Just as mandatory environmental, social, and governance (ESG) reporting appears to be right around the corner, and businesses are preparing disclosure processes concerning the climate and human rights in supply chains, an anti-ESG movement is taking root south of the border.
Bill S-211, the Fighting Against Forced Labour and Child Labour in Supply Chains Act, received Royal Assent on May 11, 2023. By May 2024, many government agencies and private companies must report annually on their actions to prevent forced or child labour use in their supply chains. The new law applies to private-sector organizations listed on a Canadian stock exchange or who have a nexus to Canada because they have Canadian assets, a place of business, or are doing business in Canada. For the law to apply, a private company must meet two of three criteria: at least $20 million in assets, $40 million in revenue, or 250 employees.
“We’re starting to see this movement towards more regulation, more hard requirements,” says Gordon Raman, chair of Fasken Martineau DuMoulin LLP’s ESG and sustainability practice. While mandatory diversity, equity, and inclusion requirements have existed for a long time, he says ESG reporting has been mostly voluntary. Raman is a partner at Fasken, and his practice includes advising clients on mergers and acquisitions, corporate governance, and capital markets.
The Canadian Securities Administrators (CSA) is the umbrella of provincial securities regulators, which govern Canadian markets, securities issuers, and investors. In early 2023, it proposed two alternative approaches to the rules related to diversity and director nominations for public companies.
“One is quite prescriptive. The other one is less prescriptive,” says Ravipal Bains, a partner at McMillan LLP’s capital markets and securities practice. He says the market has mixed views, and stakeholder discussion is ongoing.
Some European jurisdictions have succeeded with mandatory quotas for female board representation, says Bains, who advises clients on mergers and acquisitions, corporate governance, and corporate finance. He says that Canadian capital markets face “unique challenges” with female board representation, with many junior companies not having a high degree of representation of women on board and executive officer positions. “That is an area where we can certainly do better. But we have seen some progress.”
The Form 58-101F1 Corporate Governance Disclosure of National Instrument 58-101 Disclosure of Corporate Governance Practices requires all issuers listed on the Toronto Stock Exchange (TSX) to disclose annually the number and percentage of women on boards and in executive officer roles and targets for that number or percentage, among other things.
There was a three percent rise in total board seats occupied by women, according to the Year 9 Report of the CSA’s review of disclosure concerning female representation on boards and in executive officer positions, released in late 2023. Their representation went from 24 percent of total board seats to 27 percent. Women assumed 43 percent of new board vacancies, and eight percent of the board chairs were women, a one percent increase from 2022. Only five percent of the companies had a female CEO, and 17 percent had a female CFO.
Mandatory climate-related disclosures are also on the horizon.
On June 26, the International Sustainability Standards Board (ISSB) released two sustainability disclosure standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. The Canadian Sustainability Standards Board, which works to advance the adoption of sustainability disclosure standards, recently launched a consultation to develop a revised CSA rule concerning climate-related disclosure requirements.
Raman says everyone has been in a “holding pattern” waiting for the US Securities and Exchange Commission to develop climate-reporting rules. They were released on March 6, after Lexpert interviewed Raman for this article.
“Once the SEC has its disclosure rule, the CSA will look at it and likely come up with its own rules as well,” he says. “Both on the ‘S’ side and the ‘E’ side… we’re going to have real requirements that are going to kick in.”
Some companies have long been disclosing sustainability information – especially larger ones – and they will be well situated when the rules come into place, says Bains. He says others will be less prepared but will develop internal processes, infrastructure, and controls once sustainability information disclosure becomes a regulatory requirement.
“We did see a number of issuers a step ahead of the curve and already provide disclosure that would be similar to what would be required in a mandatory situation.”
After years of public companies and other organizations touting their bona fide ESG activities to please customers and attract investment, a backlash is emerging.
Investment vehicles known as anti-ESG or traditional funds specifically exclude ESG criteria from decision-making processes. According to KnowESG, an “integrated sustainability data hub,” anti-ESG funds have grown in popularity in recent years. The objective of these funds is to maximize financial returns. They are skeptical of ESG’s purported benefits and believe that exclusively considering financial metrics is better aligned with their objective. According to research released last June from Morningstar, there are 27 funds with an anti-ESG agenda.
The anti-ESG movement is more prevalent in the political sphere than in the boardroom. Between January and June of 2023, US lawmakers introduced 165 bills and resolutions against ESG criteria in 37 states, according to S&P Global Market Intelligence. The proposed laws involve measures such as banning state pensions from considering ESG and investing in funds deemed discriminatory against the oil and gas industry.
“That is a pretty dominant and continuing to be dominant theme,” says Rima Ramchandani, co-head of the capital markets practice at Torys LLP. “It really puts a lot of companies in a difficult position.”
The anti-ESG movement is primarily a US trend. But it means many companies are being tugged in different directions, she says. On one side, some advocates and stakeholders are pushing them to go further with net-zero targets and other ESG metrics. On the other hand, different stakeholders and advocates disagree with the strategy and demand that they hit pause.
Ramchandani advises clients on financings, mergers and acquisitions, and corporate governance, among other things.
“It’s definitely more dominant in the states than in Canada,” she says. “But I think we’re seeing a creep into Canada.”
The US has seen an uptick in anti-ESG shareholder proposals, with one in Canada last year. Ramchandani says this year’s proxy season will reveal if the trend has legs in Canada. “What happens in the states tends to be a good precursor of what we’ll see up here.”
“We don’t necessarily have the same dynamics in Canada,” says Bains. “But that is certainly something that is developing and evolving.”
The focus of the anti-ESG movement has primarily been the climate, says Ramchandani. With the emphasis on net-zero targets and greenhouse gas emissions reduction targets, there is a feeling in high-emitting sectors that they are being prejudiced. Diversity is another focus, she says. In October, a US appeals court upheld the board diversity rule at Nasdaq, which required companies listed on the exchange to have women and people from minority communities on their boards of directors or explain why they are absent.
“I suspect that as there are more legal and constitutional challenges to some of those laws and some of those rules in the states, we’ll start to see a bit of creep up here too.”
Ramchandani says that the anti-ESG movement has led some companies to temper their statements and exercise more caution on ESG. However, the foundational drivers of ESG have not changed. She says companies are still focused on it because ESG is a competitive advantage and imperative for business.
“There’s that push and pull that companies are having to navigate,” says Ramchandani. “I don’t believe that, at the end of the day, the fundamentals of the strategy have changed as a result of it. It’s just a heightened sensitivity around the communications you make, the disclosures you make, and how you talk about this. You have to manage both sides of these constituencies.
“It’s just been so politicized.”