Firms need a strategic approach to ESG as investors and stakeholders hold them to their claims: BLG

ESG concerns playing a larger role in raising capital, new report says

Firms need a strategic approach to ESG as investors and stakeholders hold them to their claims: BLG
Lynn McGrade and John Vellone are partners at Borden Ladner Gervais in Toronto

Canadian companies must adopt a strategic approach to ESG that includes recognizing and addressing stakeholder expectations for environmental, social and governance considerations across their organization, says a new report from Borden Ladner Gervais LLP. 

ESG Trends: Why It’s Important and What You Need to Know looks at several trends in the ESG space. They include the transition from “soft law” voluntary standards to stringent legal requirements and the emergence of more rigorous regulations; a shift towards harmonization and standardization of ESG terminology to address the need for clarity and consistency; and a growing recognition of the importance of ESG programs that acknowledge the unique history and legal position of Indigenous communities in Canada. 

ESG considerations are also playing a significant role in raising capital, says Lynn McGrade, who practises corporate law with a focus on investment management and represents both Canadian and foreign fund managers on legal issues related to the provision of advisory services, and the distribution of securities. She adds that investors and other stakeholders "are penalizing companies they perceive as lacking in ESG practices and rewarding those with a strong ESG strategy."

The question of ESG compliance frequently arises when raising capital, says McGrade, who also heads BLG’s National Investment Management Group. “Those who are developing ESG-related investment products want to know that the companies they include are going beyond superficial sustainability rhetoric.

“Companies will need to tell their ESG story properly in order to be successful in raising capital,” she says, as “green” investors will want to know the ESG-related funds they invest in have undergone robust due diligence.

John Vellone, a BLG partner with an energy and technology law practice that has a focus on Canadian electricity markets and infrastructure revitalization, says that as investment managers shift to more ESG-oriented products, “we’ve seen a tremendous pivot in the community of our clients towards trying to attract that capital into their business.” 

They are now paying more attention to their ESG story “because they know the portfolio managers are screening their investments for it.”

These companies then turn to their suppliers and ask what they are doing on the ESG front, “so it is rippling its way down through the economy,” Vellone says.

McGrade writes in the BLG report that although ESG funds continue to grow in popularity, the rules and regulations around them have mostly been rather lax, making it difficult for investors to spot greenwashing. The Canadian Securities Administrators sought to rectify this when it released guidance in January 2022 that encourages greater disclosure on matters such as ESG objectives and strategies, proxy voting, shareholder engagement, and naming conventions. This guidance was the subject of ongoing audit reviews by staff of various provincial securities regulators throughout the latter half of 2022.

In April, the Canadian Investment Funds Standards Committee (CIFSC) also released an “identification framework” that aligns with global developments to assist Canadian investors in understanding common language and definitions.

To be considered a Responsible Investment fund under this new framework, a fund must have an RI/ESG investment mandate and meet the criteria of at least one of the framework’s outlined approaches: ESG Integration and Evaluation, ESG-Thematic Investing, ESG Exclusions, Impact Investing, ESG-Related Engagement and Stewardship Activities, and ESG Best in Class.

The Securities Exchange Commission in the United States also proposed requirements surrounding ESG fund disclosures, which would introduce new disclosure and other requirements applicable to funds and investment advisors that use ESG factors when making investment decisions and setting strategies.

The upshot of these developments, McGrade says, is that funds “will need to comply with a range of evolving disclosure requirements.” She says a thoughtful approach to disclosure is essential, as several investment fund managers in the United States face litigation around disclosure issues, “an indication that liability exposure is definitely on the rise.”

Vellone notes legal claims often arise from a regulatory investigative process regarding allegations of misrepresentation and greenwashing.

“These investigations tend to do the heavy lifting in proving culpability, and that often leads to class actions.” 

From the point of view of advising clients, he adds, “We have to look at what processes and controls are in place to make sure the ESG claims you make are true.”

Vellone also notes that law firms likely need to take an interdisciplinary approach to advising clients on ESG matters, given the broad scope of environmental, social and governance concerns, with the added need to address issues related to Canada’s Indigenous communities.

As head of BLG’s Environmental, Social & Governance initiative, Vallone works closely with about 20 lawyers as a steering committee that can guide how ESG affects different areas of law.

“This can be everything from helping real estate lawyers get landlords to fulfill ESG covenants in a lease to securities lawyers looking at how ESG funds work or lawyers dealing with provisions in new disclosure requirements regarding slavery. These aren’t services that one lawyer can provide.”

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