On November 16, 2021, McCarthy Tétrault held its 19th Annual Disclosure and Governance Seminar (the “Seminar”). As part of the Seminar, the firm hosted ESG Best Practices in Canada (the “Panel”). Wendi Locke, a Partner in our Business Law Group, moderated the Panel. The panelists included:
- Janet Drysdale, VP Sustainability, CN;
- Ian Giffen, Chairman, Kinaxis Inc., Corporate Director, FCPA, FCA, CF; and
- Catherine Simard, Director, Stewardship Investing, Caisse de dépôt et placement du Québec.
The following are the questions posed and key takeaways from the Panel. Please contact Wendi Locke or Sonia Struthers if you would like additional information about environmental, social, and governance (“ESG”) best practices for your business.
A. What can your business do to get started on its ESG practices?
1. Why is ESG an important topic, and is it important for all organizations?
ESG is important for all organizations and it is one of the most important topics for a board to engage on today. This is due largely to its uniquely pervasive nature: the breadth of matters falling within ESG means that it can impact virtually all of an organization’s stakeholders. In addition, how an organization responds to ESG-related matters can greatly influence its brand and reputation, its access to capital, as well as its ability to attract and retain employees. Today’s workforce is attuned to ESG, particularly for matters falling under the “environmental” and “social” branches of ESG. As a result, companies seeking maintain or advance competitive advantage simply cannot afford to not engage on ESG matters.
2. What are concrete steps that organizations can take to address ESG issues?
Prior to setting out concrete steps, the panelists recognized that organizations exist along a broad spectrum of ESG sophistication. This means that relevant stakeholders may recognize that organizations are on an ongoing journey of enhancing their ESG-related efforts for matters ranging from diversity to climate change. As a result, it is not necessarily expected that ESG will be immediately identified and addressed. An organization’s efforts may begin slowly and increase in pace as its initiatives gain traction, but it is an imperative for organizations to not delay their efforts in the first place in anticipation of perfect solutions.
The primary suggestion from the panel is to rely on prominent existing international frameworks. In particular, the panel referenced the value of the SASB Standards for the concept of “materiality”, as well as the Task Force for Climate-Related Financial Disclosure (TCFD) framework. The SASB Standards can assist an organization in determining what is considered “material” for its industry, which can help focus its ESG efforts. A benefit of using established frameworks is that your organization will develop baseline ESG data that is measurable, accountable, and can be observed in its development over time.
The panel also advised that engaging in earnest with your investors can facilitate significant in-roads for ESG action. Investors can help drive an organization’s internal ESG agenda because they are necessarily a source of responsiveness from management. This makes investors powerful allies in furtherance of an organization’s ESG-related efforts.
3. How does a general counsel (“GC”) or member of executive management get their organization to focus on ESG issues?
It is essential to engage the board on ESG issues, and tone-setting at the top of an organization is a crucial first step. While it is important to have CEO support, the panelists recognized that it may also be important to have a single, credible ESG point person informed on ESG initiatives that can advance an ESG agenda. Another option is having an ESG working group that reports to the board, as there are benefits to decentralizing ESG initiatives.
The GC has board proximity, can assist with governance, likely has expertise in identifying risks, and should be well-versed in disclosure documents. Additionally, a GC can also help mandate board activities and ensure the board has the access it needs to appropriate ESG training.
The panel ultimately underscored the importance of board engagement, particularly the board’s tone and attitude toward ESG. Although a GC can be the primary implementer of ESG initiatives, comprehensive buy-in is required with a shared view of doing business differently rather than engaging in regulatory box-checking.
4. What are the key elements to implementing a successful ESG policy?
The panelists identified a key perspective to maintain: ESG is a strategy discussion, and not a policy discussion. Recognizing this, it is important to bring a deep understanding of the corporate purposes and values to discussions around ESG. Then, evaluate how these values translate to corporate policy. It is common today for ESG values to center around organizational resilience—in other words, how an organization may withstand future external shocks. These shocks may mean significant transitions, such as with future supply issues involving fossil fuels or impacts on distribution networks.
The panelists emphasized shifting ESG thinking from being a compliance issue to a way to generate value. Although, as noted, there are necessarily risks to be discussed, there are also considerable opportunities—particularly in implementing ESG policy with the goal of increasing future resilience.
5. What level of board involvement or oversight is appropriate (both generally and in terms of disclosure practices)?
Although the panelists were of the view that it is vital for boards at-large to be prepared to oversee or contribute to ESG-related efforts, it could also be useful to have a dedicated group such as a steering committee to oversee this effort. Further, director training on ESG is necessary in order to ensure the board at large is up to speed for this discussion. Once informed, the board can meaningfully consider action such as deploying measurable ESG metrics as part of the compensation conversation. Reporting on ESG also presents a great opportunity to reflect a company’s culture and identity.
B. What should your business be considering with regard to ESG disclosure?
6. When thinking about disclosure issues related to ESG, how much detail should issuers be providing? And how?
The panelists noted that there are several prominent voluntary disclosure frameworks, making it a challenge for organizations to tailor varied information to investors. Without a single, consistent ESG reporting standard, the panel recommended that organizations avoid making vague disclosures and to also avoid disclosing everything tangentially related to ESG. Instead, organizations should aspire to provide relevant, accurate data in one meaningful framework and to also identify material issues with appropriate metrics.
It was recognized that Canadian pension funds have agreed to follow recommendations to report pursuant to SASB Standards for sustainability and use TCFD for climate-related disclosures. The SASB Materiality Map helps identify material issues, and also identifies appropriate accounting metrics and how to disclose them.
The panel concluded by stating that the solution to disclosure issues is emphatically not to avoid making disclosures. If an organization does not make disclosures, investors will find that information from another source, including from increasingly prominent artificial intelligence. As such, organizations must control their own narratives and back up the narratives with data.
C. Questions from the Audience
Panel attendees had the opportunity to ask their ESG-related questions to the panelists. Notable questions and responses from this portion of the event follow below.
7. We have recently seen advances of ESG disclosure in other jurisdictions and the in-force entry of SFDR in the European Union. Do you think these developments will encourage the arrival of a Canadian disclosure regime?
A climate-related disclosure regime is imminent in Canada. An analysis of the proposed National Instrument 51-107 by McCarthy Tétrault may be found here. Despite this development in Canada, there is a general need for global alignment in disclosure standards. European and Asian markets are currently leading but developments like this proposal in Canada mean we are quickly catching up. The competition within global markets indicates the necessity of a global standard.
8. How has the COVID-19 Pandemic affected ESG investing?
Despite initial concern that the COVID-19 Pandemic would result in curtailed sustainable investing as a result of market volatility, data at this point indicates that ESG investing has only been enhanced. Further, if an organization’s pandemic response was captured by its ESG disclosure framework, it had the opportunity to become part of an organization’s narrative. This narrative likely spoke to resilience and an organization’s ability to balance short- and long-term needs. Ultimately, the Pandemic was also a sobering reminder to investors that non-financial risks can have extraordinarily large financial impacts. This truth will extend beyond COVID-19 to issues such as climate change.
9. How should investors assess ESG strategy?
ESG integration is used by most institutional investors to incorporate ESG factors into every investment decision that they make. In ESG investing, there are two key terms: protect and enhance. In order to protect, investors perform pre-investment due diligence and risk management. There is now a focus on enhancing in order to generate greater returns. In order to enhance, investment teams are now reflecting on how they should position their portfolios in a transition to low-carbon economies.
10. Should institutional investors publish their standards? Would this be helpful for reporting issuers?
The panelists responded to this question with an unequivocal “yes”. Institutional investors are encouraged to issue investing reports with ESG-related information every year and to provide relevant proxy voting guidelines. It was noted that investment firms are starting to show some alignment on this. Lastly, it was remarked that investors must give thought to “walking their own talk” as they increasingly pose their ESG-related questions to organizations.