As mandatory disclosure deadlines approach in Canada, how can in-house counsel prepare?
As an era of mandatory ESG disclosure dawns, 2023 looks set to go down in Canadian corporate history, according to Conor Chell.
“This is the year that everything changes, from a disclosure perspective,” says Chell, the Calgary-based head of the ESG practice group at MLT Aikins LLP. He says the final countdown has already begun to the deadline for Canada’s first set of mandatory environmental, social, and governance-specific disclosures.
Assuming events proceed as scheduled, that honour will go to institutions covered by S-211, The Fighting Against Forced Labour and Child Labour in Supply Chains Act, which received Royal Assent in May 2023.
Under that federal law, certain government agencies and private companies – many of them in the mining and apparel manufacturing industries – must report by May 2024 on their efforts to prevent forced or child labour use in their supply chains.
Subsequently, at the end of the 2024 fiscal year, some of Canada’s largest banks and insurers will join the club of mandatory ESG reportees. Under the Office of the Superintendent of Financial Institutions’ regulation B-15, they must conduct stress testing to assess the potential impact of climate change on their risk management and governance strategies.
Larger institutions must also disclose their annual Scope 1 and 2 greenhouse gas emissions, with Scope 3 numbers to follow by the end of 2025 – the same date the broader disclosure requirements kick in for smaller OFSI-regulated businesses.
And public companies may not have much longer to wait, as the next wave of mandatory ESG disclosure swells at the Canadian Securities Administrators. The group’s long-awaited though not-yet-implemented National Instrument 51-107 would force reporting issuers to make environmental disclosures broadly in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework – standards associated with a G20-affiliated group.
Although the first round of mandatory disclosures will not be made until after the new year, Chell explains that they will relate to data collected this year, making 2023 a year-zero baseline to which all future data sets will be compared.
“What that means is that companies are having to adapt to mandatory regimes right now, in real-time,” he says. “Up until now, virtually all ESG disclosure has been made voluntarily, which means that companies have had unlimited discretion in terms of the topics they pick and the manner in which it happens.”
Chell adds that the transition from voluntary to mandatory ESG reporting is risky for businesses and may even lead to a spike in the already-growing threat of ESG-related litigation.
According to the New York-based Sabin Center for Climate Change Law, almost 2,400 climate litigation cases have been launched worldwide against governments, corporations, and individuals since 2008, the vast majority of which were initiated after the landmark 2015 Paris Agreement, when almost 200 national governments committed to keeping global warming below two degrees Celsius this century.
“Once mandatory reporting is up and running, it’s going to be easier for claimants to identify who their targets are. Reporting itself gives them the ammunition they need to commence actions,” Chell says.
It’s not just those with no disclosure history that will be at risk of legal action from government regulators or even their shareholders. Mandatory disclosure could also reveal retrospective evidence of “greenwashing” by companies prone to cherry-picking more favourable ESG data in their earlier voluntary disclosures at the expense of less flattering statistics.
“For many making voluntary disclosures, there has not been a real focus on ensuring that the data is robust or accurate,” Chell says. “One of the things we talk to clients about is their historical disclosure and whether it could be classified as greenwashing in some capacity, even if it was unintentional.”
At RioCan Real Estate Investment Trust, senior vice president Jennifer Suess says the collateral damage caused by greenwashing claims is one of the reasons she welcomes the prospect of a more rigorous ESG disclosure regime that would make it more difficult for environmental embellishers to hide.
“The more these kinds of allegations come out, the less [trust] investors have in the entire sector. It undermines the integrity of a robust ESG program,” says Suess, who serves as the firm’s general counsel and its ESG and corporate secretary.
According to Carlton Mathias, the chief legal, ESG, and governance officer at Ontario Power Generation, organizations that are not yet subject to mandatory disclosure should consider the likelihood of future compliance to assess their current ESG activities.
Since 2018, he says OPG has conducted its own voluntary ESG reporting in line with the TCFD framework, which is expected to form the basis of any standards for disclosure that may be imposed on Canadian public companies.
“I would say that the role of the general counsel and the legal team is to help lead the company in positioning itself by understanding what the obligation will be so that it’s ready to be compliant when the time comes,” Mathias says. “Voluntary disclosure should be done in line with best practices because it could harm the company if you start doing it in a half-baked way.”
Despite the potential pitfalls associated with mandatory ESG disclosure, Wendy Berman, the head of the securities litigation practice group at McCarthy Tétrault LLP, says many companies in the Canadian market will welcome the development because of the greater level of certainty that comes with stricter regulations.
“What I think is good for us is that we can put this mandatory-versus-voluntary debate to an end. We can say it is dead and mandatory won,” Berman adds.
In the long run, Berman says mandatory disclosure rules may have little impact on the volume of ESG-related litigation but will undoubtedly change the nature of disputes.
“Companies are really going to have to treat climate-related disclosure with the same level of care and scrutiny that they apply to other financial and operational disclosures,” Berman says.
Gowling WLG partner Stephen Pike urges his in-house counsel clients to remember the flip side of the risk coin: opportunity.
“There is a chance here for businesses to tell their story in a way that will foster greater engagement and positively enhance their relationships with their stakeholders,” he says.
Mandatory ESG disclosure key dates:
- May 31, 2024: First annual reports on forced and child labour due under S-211
- September 2024: Public reporting deadline for Canada’s largest banks and insurers under OSFI Guideline B-15
- September 2025: Public reporting deadline for the rest of the 350 federally regulated financial institutions covered by OSFI Guideline B-15