for a review of the landscape of environmental, social, and governance (ESG) disclosure in Canada. Management and boards should also tailor future efforts to address these developments and this post offers certain suggestions to do so.

Notable Developments

Regulatory Momentum

CSA Staff Notice 51-354 Report on Climate Change-related Disclosure Project (April 2018): This spring, the Canadian Securities Administrators (CSA), the umbrella organization representing the 13 provincial and territorial securities commissions, published the results of its climate change related disclosure review project. The CSA review noted that users “were dissatisfied with the current state of climate change related disclosure, and believe that improvements are needed.” The CSA indicated that it will develop guidance for disclosure of business risks, opportunities, and financial impacts associated with climate change.

OSC Statement of Priorities for 2018-2019 (July 2018): The Ontario Securities Commission (OSC), which is the securities regulatory agency for the province of Ontario, released a statement of priorities, noting “the growing financial relevance to investors of [ESG] factors and the need for ESG disclosure by companies.”

ESG-oriented Institutional Investors

CCGG’s E&S Handbook (May 2018): The Canadian Coalition for Good Governance (CCGG), an influential investor organization often considered to be the voice of the Canadian buy-side firms, noted growing shareholder emphasis on environmental and social (E&S) factors. In May 2018, the CCGG published the E&S Handbook which outlines a number of criteria for boards of directors to use to oversee the E&S disclosure and judge materiality.

CPP-IB Report on Sustainable Investing (October 2018): In its annual report on sustainable investing, the Canada Pension Plan Investment Board (CPP-IB) noted that it has added Board Effectiveness as a fifth focus area, in addition to Climate Change, Water, Human Rights and Executive Compensation. The report highlights that, in the 2017 proxy season, CPPIB voted on measures at shareholder meetings for “45 Canadian companies with no women directors to demonstrate [CPP-IB’s] desire for improved diversity.” One year later, the report noted nearly half (21) of those issuers had appointed at least one woman to their boards. CPP-IB indicated that, for the coming year, one of its focus areas will be to build a framework of ESG materiality by industry groups.

Petition to the SEC (October 2018): In October 2018, two prominent business law professors (including Cynthia A. Williams, Osgoode Hall Law School), supported by investors and other entities with over US$5 trillion in assets under management, filed a petition calling on the Securities and Exchange Commission (SEC) to “develop a comprehensive framework requiring issuers to disclose identified environmental, social, and governance […] aspects of each public-reporting company’s operations.”

ESG Focused Funds

Canadian fund managers were also enthusiastic about their adoption of ESG principles. In October 2018, Scotia Global Asset Management signed on to the United Nations supported Principles for Responsible Investment (PRI). Also that month, one of Canada largest lenders, Canadian Imperial Bank of Commerce, sold $1 billion of three-year deposit notes, which will support lending to companies committed to promoting women to executive positions. Similarly, Caisse de dépôt et placement du Québec (CDPQ) teamed up with Al Gore’s Generation Investment Management with the aim of making $3 billion of long-term investments in sustainable companies.

According to data from the Responsible Investment Association, a Canadian association for responsible investment (RI) focused mutual funds, asset managers and financial institutions, assets in Canada managed using one or more responsible investment strategies increased from $1.51 trillion at the end of 2015 to $2.13 trillion as at December 31st, 2017. This represents a 41.6% increase in RI assets under management over two years.

ESG-Oriented Activists

Canadian activist activity in 2018 has focused primarily on orthodox issues such as capital allocation, corporate strategy and operational efficiencies, however, as some commentators have noted there was “an interesting behind the scenes trend,” where institutional investors encouraged issuers to act on ESG issues.

The backdrop to this was the flurry of ESG-related activists in the US and a suite of new socially responsible funds, including JANA Partners’ new “Impact Capital” fund, ValueAct’s new socially responsible “Spring Fund”, and Mark Mobius’ new ESG focused “Mobius Capital Partners” fund. If precedent is a guide, activists will build on the behind-the-scenes whispers, and ESG-focused activism should gain traction in Canada.

ESG Frameworks

2018 saw further mainstream adoption of ESG reporting frameworks, including:

GRI Standards: The Global Reporting Initiative (GRI) is an Amsterdam-based organization that helps firms analyse the impact of their activities on issues such as climate change. The GRI’s most recent reporting frameworks are the GRI Standards, launched in October 2016. Major issuers such as Goldcorp Inc., WSP Global Inc., and Teck Resources Inc. already produce annual sustainability reports in compliance with the GRI standards, and Hydro One Limited is also moving towards aligning its ESG reporting with GRI standards.

SASB Standards: Sustainability Accounting Standards Board (SASB), a San Francisco-based standards organization, was founded in 2011 to develop sustainability accounting standards to supplement accounting standards developed by the Financial Accounting Standards Board (FASB). SASB standards are in the final stages of codification and are expected to be available in late 2018. However, certain issuers are already conforming their ESG disclosure reporting to SASB standards. For instance, Cascades Inc., a TSX listed forestry issuer, makes additional data available to investors and the public on a number of indicators recognized by SASB.

ESG Ratings

ISS Environmental & Social QualityScore (February 2018): In February 2018, the proxy advisory firm, Institutional Shareholder Services, Inc. (ISS), launched the E&S QualityScore to provide investors a new metric to evaluate the ESG risk of their portfolio companies. The E&S QualityScore measures an issuer’s disclosure on environmental and social issues, including sustainability governance, and identifies key disclosure omissions. ISS sets E&S disclosure thresholds by industry group. Starting this year, ISS’s policy proxy research reports include an issuer’s top level scores under the E&S scoring methodology, in addition to those for the company’s corporate governance. ISS assigns each company a numeric score indicating a company’s level of E&S disclosure relative to its peers. Scores range from “1” to “10,” with “1” indicating relatively higher quality disclosure.

Glass Lewis ESG Profile (February 2018): Glass Lewis has also indicated that will be integrating review of an issuer’s ESG disclosure into its proxy paper reports. Specifically, Glass Lewis will incorporate Sustainalytics’ (a third party provide of ESG data) research and ratings into its proxy research platform.


Risk Factor Disclosure

Whether it is the CSA’s climate disclosure review project or CCGG’s E&S guidebook, a key focus of ESG actors is enhancing climate-related risk disclosure. An issuer must avoid boilerplate climate risk disclosure that is vague, incomplete, or inconsistent; instead, climate risk disclosure must be entity-specific and must discuss the regulatory, physical, and operational trends, as well as the uncertainties, materiality assessments, and the governance and oversight mechanisms, in place at the issuer’s business.

Separate Sustainability Reports

Issuers should consider publishing sustainability reports to enhance their ESG disclosure. A number of TSX issuers already publish such reports, either separately or in combination with annual reports. Sustainability reports disclose an issuer’s ESG performance and are often based on environmental accounting frameworks (such as GRI Standards). The audience for such reports is broader than traditional annual disclosure documents, which are tailored towards investors, and address communities in which the issuer operates, customers, and employees.

Highlighting ESG Initiatives

For junior issuers at a stage where a standalone sustainability report would be inappropriate, ESG disclosure could be enhanced by providing further details in annual reports and sharing web-based materials. Increasingly, investors, stakeholders, and ratings agencies collect data regarding ESG compliance from numerous sources (including non-regulatory filings), and additional sources that are easily accessible aid investors and third party reviewers in their assessment of an issuer’s ESG compliance efforts.

Compliance with ESG Frameworks

Proxy advisory firms take into account numerous factors in making their ESG assessments. ISS, for instance, reviews around 240 factors (adjusted for industry groups). Many of these factors overlap with the factors found in the reporting frameworks of SASB and GRI. As such, an issuer that complies with such standards (SASB and GRI), would also stand a better chance of higher ratings from proxy advisory firms.

Contacting Proxy Advisors to Verify Data

If management is concerned with an issuer’s rating on the QualityScore, then they should reach out to ISS and verify that the relevant ISS analyst has the full dataset on file. ISS mentions that, along with mainstream securities filings, it also collects data regarding ESG compliance from “websites or member lists made available by the relevant multi-stakeholder initiatives.” Furthermore, in its FAQs, ISS states that “Issuers are invited to review and verify their data through routine data verification.”

Monitor Opinions of Major Investors

With institutional investors taking a lead on ESG disclosure, and in certain cases being ahead of the regulatory curve (on this and other issues), it would be advisable for management to monitor their opinions to ward off unexpected surprises.

For instance, BlackRock Inc., in its 2018 US Proxy Voting Guidelines, stated that: “We [BlackRock] would normally expect to see at least two women directors on every board. … To the extent that we believe that a company has not adequately accounted for diversity in its board composition, we may vote against the nominating/ governance committee members.” Interestingly, BlackRock’s Canadian voting guidelines (which were last updated in 2015) do not contain this language.

Proactive management would require that executives make the nomination and governance committee members aware of such developments and, if the issuer’s board composition does not match the stated criteria, liaise with major investors to communicate the committee’s position.

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