As discussed in our earlier blog post, the Kingsdale Advisors’ (Kingsdale) annual Proxy Season Review for 2017 identified ESG trends as one of several issues on the horizon for public companies. Kingsdale noted that heightened scrutiny from investors could translate into a demand for enhanced disclosure on the part of issuers.
The three factors that form ESG are integrated into investment analyses to determine the sustainability and future financial performance of companies. These factors are also used as tools by companies to analyze, evaluate and to better understand the overall risks and opportunities that their businesses are exposed to.
Emerging ESG Trends
EY’s 2017 report on ESG and nonfinancial performance provided key insights into the views of more than 320 institutional investors with regards to nonfinancial reporting by public companies and the role ESG analysis plays in their investment decision-making. One key finding concerning investor sentiment on ESG practices was that nonfinancial performance plays a pivotal role in investment decisions for most of the institutional investors that took part in the survey. Furthermore, the number of institutional investors adopting ESG analysis has been growing steadily over the past few years.
In the U.S., there have been record numbers of both public company resolutions involving climate change and successful climate change-focused shareholder proposals. This trend indicates that investors are taking greater proactive steps to address climate concerns and ensure the long-term viability of their investments.
According to a recently published survey report conducted and published by RBC Global Asset Management (RBC GAM), responsible investing has moved into the mainstream due to greater awareness and interest in the adoption of ESG analysis. The report states that approximately 73% of institutional investors in Canada use ESG principles as part of their investment approach.
Moreover, earlier this year, Glass Lewis announced its partnership with Sustainalytics, a company that focuses on sustainability research and analysis, to integrate ESG content into Glass Lewis’ proxy voting and vote management services. Among other reasons, the partnership was formed in hopes of delivering value for Viewpoint clients by allowing them to “incorporate more nuanced proxy voting and referral-item triggers around ESG performance, even when there are no shareholder proposals on the ballot to address specific areas of interest.”
Requirements set by Regulators
Demand for enhanced ESG-related disclosure by Canadian regulators has also been increasing in the past few years, as environmental and social issues slowly make their way into Canadian politics.
Public issuers in Canada are familiar with CSA Staff Notice 51-333: Environmental Reporting Guidance, (Staff Notice) released by the Canadian Securities Administrators in 2010. The Staff Notice was intended to provide guidance to reporting issuers on existing environmental disclosure requirements under securities legislation. The Toronto Stock Exchange also released a Primer for Environmental & Social Disclosure (Primer) in 2014 that discusses mandatory disclosure requirements and voluntary reporting. The Primer identifies resources and benchmarks that issuers can access to improve how they measure and report economic, environmental and social performance.
The most recent development related to the governance aspect of ESG is the proposal to amend the Canada Business Corporations Act in Bill C-25, which includes requirements for public companies to disclose information with respect to the diversity of directors and senior management.
Climate change, human rights and diversity in the workplace are becoming concerns that investors and regulators are increasingly aware of and interested in addressing. A growing number of investors are taking into consideration companies’ ESG profiles when making investment decisions and regulators are providing guidance to issuers on ways to meet disclosure requirements. As the importance of ESG to investors and regulators increases, so too does the importance of issuers’ ability to manage and deal with ESG issues affecting their businesses.
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The author would like to thank Jenny Ng, articling student, for her assistance in preparing this legal update.