Canada | Publication | September 8, 2023
This update covers the latest trends and our recommendations regarding the evolving landscape of environmental, social and governance (ESG) practices. For 2024, we see each of the “E”, the “S” and the “G” increasing in prominence. With the operationalization of ESG oversight becoming of growing interest, this update also covers key strategies issuers may consider when assigning and executing oversight responsibilities.
In preparing this update, we reviewed the most recent disclosure of TSX 60 issuers, as was done in the previous two years. Please note that variations between 2021, 2022 and 2023 should be interpreted with caution as the TSX 60 Index’s composition has changed over the years.
ESG oversight
North American investors and proxy voting advisory firms continue to push for a more robust oversight of ESG matters at the board and committee levels. For instance, in its review of Canadian issuers’ governance practices, Glass Lewis identifies which board-level committees have been charged with overseeing ESG issues, and may recommend voting against the governance chair of a TSX 60 issuer that fails to disclose the board’s role in ESG oversight.1 Others continue to take a more targeted approach and will, for instance, vote against the chair of a committee in charge of overseeing climate change where the board has failed to demonstrate adequate consideration for that topic.2
Moreover, The Globe and Mail’s Board Games methodology for 2023 will consider board responsibility for the environment, with top marks being attributed to issuers that identify the board committee(s) responsible for climate policy and/or describe how and how often other board committees consider climate-related issues. Of note, issuers cannot get marks in that respect in the Board Games survey if the committee responsibilities are described broadly, such as “ESG” or “environment”; disclosure must be climate specific, qualifying responsibilities using words or phrases such as “climate change,” “global warming,” “greenhouse gases” or “carbon.”3
In 2022, our analysis confirmed that 54 out of 60 (90%) issuers composing the TSX 60 Index provided that either their boards and/or at least one committee was tasked with overseeing ESG-related matters. This proportion increased to 58 out of 60 (97%) in 2023.
When it comes to committee oversight of ESG matters, the dominant trend remains to delegate such responsibility to either governance committees (or equivalent) or to “specialized” committees such as an ESG committee, a sustainability committee, or an environmental, health, safety and sustainable development committee. Of the 57 issuers that have disclosed overseeing ESG matters at the committee level in 2023 (51 in 2022), whether in addition to or instead of their boards, 23 assigned ESG oversight to multiple committees (15 in 2022). We also note a fairly significant proportion of boards of directors, namely 35 out of 60 issuers (58%), entrust their governance committee with ESG responsibilities. Only one board of directors (four in 2022) retains full oversight of ESG matters at the board level. Our findings are summarized in the table below:
| Number of TSX 60 Issuers | ||
|---|---|---|
| ESG oversight | 2022 | 2023 |
| Board only | 4 | 1 |
| Governance committee (or equivalent) | 28 | 35 |
| “Specialized” committee | 18 | 20 |
| Audit committee | 9 | 15 |
| Multiple committees (including the above, as the case may be) | 15 | 23 |
An analysis of the practices of TSX 60 issuers shows 87% of them base director nominations or disclose board composition against a matrix that includes some combination of ESG skills, including, among others, diversity and inclusion, which is included in 20% of TSX 60 issuers’ skill matrices. We note The Globe and Mail’s Board Games methodology for 2023 will consider whether an issuer has included climate expertise as a “required skill” in the board skills matrix and whether at least one director is attributed with climate expertise.
Factors that may influence issuers in determining if the entire board or a board committee should be responsible for ESG oversight include:
Recommendation: Consider reviewing the charters (or mandates) of your board of directors and its committees to include ESG oversight responsibilities. Review your skill matrix to take into account experience and expertise on ESG, including climate expertise.
Getting ready to implement new requirements from modern slavery legislation
As mentioned in our legal update, Canada has adopted Bill S-211, an Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff (the Modern Slavery Act). It received royal assent in May and will come into force on January 1, 2024. The purpose of the Modern Slavery Act is to implement Canada’s international commitment to combat forced labour and child labour by imposing reporting obligations on, among others, business entities listed on a Canadian stock exchange that produce goods in Canada or elsewhere or import goods produced outside Canada. The legislation also applies to entities not listed on a Canadian stock exchange that meet certain size thresholds.
The Act requires that, on or before May 31 of each year, in-scope entities report to the minister of public safety and emergency preparedness on the steps taken during the previous financial year to prevent and reduce the risk that forced labour or child labour is used at any step of the production of goods in Canada or elsewhere by the entity or of goods imported into Canada by the entity. The first reports under the Modern Slavery Act are due no later than May 31, 2024.
The report must also include information about the entity’s:
The reports will be publicly accessible through an electronic registry. The minister also has the discretion to impose specifications on the form and manner in which reports are to be provided, but has not yet done so.
The report of a Canadian-listed corporation must be approved by its governing body, which should normally be the board of directors. Corporations must make their reports available to the public, including by publishing them prominently on their website.
Federally incorporated entities, including those incorporated under the Canada Business Corporations Act or the Bank Act, are also required to deliver their reports to their shareholders, along with their annual financial statements. As a result of this requirement, many federally incorporated entities will effectively be required to deliver their reports ahead of the May 31 deadline.
The Act gives significant investigative powers to persons designated by the minister and the minister has broad power to require an entity to take any measures the minister considers necessary to ensure compliance.
Every person or entity that fails to comply with the Modern Slavery Act (including by failing to prepare a report or make a report publicly available, by failing to assist in an investigation, by obstructing an investigation or by failing to comply with a corrective order), is guilty of an offence punishable on summary conviction and liable to a fine of more than $250,000. Every person or entity that knowingly makes any false or misleading information or knowingly provides false or misleading information to the minister or one of the minister’s designates is also guilty of an offence punishable on summary conviction and liable to a fine of not more than $250,000.
In addition, if a person or entity commits an offence under the Modern Slavery Act, any director, officer or agent or mandatary of the person or entity who directed, authorized, assented to, acquiesced in or participated in its commission is also guilty of the offence and liable on conviction to the punishment provided for the offence, whether or not the person or entity has been prosecuted or convicted.
Recommendation: Although issuers with material supply chain risk may already be engaged in diligence and reporting exercises, the Modern Slavery Act is likely to capture many entities that have not previously considered potential modern slavery issues. Considering the potential liability for directors and officers and with reports under this new legislation due in less than a year, you should review your governance policies, map your supply chain, assess the areas of risk and consider any gaps and risk mitigation strategies.
Stay on the watch for “diversification” of diversity expectations and requirements
As stated in our publication related to the 2023 proxy season, one of the key changes in the last few years regarding investor expectations on diversity was the amendment by Institutional Shareholder Services (ISS) of its voting guidelines such that effective February 1, 2024, S&P/TSX Composite Index constituents will be expected to have at least one racially or ethnically diverse director. Under the new policy, ISS may recommend voting against the chair of the committee responsible for director nominations, or where no such individual is identified, the chair of the board of directors, when an issuer does not comply with this guideline.
Meanwhile, as mentioned in our legal update, the Canadian Securities Administrators (CSA) have sought comments on whether to increase disclosure obligations for diversity on boards and in senior management to cover identified groups beyond women (the Consultation). The Consultation envisions two proposed alternative models, each endorsed by different provincial regulators. Regulators in British Columbia, Alberta, Saskatchewan and the Northwest Territories have suggested a model that would require an issuer to disclose its approach to diversity for the board and senior management, but would not mandate disclosure about any specific groups, other than women. An issuer would be left to determine the groups whose representation on its board or in senior management positions form part of its diversity strategy.
The Ontario Securities Commission prefers the approach to diversity disclosure recently adopted under the Canada Business Corporations Act (CBCA), and has suggested a model that will require reporting on the representation of five designated groups: women, Indigenous peoples, racialized persons, persons with disabilities and LGBTQ2SI+ persons, on boards and in executive officer positions. The remaining provincial regulators are not picking a side at this time.
Related amendments, agreed to by all CSA members, were proposed in the Consultation. They relate to disclosure and guidance around board renewal and nominations. New guidelines on board renewal have been suggested in the Consultation, specifically on maintaining an effective succession plan and adopting board renewal mechanisms, including term limits or using a composition matrix to identify gaps in the composition of the board.
For board nominations, proposed amendments will require increased disclosure about how a board identifies and evaluates candidates for nomination, including any written nomination policy and, if none exists, how the nomination process is carried out; how conflicts of interest during the nomination process are managed; whether the board has a composition matrix; and the skills, knowledge, experience, competencies and attributes that are considered when evaluating a candidate. Corresponding amendments would provide amended guidelines on the role of the nominating committee and recommend the adoption of a composition matrix and a written nomination policy.
The proposed amendments discussed above were open for public comment until July 12, 2023. We expect the CSA will publish new requirements in that respect within the next year.
Recommendation: Consider how the content and disclosure of your diversity, equity and inclusion (DEI) policies and renewal mechanisms align with evolving expectations voiced by regulators, investors and proxy advisory firms. Consider reviewing your skill matrix to make sure it is representative of diversity attributes that are important for your corporation.
ESG considerations in executive compensation
Based on our review of the latest compensation discussion and analysis of TSX 60 issuers, 44 of them (the same number of issuers as in 2022) consider ESG measures in executive compensation to a certain extent. They may be considered as part of their short-term incentive plan (STIP) or their long-term incentive plan (LTIP). The most frequent key performance indicators (KPIs) related to ESG used by such issuers, for compensation purposes, include the following:
| KPI | STIP | LTIP | Common sub-categories |
|---|---|---|---|
| Environment | 31 | 14 |
|
| 51.7% | 23.3% | ||
| DEI | 23 | 7 |
|
| 38.3% | 11.6% | ||
| Health and Safety | 20 | 3 |
|
| 33% | 5% | ||
| People | 15 | 5 |
|
| 25% | 8.3% | ||
| Community | 8 | 2 |
|
| 13.3% | 3% | ||
| Governance | 8 | 3 |
|
| 13.3% | 5% | ||
| ESG generally | 7 | 2 | – |
| 11.6% | 3.3% |
ESG-related KPIs can be considered on a “stand-alone” basis, as part of a scorecard, as a performance modifier or as a prerequisite to paying certain amounts.4 Based on our analysis of TSX 60 issuer disclosure, 39 issuers (65%) currently incorporate such KPIs in their STIPs and 16 issuers (27%) incorporate them in their LTIPs.
Recommendation: Once a board of directors (or a board committee) has selected relevant ESG factors, incorporating ESG KPIs into compensation plans should be considered.
Climate-related reporting
On June 26, 2023, the International Sustainability Standards Board (ISSB), a creation of the IFRS Foundation, issued its first two sustainability standards (ISSB Standards), IFRS S1 and IFRS S2, which deal with general requirements for sustainability disclosure and climate-related disclosure, respectively. The ISSB Standards are broadly based on the Task Force on Climate-related Financial Disclosures (TCFD) framework and incorporate Sustainability Accounting Standards Board (SASB) standards, and they are motivated by a single, ambitious objective: setting a worldwide baseline for sustainability and climate-disclosure reporting.
Under the auspices of Financial Reporting & Assurance Standards Canada, the Canadian Sustainability Standards Board (CSSB) recently became operational and will now work with the ISSB in supporting the uptake of the ISSB standards in Canada. Consult our recent legal update for more information on the ISSB Standards.
Going back in time: on October 18, 2021, the Canadian Securities Administrators (CSA) proposed National Instrument 51-107 – Disclosure of Climate-related Matters (the CSA Climate Disclosure Regime).5 Largely based on the TCFD’s recommendations, the CSA Climate Disclosure Regime focuses on four areas: (i) governance, (ii) strategy, (iii) risk management, and (iv) metrics and targets. A total of 131 comment letters were submitted during public consultations, which were concluded on February 16, 2022.6
The CSA Climate Disclosure Regime was initially set to come into force on or after December 31, 2022. For a variety of reasons – including a robust public consultation exercise, the expected issuance of the ISSB Standards and the publication of a proposed regime in the U.S. (see below) in the interim – the CSA Climate Disclosure Regime remains a proposal instrument at this time. On July 5, 2023, the CSA issued a press release stating that it welcomes the publication of the ISSB Standards and “intend[s] to conduct further consultations to adopt disclosure standards based on ISSB standards, with modifications considered necessary and appropriate in the Canadian context”.7 The CSA will engage and collaborate with the CSSB on a review of the ISSB Standards. A further market update, possibly including a second iteration of the CSA Climate Disclosure Regime, is expected in the coming months.
In March 2023, the Office of the Superintendent of Financial Institutions (OSFI) published Guideline B-15 - Climate Risk Management (B-15),8 applicable to federally regulated financial institutions (FRFIs). B-15 establishes OSFI’s expectations related to FRFIs’ management of climate-related risks. It covers two main areas: (i) governance and risk management expectations, and (ii) climate-related financial disclosures. While these are (also) largely based on the TCFD recommendations, it is worth noting they include climate scenario analysis, requiring FRFIs to describe the resilience of their climate-related strategy, taking into account different scenarios. In contrast, the CSA did not include a climate scenario analysis requirement in its proposed CSA Climate Disclosure Regime.9
Although B-15 is not necessarily incompatible with the ISSB Standards, OSFI will likely be faced with the same choices as the CSA in terms of incorporating ISSB/CSSB concepts into its existing rules, should it wish to adopt them in some form.
In parallel, the US Securities and Exchange Commission (SEC) proposed new rules in March 2022 that would require domestic and foreign registrants to provide climate-related disclosures in their registration statements and annual reports (the SEC Climate Disclosure Regime).10
The SEC Climate Disclosure Regime, if adopted, would require registrants to disclose: (i) information about climate-related financial risks over the short, medium, and long term, (ii) information about their governance of climate change risks and relevant risk management processes, (iii) their greenhouse gas emissions that, in certain cases, would be subject to certification requirements, (iv) climate-related financial metrics, and (v) information about climate-related targets, goals, and transition plans. Consult our legal update for a detailed analysis of the SEC Climate Disclosure Regime. In June 2023, the SEC updated its rulemaking timetable, such that it is now expected that the SEC Climate Disclosure Regime will be finalized in October 2023.11
European companies are also on their toes given the European Commission recently adopted its first set of 12 European Sustainability Reporting Standards (ESRS), namely rules and requirements for EU and some non-EU companies to report on sustainability-related impacts, opportunities and risks under the Corporate Sustainability Reporting Directive. Consult our recent legal update for more information on the ESRS.
Pending the finalization and coming into effect of the above-mentioned initiatives, major Canadian issuers continue to resort to globally recognized voluntary disclosure frameworks. The TCFD framework and the SASB standards are at the top of our watch list. The adoption rates for these leading models remain high at 75.0% and 88.3% respectively, among TSX 60 issuers. The table below summarizes the latest data on the adoption of the main standard disclosure frameworks among TSX 60 issuers over the last three years:
| Standard framework | Proportion of TSX 60 issuers that use the standard framework | ||
|---|---|---|---|
| 2021 | 2022 | 2023 | |
| Task Force on Climate-related Financial Disclosures (TCFD) | 66.7%(i) | 75.0%(ii) | 75.0% |
| Sustainability Accounting Standards Board (SASB) | 68.3% | 80.0% | 88.3% |
| Global Reporting Initiative (GRI) | 75.0% | 75.0% | 81.7% |
| Carbon Disclosure Project (CDP) | 75.0% | 65.0% | 60.0% |
(i) Including four issuers in the process of adopting the framework.
(ii) Including one issuer in the process of adopting the framework.
We note several Canadian issuers have adopted and publicized climate-related objectives, including targets to cut greenhouse gas emissions. Such objectives are often integrated as forward-looking statements in a number of public documents. Since our 2021 publication, in which we discussed secondary market liability considerations in this specific context, many issuers have enhanced their cautionary language for forward-looking statements to better address climate-related statements. We expect this trend to grow in the coming years.
Recommendation: Be proactive in assessing your ESG reporting practices, consider implementing well-recognized standard frameworks and prepare for the upcoming adoption of mandatory climate disclosure regimes. Be mindful of potential liability. Ensure ESG claims are accurate and integrate forward-looking cautionary language in ESG disclosure, where appropriate.
ESG Proposals
ESG proposals from TSX 60 issuers have gained ground in recent years. Climate-related shareholder proposals continue to be prominent, with such proposals including requests to:
However, a more diverse range of proposals centered around social issues gained traction in 2023 among TSX 60 issuers, emphasizing the increasing need for corporate oversight of a wide range of social issues. Such proposals include requests to:
Governance-related proposals in 2023 included requests to:
Alongside what appears to be accrued shareholder interest in ESG proposals, anti-ESG proposals have also reared their head in Canada, albeit with very limited support (less than 2%). Indeed, shareholder proposals were brought to certain Canadian financial institutions, seeking to have them commit to continue to invest in and finance the Canadian oil and gas sector and review their policies to ensure there are none that encourage divestment from the sector.
Recommendation: Boards should pre-empt proposals by considering in advance topics discussed above and engage in responsive and active engagement year-round.
As we noticed last year, our continuous review of TSX 60 issuers’ ESG disclosure shows there is no “one-size-fits-all” approach when it comes to the operationalization of ESG oversight. Some issuers have established management-level committees comprised of members of senior leadership who are responsible for various ESG functions. These management-level committees typically develop and implement the issuer’s ESG strategy and action plan and report to the board (or one of its committees) on progress made.
In exercising their oversight functions, the board and its committees should be provided with sufficient information to be able to assess the progress of the ESG strategy against set goals and to monitor current and planned ESG initiatives. To do so, the board or lead board committee, together with management, should understand and agree on the most important ESG risks and opportunities and develop measurement criteria, such as ESG metrics and KPIs, against which reporting can be made to the board or board committees.
The scope and frequency of ESG reporting may vary depending on the issuer’s specific characteristics, including:
The frequency of reporting can also differ according to the various “E,” “S” and “G” topics monitored by the issuer, as each topic may evolve at a different pace. As a best practice, issuers may consider using a work plan to coordinate reporting to the board and board committees on various ESG topics. This work plan should be reviewed periodically to take into account best practices and internal developments.
As mentioned above regarding climate-related reporting, issuers should consider secondary market liability implications when disclosing ESG policies and practices. Relevant forward-looking cautionary language should accompany such disclosure.
Recommendation: Consider assigning overall ESG oversight responsibilities to a management committee and ESG-related tasks to relevant management teams. Identify the most important ESG risks and opportunities and develop measurement criteria to assess the progress of the ESG strategy and initiatives. Consolidate ESG responsibilities into a work plan and use that plan to implement a schedule for reporting to the board and board committees. Review the work plan periodically to adapt to best practices and internal developments. Be mindful of potential disclosure liability and include appropriate cautionary language in public documents.
See the public consultation deck: https://www.osc.ca/sites/default/files/2021-10/csa_20211018_51-107_disclosure-update.pdf.
Publication
In this edition of Regulation Around the World we review recent steps that financial services regulatory authorities have taken as regards investment research.
Publication
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