Business Law Blog

The 50^th Earth Day has passed this year under the shadow of a global pandemic, where the immediacy of human health has eclipsed, for now, the focus on the long-term health of the planet and humanity’s place within it that had begun to preoccupy businesses and investors. From a corporate governance perspective, that is reasonable, as risks to short-term survival take precedence over the long-term planning and risk mitigation demanded by more epochal trends like climate change.

But for boards of directors and corporate executives, lessons and effects of the pandemic can be linked to larger trends. Weaknesses that have been exposed are not likely due solely to the suddenness of it all or the peculiar nature of COVID-19. The ability to plan for, adjust to and recover from crises that arise over any time horizon, whether instigated by climate change, a pandemic or some other source, is an integral component of long-term sustainability. Further, pressure from investors and regulators for sustainability disclosure has now been bolstered by the announcement this week by the Canadian federal government of its Large Employer Emergency Financing Facility (“LEEFF”), which ties pandemic-related financial support to new disclosure requirements relating to the government’s climate goals, among other things. There could be little doubt coming into 2020 that long-term sustainability in the face of environmental and social issues had become the predominant trend in corporate governance. That trend clearly endures.

The Emergence of Sustainability Disclosure Standards

With so-called “shareholder primacy” on the wane, it can be expected that long-term investors will increasingly seek to scrutinize each company’s particular purpose and the unique constellation of stakeholders, risks and available strategies that purpose engages over the long term.^[1] That scrutiny presents public companies with the challenge of articulating in their disclosure what their purpose is, what strategies and practices they have implemented to ensure their own sustainability in pursuit of that purpose, and how those practices promote long-term value for investors and other stakeholders.

Securities laws and stock exchange requirements in Canada require disclosure of all “material” information. However, in the face of investor pressure and a lack of uniformity in disclosure of matters relating to sustainability, independently developed standards for voluntary disclosure have proliferated in recent years. The standards developed by the Sustainability Accounting Standards Board (“SASB”), which provide a framework for reporting sustainability information on an industry-specific basis and, specifically for climate change, the framework developed by the Task Force on Climate-related Financial Disclosures (the “TCFD”), are together emerging as the benchmark standard, and have been endorsed explicitly by BlackRock Inc., whose CEO declared this year in his widely cited annual letter that “climate change has become a defining factor in companies’ long-term prospects” and that “we are on the edge of a fundamental reshaping of finance.”

Notably, this week’s announcement of the LEEFF program states that recipients of funding under the program would be required to commit to publish annual climate-related disclosure reports consistent with the TCFD framework, including how their future operations will support environmental sustainability and national climate goals. Not only does this statement reiterate the government’s focus on climate change and the role of business in fighting it, but further displays its willingness to assert its voice in matters of corporate governance.^[2]

Sustainability Disclosure in Canada

While disclosure of environmental and social matters by reporting issuers in Canada has not conformed to any given framework, interest in particular frameworks has not gone unnoticed. As noted, the LEEFF program is explicit in its requirement for those companies that receive funding that they provide disclosure in accordance with the TCFD framework. Shareholder proposals have also focused on them, and the Canadian Coalition for Good Governance, in its “E&S Guidebook” published in 2018, specifically mentions the SASB standards and endorses the TCFD framework, noting that while the latter was developed with climate change risk in mind, it “has applicability across all material business risks and organizational types.” The Canadian Securities Administrators (the “CSA”), in Staff Notice 51-358 – Reporting of Climate Change-related Risks, acknowledged the focus of investors on climate change-related issues and the difficulties for issuers in determining the materiality of climate-related risks for which the probability and timing are uncertain, even if the magnitude could be significant. In doing so, the CSA mentioned the SASB standards and the TCFD framework, relying on the latter in particular in formulating their analysis of climate change-related risks and opportunities.^[3]

While the CSA have focused on the disclosure of risks related to climate change, the disclosure required under the LEEFF program will be broader, and investors are focused on new disclosure standards as a means for them to assess governance a whole. Investors want to know not only what environmental and social risks a board has considered, but how those risks relate to the company’s strategy, resilience, sustainability and corporate purpose. In Canada in particular, beyond the focus on climate change and the pandemic, recent events have also highlighted the importance of the relationship between businesses and Indigenous peoples. The new disclosure frameworks can assist in crafting disclosure of these matters just as they do in relation to climate change.

Balance in Disclosing Environmental and Social Matters

The increasing focus on corporate sustainability and the endorsement of the SASB standards and TCFD framework by major market participants – including major investors and now the federal government through the LEEFF program – present an opportunity for reporting issuers to modernize their disclosure in a way that meets (or likely exceeds) regulatory requirements and rises to the heightening expectations of major investors. The SASB standards and TCFD framework are designed to allow companies the flexibility they need to not only disclose their environmental and social practices and demonstrate how those practices align with the company’s purpose and strategy over the long term, but to do so in a way that conforms to the governing regulatory regime and the unique nature of each company’s business. At the same time, reporting issuers must remain vigilant about how and what information is disclosed. Even where conforming to a market-accepted standard, disclosure remains subject to local securities laws. It can be the source of liability or regulatory scrutiny, and over-disclosure can cause confusion over an issuer’s standards for materiality.

The COVID-19 pandemic is not likely to detract from investor demand for disclosure that evidences a company’s commitment to long-term sustainability. On the contrary, the announcement relating to LEEFF suggests that sustainability disclosure under the TCFD framework will be a requirement for those larger companies that accept funding under that program. While it remains to be seen whether companies will be willing to accept the conditions that attach to that funding, we do not expect the market’s appetite for sustainability disclosure to wane, even in a post-pandemic world.

If you have any questions about sustainability disclosure, corporate purpose, disclosure by reporting issuers more generally or how these matters interact, please contact any member of our Corporate Finance & Securities Group.

^{[1] For further discussion of this trend, see my August 28, 2019 article available here.}

^{[2] The announcement notes further that the LEEFF program will also set strict limits on dividends, share buy-backs, and executive pay.}

^{[3] Notably, the CSA highlighted the difference between the standard of materiality applicable to disclosure in each issuer’s Annual Information Form (“AIF”) and management’s discussion and analysis (“MD&A”) and the concept of “materiality” under securities laws more generally. The forms for the AIF and MD&A require disclosure of information where “a reasonable investor’s decision whether or not to buy, sell or hold securities [would] likely be influenced or changed if the information in question was omitted or misstated.” This is in contrast to the use of the term “material facts”, for example, under securities legislation, which relates to a fact “that would reasonably be expected to have a significant effect on the market price or value of the securities.” While the different standard in most circumstances has not been seen to impose an additional disclosure burden on issuers, the CSAs’ focus on the distinction suggests that a general change in investment philosophy of investors could theoretically trigger a disclosure obligation in an AIF and MD&A that would not amount to a “material fact”. As a result, disclosure of environmental and social matters under a well-accepted framework could in fact become a regulatory requirement, even where the disclosure itself would not necessarily attract third-party liability under securities laws.}