Critics decry ‘disjointed’ diversity disclosure options from securities administrators

Lawyers say Canadian Securities Administrators want business to decide rather than taking a stand

Critics decry ‘disjointed’ diversity disclosure options from securities administrators
Gordon Raman, Marie-Christine Valois, and Stephen Erlichman of Fasken

There is a growing consensus towards gender diversity disclosure concerning visible minorities and other under-represented groups, but lawyers at Fasken Martineau Dumoulin LLP say the regulatory environment remains unclear.

And while a recent proposal by the Canadian Securities Administrators (CSA) puts forth two proposals related to diversity disclosure for public comment, the Fasken lawyers write in a recent article that “this disjointed situation” reflects Canada’s lack of a national securities regulator as well the “complicated nature” of the issue of diversity disclosure.”

“The CSA is asking the members of the business community to take a stance on two different proposals,” says partner Marie Christine Valois. “Usually, you would have one proposal, and then the business community would make suggestions and provide some ways to improve the proposal. But in this case, the business community is being asked to take a stand.”

She adds that it is a “very delicate” situation, noting that law firm clients will also have differing views.

Under the CSA’s “Alternative A” proposal, the diversity proposals are “less prescriptive” and defer to public companies to decide which categories of “identified groups” (in addition to women) will be disclosed under the issuer’s diversity strategy.

In contrast, “Alternative B” focuses significantly more on mandating disclosure regarding historically under-represented “designated groups.” In addition to women, disclosure would be required for LGBTQ2SI+ persons, racialized persons, persons with disabilities and Indigenous peoples.

The Fasken article says the CSA’s proposals “appear to have (at least initially) further divided the country’s provincial and territorial securities regulators.” The CSA noted in announcing the proposals that four provinces and territories (British Columbia, Alberta, Saskatchewan, and the Northwest Territories) support Alternative A, while the country’s largest province, Ontario, indicated support for Alternative B. The remaining jurisdictions have not yet indicated a preference.

Gordon Raman, chair of the firm’s ESG and sustainability practice, points out that “the regulators themselves seem to have diverging views on the scope of diversity disclosure, and they’ve kind of thrown their hands up and said, ‘We don’t think we can really resolve this, so we’re [leaving] it up to the business community . . . to see where they want us to land on this.’”

Partner Stephen Erlichman says that while it’s not surprising that there are diverging views among securities regulators, he thinks that “we’re going to end up with very divergent views from commentators on these two proposals, both from the institutional investor community as well as from the corporate community.” It will be unlikely, he adds, that there will be consensus on going with proposal A or B.

The Fasken article notes that this is “really just the beginning” of the discussion on regulating diversity at the board and C-suite level. It adds that “indeed, Canada is not the only jurisdiction to experience internal division” in the realm of ESG. The article’s authors also question whether any significant widespread consensus regarding diversity disclosure can reasonably be expected” in Canada or elsewhere.

“Although recent years have seen a growing number of regulators and market actors adopting diversity disclosure requirements, including in the U.S., Canada, Europe and the United Kingdom, there is no straight line in the approaches taken in this regard.”

Still, the authors note that shareholder proposals related to diversity in Canada and social issues continued to gain traction in 2023.

Fasken counted more than 40 social-related proposals made by shareholders as of April 19, 2023, a continuation of 2022, when social matters represented an important portion of shareholder proposals. “{Third-party racial equity audits, operationalization of Indigenous informed consent, women in management, bilingualism, artificial intelligence, human rights, and supply chain issues are among the topics of these proposals.”

Fasken notes, however, that Canada’s approach to diversity disclosure is fragmented. Since 2014, most, but not all, provincial securities regulators adopted mandatory disclosure regarding women on boards of directors and in executive officer positions. Two provinces remain silent on the issue.

Canada also has variations in diversity disclosure requirements among the country’s corporate statutes. Since 2020, companies incorporated under the federal Canada Business Corporations Act must disclose diversity data regarding board and management composition concerning women, aboriginal peoples, persons with disabilities and visible minorities. No provincial or territorial statutes have yet followed suit.

There may even be good reasons to have a more diverse approach to diversity,  the Fasken article says, pointing out the increasing practice of voluntarily disclosing the language proficiency of directors by Quebec-based issuers.

However, the authors also point out Canada “has a significant Indigenous population, was historically built on immigration from different parts of Europe and is now increasingly home to people of various ethnic backgrounds from around the world.“

This being the case, “one can reasonably wonder why it remains a challenge for provincial authorities to agree on a single approach to diversity disclosure and to instead ask various actors in the business community to take a stance (or choose a side) on such a delicate matter as the CSA has recently done.”

However, Canada hasn’t yet experienced the level of backlash to ESG-related governance issues compared to the United States.

Erlichman says this mainly is because ESG has “predominantly become a political issue” in the U.S., though sometimes couched as a financial one. One example is the increase in anti-ESG shareholder proposals and announcements or legislation by various states that their state pension funds cannot invest in ESG-focused funds.

Proxy advisers also have been brought into the fray. In January 2023, 21 Republican state Attorney Generals sent a letter to ISS and Glass Lewis claiming that their diversity policies may violate state anti-discrimination laws and fiduciary and contractual duties. ISS and Glass Lewis, in their respective responses, denied any wrongdoing.

This State Attorney General pushback comes amid a climate of increasing shareholder proposals related to diversity. For example, the Conference Board reported that proposals on racial equity and civil rights audits gained traction in 2022. Forty-three such proposals were filed in 2022 compared to only 9 in 2021, of which 31 were voted on in 2022 compared to 9 in 2021.

On April 20, 2023, Axios reported that 68 anti-ESG proposals had been filed in the U.S. in 2023, compared to 45 in 2022. Approximately one-third of these 68 anti-ESG proposals are focused on diversity and ask companies such as Apple, JP Morgan, Coca-Cola and McDonald’s to “report on the ‘risks’ that their anti-discrimination or racial justice efforts pose to their business.”

Even if most of these anti-ESG proposals continue to be ultimately unsuccessful – as they generally have been to date – Fasken notes this does not mean the anti-ESG movement is not affecting market practice. It notes the Financial Times recently reported that a dozen financial companies, including BlackRock, Blackstone and KKR, now list anti-ESG efforts as a risk in their annual reports.

And Axios has stated that while “[p]romoting ESG policies was once an easy layup to score good press,” it is increasingly viewed now as “a way to court controversy, the ire of politicians, and attention from well-funded anti-ESG groups.”.

Consequently, there may be “fewer press releases and puff pieces about the issue” in the near term, along with the emergence of “greenhushing,” as in companies not publicizing their ESG activities to avoid scrutiny or backlash.

Erlichman says that the issue might become more politicized n Canada, “but don’t believe we will end up anywhere close to what the anti-ESG backlash is in the U.S.” Valois agrees, pointing out that Canada’s history, composition and constitutional structure are very different.

She says: “In the last few years in Canada, there has been an increase in shareholder proposal regarding diversity, Valois says, and three banks have committed to conduct diversity and inclusion audits.

“I think there are trends in the social realms coming to Canada, but . . . we’ve seen very few shareholder proposals that are anti-ESG. There’s been no traction at all in Canada in this regard.

Raman says while Canadians’ views may not be as extreme, it doesn’t mean that we are immune to having the issue of ESG and diversity become more politicized, especially as we approach a federal election.

“But for the most part, it is just a much different atmosphere than in the United States, taking what should really be a governance issue or a financial performance issue and turning it into and turning it into a political issue, which is really what the backlash has been all about.”

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