Pension professionals need to keep an eye on these latest ESG trends that will affect the domestic companies in which Canadian pensions invest.
By Ed McCarthy
Alicia Quesnel
ESG initiatives and regulations are showing up everywhere in Canada. Alicia K. Quesnel, a Calgary-based partner with attorneys Burnet, Duckworth & Palmer, LLP, notes the changes are coming in different levels. Statutory regulations, environmental rules and impact assessment legislation are what Quesnel calls level one “hard laws.” Level two is a move towards greater transparency and disclosure. These are “soft” laws in the sense that “you don’t have to meet a target, but you do have to disclose where you’re at, and that, in and of itself, should give you incentive to start doing better,” she explains. The third level is incentives the government can put in place to motivate behavior through the tax system. Examples include carbon taxing or providing funding for technology and rebates.
ESG initiatives will affect the domestic companies in which Canadian pensions invest, which creates a need to monitor the major trends. Here are some recent developments worth tracking:
Updated Proxy Voting Guidelines
Last November Institutional Shareholder Services (ISS) published its 2021 Proxy Voting Guidelines for TSX-Listed Companies Benchmark. The guidelines took effect for shareholder meetings on or after February 1, 2021 and the themes included under “Social/Environmental Issues” include “consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues.”
The guidelines also review reasons for withholding votes or voting against board members. These reasons include: “Material failures of governance, stewardship, risk oversight or fiduciary responsibilities at the company…” ISS expands that guidance in a footnote with examples of failure of risk oversight such as “demonstrably poor risk oversight of environmental and social issues, including climate change (emphasis added).”
Provincial Initiatives
In January 2021, Ontario’s Capital Markets Modernization Task Force issued a report that recommended “mandating disclosure of material ESG information, specifically climate change-related disclosure that is compliant with the TCFD (Task Force on Climate-Related Financial Disclosures) recommendations for issuers through regulatory filing requirements of the OSC (Ontario Securities Commission).”
According to the report, the requirements would apply to all reporting issuers (non-investment funds) and would include the following:
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Mandatory disclosure recommended by the TCFD related to governance, strategy and risk management (subject to materiality). This would exclude mandatory disclosure of scenario analysis under an issuer’s strategy.
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Disclosure of Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas emissions on a “comply-or-explain” basis.
This recommended mandate may go national. A recent analysis from law firm McCarthy Tétrault notes that the task force has “called for the Canadian Securities Administrators (CSA) to impose a uniform standard across all provinces. The report also recommends changes to Ontario’s securities legislation to increase regulatory oversight of proxy advisory firms and to promote greater corporate board diversity through enhanced disclosure and novel term limits for directors of public issuers.”
National Plans
Brendan Downey
Brendan Downey, an associate in Burnet, Duckworth & Palmer, LLP’s Calgary office, points to recent changes in the Canada Business Corporations Act as an example of a national ESG-focused change. Affected companies “now need to provide some diversity disclosure where they identify their initiatives intended to increase the representation of certain designated groups within the company’s governance structure and also on the boards,” he explains. “That includes women, indigenous peoples, people with disabilities and other members of visible minorities.”
In May 2021, the Government of Canada launched the Sustainable Finance Action Council with a stated goal of helping to lead the Canadian financial sector toward “integrating sustainable finance into standard industry practice.” The Council’s early emphasis will be on implementing the TCFD’s recommendations; it will also work on gender and diversity reporting.
Other national initiatives are emerging. Last November the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) announced plans for a pilot project to “use climate-change scenarios to better understand the risks to the financial system related to a transition to a low-carbon economy. A small group of institutions from the banking and insurance sectors will participate voluntarily in the project.”
Seeking Clarity
Greg McIlwain
There are numerous organizations providing ESG advice, regulation and recommended standards. In addition to the government, the TCFD, SASB (Sustainability Accounting Standards Board), CDP (formerly Carbon Disclosure Project) and the Climate Disclosure Standards Board (CDSB) are all active. Nonetheless, Greg McIlwain, a partner with law firm McMillan, LLP in Calgary, notes that companies aren’t simply “falling into step” with government regulations. “It’s more like the industry trend has caused companies to want to disclose what they’re doing about ESG,” McIlwain asserts.
The problem, however, is the proliferation of metrics from different organizations that evaluate a company’s ESG efforts. Consequently, that’s one area where Canadian companies are likely to see more standardization coming, McIlwain believes. He isn’t the first to highlight the applicable metrics-challenge. Last November, the chief executive officers of Canada’s eight largest pension plan investment managers issued a joint statement calling on “companies and investors to provide consistent and complete environmental, social, and governance (ESG) information to strengthen investment decision-making and better assess and manage their collective ESG risk exposures.” Specifically, the CEOs called on companies to use the Sustainability Accounting Standards Board (SASB) standards in conjunction with the Task Force on Climate-Related Financial Disclosures (TCFD) framework to help standardize ESG-related reporting.
Given their clout in the markets—the plans controlled a combined C$1.6 trillion when the CEOs issued their statement—perhaps the efforts to standardize ESG metrics will gain momentum.
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
