In recent years, boards of directors of reporting issuers are becoming increasingly aware of the environmental, social and governance (“ESG”) disclosure requirements imposed by regulators. Within the current landscape, Canadian companies must work to balance their operational needs with environmentally and socially-responsible practices to avoid issues and generate value for organizational stakeholders.
Given that effective management of ESG issues engages numerous laws, regulations and recommendations, this article will provide a brief overview of some notable ESG-specific securities law requirements and best practices that directors should consider when deciding upon board composition, training and sustainable corporate governance.
Securities law requirements
To date, there is no single Canadian law or regulation mandating a uniform ESG-reporting framework. However, pursuant to section 5.2 of Form 51-102F2 Annual Information Form (“51-102F2”) and section 1.4(g) of Form 51-102F1 Management’s Discussion and Analysis, Canadian securities law does require that reporting issuers disclose the material risks affecting their business and, where practicable, the financial impacts of such risks. Environmental and health risks are specifically contemplated as a risk factor under 51-102F2. For many issuers, particularly those in the mining industries, these risks can engage ESG-related issues such as emissions concerns, environmental hazards associated with mineral exploration, or the potential for climate-related litigation.
Gender diversity is a key component of ESG disclosure that directors should consider. Item 11 of Form 58-101F1 Corporate Governance Disclosure (“58-101F1”) requires that issuers disclose whether a written policy relating to the identification and nomination of women directors has been adopted. Disclosure in respect of the policy must include (i) a summary of its key objectives; (ii) the measures taken to ensure the policy’s implementation; (iii) the issuer’s progress in achieving the objectives of the policy; and (iv) whether and how the board or its nominating committee measures the effectiveness of the policy. If such a policy has not been adopted, the issuer must disclose why.
58-101F1 also considers an issuer’s approach to continuing education, with Item 4(b) mandating issuers disclose the measures, if any, a board of directors takes to provide continuing education for its directors. Pursuant to Canadian Securities Administrators (“CSA”) Staff Notice 51-358, the CSA encourages boards and management to deliberately assess their expertise regarding sector-specific climate change-related risks to enable them to make informed decisions about both risk management and disclosure. If the board does not provide continuing education, issuers must clarify how the board ensures that its directors maintain the skill and knowledge necessary to meet their obligations as directors.
Taken together, these requirements demonstrate the importance of ESG issues in the continuous disclosure framework. That being said, boards of directors should be cautious to not act in an overly-promotional manner. In a recent staff notice, the CSA cautioned issuers against “greenwashing”, stating that regulators have “observed an increase in issuers making potentially misleading, unsubstantiated or otherwise incomplete claims about business operations or the sustainability of a product or service being offered, conveying a false impression commonly referred to as ‘greenwashing’”. Examples, such as overly-promotional language or excessively broad statements about an organization’s social impact are highlighted as problematic practices that should be avoided.
Recommendations from proxy advisory firms
Proxy advisory firms such as Glass, Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services (“ISS”) are more closely monitoring companies’ performance on environmental and social issues – particularly those pertaining to human capital management and climate. Indeed, in its 2023 Policy Guidelines, Glass Lewis confirms that it regards climate risk as a material risk for all companies and may recommend voting against an issuer’s audit committee where there is absence of explicit board oversight of environmental and social issues. ISS similarly regards “demonstrably poor risk oversight of environmental and social issues” as examples of failure of risk oversight which may prompt vote withhold for boards of directors.
Both Glass Lewis and ISS provide recommendations on gender diversity. Transitioning from a fixed numerical approach to a percentage-based approach, Glass Lewis will generally recommend voting against the nominating committee chair of any TSX company board that is not at least 30 percent gender diverse. A sufficient rationale or plan to address the lack of diversity may refrain application of a negative recommendation. For companies not listed on the S&P/TSX Composite Index, ISS will generally vote against the chair of the nominating committee if there are no women on the board of directors.
These recommendations align with guidance recently published by the TMX Group and Institute of Corporate Directors, which recommends that boards of directors make up no less than 40% of people who identify as women to reflect the diversity of the company’s stakeholders and the communities in which it operates.
Director competencies and compensation
Complementing the requirements imposed by Form 58-101, proxy advisory firms will also assess an issuer’s climate-related disclosure in the context of continuing education. Glass Lewis notes that having an appropriate mix of attributes on a board of directors – including specific skills and diversity – are necessary to effectively advise management on key decisions. ISS will generally recommend to vote against the chair of the responsible committee of a company that is (i) a significant greenhouse gas emitter and (ii) is not taking the minimum required steps to understand, assess and mitigate risks related to climate change.
Proxy advisory firms will also factor in climate-related performance measures of executive short- and long-term incentive plans into voting recommendations. Although Glass Lewis strongly supports companies’ incorporation of material ESG-related risks and recommends that companies set long-term targets for environmental and social ambitions, this area is less prescriptive. Glass Lewis believes that ESG metrics in compensation programs should be predicated on each company’s unique circumstances. With this in mind, boards of directors should consider how ESG-focused incentive plans enhance or protect shareholder value in both the short- and long-term.
In a recently released 2023-2024 Statement of Priorities, the Ontario Securities Commission (“OSC”) has committed to furthering its work on ESG-related disclosures for reporting issuers. Central to this mandate is the OSC’s planned outcomes that (i) investors have sufficient access to ESG information necessary to inform their investment and voting decisions; and (ii) reporting issuers have clarity on their ESG disclosure requirements.
Although characterized as “nascent”, the OSC continues to focus on ESG reporting practices as a mechanism to promote investor confidence in corporate disclosures following heightened institutional and retail investor interest in the area. In 2021, the CSA published for comment draft Proposed National Instrument 51-107 Disclosure of Climate-Related Matters (“NI 51-107”), along with a companion policy and two Forms. NI 51-107 seeks to standardize issuer’s climate-related disclosure in compliance with recommendations from the Task Force on Climate-Related Financial Disclosures. Given the attention that ESG continues to receive from regulators and proxy advisory firms, boards of directors should continue to stay up-to-date and implement environmentally and socially-responsible practices that drive shareholder confidence and company performance.
With a strong national presence and unparalleled depth of experience, Miller Thomson’s ESG and Carbon Finance Group is well-positioned to advise on any and all business activities within the ESG space. Feel free to reach out to our national group leads to see how we can assist your business.
Additionally, please mark your calendars for Tuesday, March 7, 2023 for Miller Thomson’s inaugural ESG and Carbon Finance event: ESG and The Mining Industry. This will be an in-person event, held at our Toronto office and broadcasted virtually for those who wish to dial in. To learn more, please email firstname.lastname@example.org.
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 OSC, CSA Staff Notice 51-358 Reporting of Climate Change-related Risks, August 1, 2019.
 In Alberta, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Québec, Saskatchewan and Yukon only.
 OSC, CSA Staff Notice 51-364 – Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2022 and March 31, 2021, November 3, 2022.
 Glass, Lewis & Co., 2023 Policy Guidelines, November 17, 2022.
 Institutional Shareholder Services, Canada: Proxy Voting Guidelines for TSX-Listed Companies Benchmark Policy Recommendations, December 13, 2022.
 TMX Group & and Institute of Corporate Directors, Charting the Future of Canadian Governance: A Principled Approach to Navigating Rising Expectations for Boards of Directors. Report of the Committee on the Future of Corporate Governance in Canada, January 18, 2023.
 OSC, 2023-2024 OSC Statement of Priorities, November 22, 2022.
 Task Force on Climate-Related Financial Disclosures, Recommendations of the Task Force on Climate-related Financial Disclosures, June 2017. For a detailed discussion of NI 51-107 please see our newsletter.