Longer publication test

On June 24, 2024¹, new greenwashing provisions under the Competition Act came into force with the passing of Bill C-59, confirming that potential greenwashing continues to be an enforcement priority. More precisely, such provisions prohibit:

• with respect to product-specific environmental representations, any “representation to the public in the form of a statement, warranty or guarantee of a product’s benefits for protecting or restoring the environment or mitigating the environmental, social and ecological causes or effects of climate change that is not based on an adequate and proper test” (subparagraph 74.01(1)(b.1) of the Competition Act); and
• with respect to business-wide environmental representations, any “representation to the public with respect to the benefits of a business or business activity for protecting or restoring the environment or mitigating the environmental and ecological causes or effects of climate change that is not based on adequate and proper substantiation in accordance with internationally recognized methodology” (subparagraph 74.01(1)(b.2) of the Competition Act).

There is still much uncertainty around such provisions, including the meaning and implication of the terms “adequate and proper test” and “internationally recognized methodology”, as they are not currently defined under the Competition Act. Importantly, it remains unclear whether mandatory disclosure standards issued by Canadian Securities Administrators (CSA) or voluntary ones issued by bodies such as the Canadian Sustainability Standards Board (CSSB) (discussed below), will be recognized as “internationally recognized methodologies” that companies can rely upon when making business-wide environmental claims.

The Competition Bureau’s public consultation on these new provisions, which concluded on September 27, 2024², is expected to inform its future enforcement guidance regarding environmental claims. In the interim, what is clear is that businesses found in violation of deceptive marketing provisions could face significant penalties. These may include orders to cease the conduct, corrective notices, and/or administrative fines that can represent up to 3% of a business’s worldwide revenues.

As further discussed in our recent legal update, the new greenwashing provisions may lead to “greenhushing” across certain industries until clear guidance is issued. Some companies have already taken protective measures against the risk of sanctions, including scrubbing disclosure documents or websites and putting a hold on the publication of new sustainability (or similar) reports.

Climate-Related Reporting: What’s Next?

With voluntary climate-related reporting standards maturing and regulators aligning their approaches, the stage is set for major regulatory changes in 2025.

Canadian Reporting Issuers

In June 2023, the International Sustainability Standards Board (ISSB), a creation of the IFRS Foundation, issued its first two sustainability standards, IFRS S1 and IFRS S2, which deal with general requirements for sustainability disclosure and climate-related disclosure, respectively. IFRS S1 and S2 became effective for annual reporting periods beginning on January 1, 2024, with earlier application permitted. Throughout 2024, the ISSB held multiple meetings on the implementation of these frameworks, and is actively working on producing educational content on the matter.

On December 18, 2024, the CSSB published the “Canadianized” version of the ISSB standards, the Canadian Sustainability Disclosure Standards (CSDS). The resulting CSDS S1 and S2 remain consistent with IFRS S1 and S2, except with respect to the timing of disclosure obligations, as CSDS S1 and S2 include transitional reliefs for some of the more burdensome requirements.

Now that the CSDS are finalized, the CSA anticipate a new round of public consultation on a revised version of its instrument setting out climate-related disclosure requirements (National Instrument 51-107). We should note that the CSA also mentioned that they are monitoring and assessing international developments, including the United States Securities and Exchange Commission’s (SEC) climate-related disclosures rules introduced on March 6, 2024³. The CSSB standards will need to be properly incorporated into a CSA rule before they become mandatory for Canadian companies.

Several TSX 60 companies are preparing for the coming changes: 36.6% of major Canadian issuers mentioned that they were tracking the evolution ISSB standards, or even taking active steps to begin complying with them in their last sustainability (or similar) report. In the meantime, the proportion of issuers that comply with other globally recognized voluntary disclosure frameworks maintained its steady growth over the past year:

Financial Institutions

The Office of the Superintendent of Financial Institutions (OSFI), which is responsible for supervising federally regulated financial institutions and pension plans, published Guideline B-15 in March 2023. This instrument sets out OSFI’s expectations of federally regulated financial institutions in relation to the management of climate-related risks. Guideline B-15 includes requirements for climate-related disclosure that are aligned with the TCFD/IFRS disclosure model and focus on governance, strategy, risk management, and metrics and targets. Depending on the institutions, some requirements became effective for the fiscal year ending in 2024, while other requirements will come into force in relation to fiscal years 2025 and 2026.

As discussed in our recent legal update, provincial and territorial regulators can impose climate disclosure obligations on financial institutions subject to their jurisdiction. In Québec, the Autorité des marchés financiers (AMF) has published the final version of its “Climate Risk Management Guideline” on July 4, 2024. The guideline puts in place a timeline, which starts applying to financial institutions for their fiscal year 2024 or 2025 depending on how they were categorized by the AMF.

Federal Private Corporations

As further discussed in our recent legal update, the Canadian federal government announced in October 2024 its intention to amend the Canada Business Corporations Act⁴ (CBCA) to introduce mandatory climate-related financial disclosure for large, federally incorporated private companies. No information on timing, process, company size thresholds or substantive requirements has been released at this time.

Preparing for Year 2 of Modern Slavery Reporting

Canada’s Fighting Against Forced Labour and Child Labour in Supply Chains Act (commonly referred to as the Modern Slavery Act) came into force last year. For a detailed overview of the Modern Slavery Act and its related reporting requirements, you can access our earlier update.

In November 2024, following its review of the first reporting year during which more than 5,650 entities published a modern slavery report, Public Safety Canada amended its guidance in an attempt to clarify some key interpretative questions. As further discussed in our recent legal update, the amendments clarify which organizations are required to report under the Modern Slavery Act, as well as the scope of the reporting requirements. In preparing for year 2, organizations should consider whether they are required to report under the amended guidelines, and consider further information provided by Public Safety Canada in the coming months. Reporting entities may also wish to consult the key findings from our review of 1,275 modern slavery reports submitted during year 1. Finally, organizations that fell short or were slightly above the relevant financial thresholds in 2024 should reevaluate the necessity to publish a modern slavery report, especially after a significant acquisition or disposition.

Navigating DEI Through the Anti-Woke Movement

In recent years, in the wake of George Floyd’s death and the subsequent Black Lives Matter protests against racial inequity in 2020, many companies worldwide increased their commitments to diversity, equity, and inclusion (DEI). This period also saw a surge in shareholder proposals related to DEI being submitted to companies.

In Canada, this social movement coincided with heightened disclosure obligations relating to diversity for distributing corporations governed by the CBCA. Since January 1, 2020, these corporations have been required to provide shareholders with information about the representation of four designated groups—women, Indigenous people (First Nations, Inuit, and Métis), members of visible minorities, and people with disabilities—on their boards of directors and among senior management.

Since then, there have been incremental increases in the representation of designated group members on both the board of directors and senior management as well as a growing trend among corporations to adopt written policies addressing the identification and nomination of members of designated groups for director roles.

More recently, however, according to ISED Canada’s 2023 annual report on the diversity of boards of directors and senior management of corporations subject to such disclosure obligations, slight declines were identified as compared to 2022, including as it relates to the number of board seats held by members of visible minorities (from 6% to 5%), the number of distributing corporations that set targets for women (from 23% to 22%) and visible minorities (from 5% to 4%) and the number of distributing corporations that considered the level of representation of women on their boards (from 70% to 69%) and on their senior management teams (from 66% to 64%) when identifying candidates.

Recent trends also indicate a decline in average shareholder support for DEI proposals in Canada.

Recent trends also indicate a decline in average shareholder support for DEI proposals in Canada.

Such declines are occurring against the backdrop of a growing anti-woke movement south of the border, with some of the largest companies retreating from their DEI programs in the face of vocal critics who dismiss DEI as a “woke agenda”. DEI disclosure obligations in the United States are also facing mounting legal heat. Indeed, on December 11, the U.S. Court of Appeals for the Fifth Circuit struck down the Nasdaq board diversity disclosure rules, holding that the SEC lacked the statutory authority under the Exchange Act to approve the rules. As such, Nasdaq-listed companies will no longer be required to comply with the rules. Nasdaq has indicated that it will not appeal the decision. A copy of the decision can be found here.

While the full impact of the anti-woke movement on Canadian boardrooms and senior management remains to be seen, it is important to note that disclosure obligations are still on the Canadian Securities Administrators’ agenda, with potential changes to diversity-related disclosure requirements being explored in an effort to work towards a harmonized national framework.

Recommendation: Consider engaging with your company’s stakeholders to make an informed decision as to where the pendulum should be with respect to your ESG objectives and disclosure. In doing so, keep in mind upcoming regulatory developments and potential liability under new rules regarding environmental-related claims.

Cybersecurity

Cybersecurity threats remain a top priority for companies as the frequency and costs of attacks continue to escalate, with the global average cost of a data breach soaring to USD $4.88 million in 2024. Against this backdrop, boards are increasingly expected to exercise broad oversight with respect to cybersecurity risks and mitigation strategies, including by keeping informed of material cybersecurity risks and allocating appropriate resources to prevent them.

Since 2023, Glass Lewis expects all companies to provide disclosure on the board’s role in overseeing issues related to cybersecurity and the steps taken to properly educate directors on the topic. In the same spirit, a new criterion was added to the Globe & Mail methodology in 2024 measuring how companies describe the consideration given by their boards to cybersecurity or technological risks, with top marks being given to companies which identify board committees for overseeing such risks, particularly if they review strategy, risk management and operating performance on a regular basis.

AI

While the development and deployment of artificial intelligence (AI) is progressing at TSX 60 companies, we are seeing emerging trends in board oversight over AI. About half of TSX 60 companies (32/60, 53%) refer to AI in their 2024 management proxy circulars. The most common disclosure relating to AI concerns the education of board members, with 24/60 (40%) of TSX 60 companies disclosing presentations or workshops having been given to directors on AI.

However, many issuers have moved past mere education on the subject. About a third (19/60, 32%) of TSX 60 companies have incorporated board oversight over AI in their board mandates. A smaller number (6/60, 10%) has delegated the responsibility of AI oversight to a single board committee (whether the risk management committee, the audit committee or the corporate governance committee, for example), while one company (1/60, 0.02%) has multiple board committees overseeing AI.

Of note, Glass Lewis dedicated a new section of its 2025 benchmark policy guidelines to the topic of board oversight of AI, much as it did in its 2023 benchmark policy guidelines for cybersecurity. Glass Lewis believes issuers that use or develop AI technologies should adopt strong internal frameworks that include ethical considerations and ensure effective oversight of AI and expects clear disclosure on how boards are overseeing AI and expanding their collective expertise and understanding in this area. If there is evidence that insufficient management of AI technology has resulted in “material harm” to shareholders, Glass Lewis may recommend that shareholders vote against the re-election of accountable directors.

We further note that AI is on the radar of the CSA. On December 5, 2024, the CSA released its Staff Notice and Consultation 11-348 – Applicability of Canadian Securities Laws and the Use of Artificial Intelligence Systems in Capital Markets (the Notice). The Notice provides guidance on the application of securities laws to the use of AI and the considerations that market participants should take into account when implementing AI systems. Although the Notice does not create or modify current legal requirements for market participants, the CSA is seeking comments on whether securities laws should regulate the use of AI in capital markets. Interested stakeholders can submit responses and feedback until March 31, 2025. For more information on the Notice, please see our article.

Recommendation: Consider developing internal procedures and policies on how the board of directors or its committees should oversee cybersecurity and AI, and provide sufficient and appropriate disclosure in such respect.

Keep Paying Attention to Pay-for-Performance

Say-on-pay resolutions garnered strong support in Canada in 2024, with approximately 93% of issuers surpassing the symbolic threshold of 80% approval, as illustrated in the graph below.

However, issuers should keep focusing on pay-for-performance, as this will remain a priority for leading proxy advisory firms. In that respect, ISS noted in its most recent benchmark policy guidelines that it will use, in exceptional circumstances, a non-CEO named executive officer’s compensation in its pay-for-performance evaluation, if doing so would provide a more appropriate basis for the alignment of pay-for-performance.

Glass Lewis noted in its 2025 benchmark policy guidelines that, rather than utilizing a scorecard approach, it will review all factors related to named executive officer compensation

Similarly, Glass Lewis noted in its 2025 benchmark policy guidelines that, rather than utilizing a scorecard approach, it will review all factors related to named executive officer compensation, including the issuer’s stated rationale for particular pay decisions as well as the issuer’s ability to align executive pay with performance and shareholder experience. Glass Lewis has also augmented its list of problematic pay practices to include excessive perquisites and adjustments to performance results that lead to problematic pay outcomes.

ESG-Pay: Here to Stay?

Despite the anti-ESG movement mentioned above, we expect that ESG considerations in executive compensation will remain a focal point in 2025. Last year, the Board Games methodology was amended to include a marking criterion relating to the consideration of ESG and climate metrics in executive compensation; top marks are attributed to issuers that disclose any measurable ESG metrics in either their short-term or long-term incentive plans (STIP, LTIP), with at east one of the metrics related to climate. There has also been multiple shareholder proposals filed advocating for the inclusion of ESG metrics in the compensation of all employees.

Based on our review of the compensation discussion and analysis of TSX 60 issuers in 2024, 44 (73%) of them consider ESG measures in executive compensation to a certain extent, the same number of issuers as in 2023. Of such issuers, 41 (93%) consider it in their STIPs (39 in 2023) and 20 of them (45%) consider it in their LTIP (16 in 2023). We further note that 17 issuers now consider ESG in both their STIP and LTIP, while there was 14 doing so in 2023.

ESG measures are included in executive compensation by virtue of key performance indicators (KPIs). As we pointed out in last year’s update, “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.” The most frequent KPIs related to ESG used for compensation purposes include the following: