Jun 22, 2021
When disclosing ESG (environmental, social and governance) information, corporations must exercise caution when making forward-looking statements, being careful to distinguish between commitments and aspirational targets, Osler’s Andrew MacDougall, partner, Corporate, told participants in the webinar “ESG Disclosures, Navigating the ESG reporting journey”, sponsored by Canadian Business for Social Responsibility (CBSR).
Diligence is required in disclosing targets
“Under National Instrument 51-102, a corporation is prohibited from disclosing forward-looking information unless the corporation has a reasonable basis for it,” says Andrew. “For example, a company cannot promise or commit to achieving net zero emissions by 2050 unless they have a plan for how they will get there based on existing technology. Absent such a plan, a corporation may disclose they are working towards net zero, or have set it as an aspirational goal or target that they may or may not achieve, but the disclosure must be clear that it is a commitment that may not be relied upon in that circumstance.”
Andrew believes that the impetus for more rigorous ESG disclosure is being largely influenced by investors. “A strong public interest in ESG investing is driving large inflows of capital investment into sustainable businesses,” he says. “There has also been strong growth in institutional investment, with institutional investors now dominating trading in our capital markets while owning a substantial portion of the equity of most public companies.
“When institutional investors look at maximizing returns at reduced risk, they look not only at the risks of individual businesses, but at the risks across their entire investment portfolio. Using climate change as an example, from an individual business perspective, these risks may be relatively small. However, when these risks are aggregated across a portfolio of investments, they become a material investment risk.”
Liability for ESG disclosures
In terms of potential ESG disclosure liability, if a corporation makes a misrepresentation, investors have a right to damages and do not have to prove that they relied on the misrepresentation. Andrew says the most important defense to liability is due diligence, but there are differences on how this is applied depending on how the disclosure is made.
“With respect to core documents, which include annual and quarterly financial statements, management discussion and analysis, proxy circulars and material change reports, corporations, their directors and executives have the onus of showing that they were diligent,” says Andrew. “For non-core documents or public oral statements, the plaintiff has the burden of showing that there was knowledge, willful blindness or gross misconduct on the part of the corporation, directors or executives with respect to the misrepresentation.
“As a result, from a liability perspective, we have a preference for ESG disclosures to be made outside of the core documents in some sort of a voluntary report.”
Enhancing your approach to ESG disclosure
From a governance perspective, Andrew says that Osler has been advising companies on how to improve oversight of their Board’s ESG issues. This involves enhancing director understanding of not only what investors and other stakeholders are looking for from the company’s ESG disclosures, but also understanding what ESG issues are most relevant to the company and to its ability to execute on its strategy both in the short and long-term.
Osler has also been working with clients in developing their approach to ESG disclosure, including identifying measures that might be considered, particularly measures that can be verified with a high degree of confidence. A long-term view of settling on a sub-set of these measures for public disclosure purposes is encouraged.
Clients are further being encouraged to say more about their ESG approach in their mandated disclosures. For example, over the past two years, Osler has suggested clients include disclosure in their annual proxy circular on how their company approaches ESG oversight and how they ensure that ESG considerations are embedded in decision making at the board and senior management levels, as well as throughout the organization.
Watch the CBSR ESG Disclosures webinar