Corporations are facing increasing pressure to offer more transparency and disclosure with respect to their governance practices that promote environmental and social sustainability. This year’s trends in Environment Social Governance (ESG) in the context of Canadian corporate governance indicate that more and more corporations are including ESG as part of their core mandates and that investors are looking and asking for more ESG-related disclosures in making investment decisions.
What is ESG?
ESG is a general term used in the capital markets referring to non-financial performance indicators including sustainability, ethics and corporate governance factors, which measure the sustainability and ethical impact of an investment. ESG factors focus on activities that have actual or potential impact on the environment, human health, and, more broadly, society. Empirical data shows that the integration of ESG considerations generate positive impacts on financial performance, cost of capital, and society.
ESG has become increasingly important for Canadian investors and corporations
According to a study by Laurel Hill Advisory Group (Laurel Hill), an independent cross-border advisory firm, Canadian investors are increasingly aware of and interested in how ESG issues are related to a company’s strategy, risk management, and operations. Similarly, according to the CFA Institute, almost 75% of investment professionals took a company’s ESG into consideration when making an investment decision. More specifically, a 2016 study by RR Donnelly makes the following key findings relating to investors’ views vis-à-vis ESG information:
- 65% of Canadian institutional participants said that they often or always consider environmental and social issues, and 95% of them often or always consider governance issues for all investments.
- ESG information is mostly used by portfolio management teams: 70% of portfolio management teams review environmental issues, 65% review social issues and 80% review governance matters for every investment.
- Only 30% of the investors find the ESG information provided by companies sufficient to help them assess the ESG’s materiality to the company’s business. 75% of the respondents said they prefer getting ESG information from third parties.
- Investors are interested in specific information linking ESG issues to the corporate strategy, risk management and operation.
The Laurel Hill report shows that Canadian investors want more information about ESG. However, there is a gap between the ESG information that companies are disseminating and the information that investors are interested in.
Regulators are contemplating additional disclosures
The increased interests in ESG has drawn regulatory attention. On March 21 2017, the Canadian Securities Administrators (CSA) announced a climate change disclosure review project. The project sought to review the disclosure practices of public companies in relation to climate-related risks and financial impacts. One of the key components of the project is to review international disclosure requirements and voluntary frameworks. In doing so, the CSA Staff will “review climate-related disclosure requirements in the securities laws of certain international jurisdictions, such as Australia, the United Kingdom and the United States, as well as recommendations contained in recently proposed voluntary disclosure frameworks with respect to climate-related disclosure.”
At the provincial level, the Ontario Securities Commission (OSC) noted in its 2018 Statement of Priorities “the growing financial relevance to investors of [ESG] factors and the need for ESG disclosure by companies.” The OSC stated that it would continue to monitor developments in respect of ESG practices “to assess whether additional or new forms of disclosure are required”.
Given investors’ surging interests in ESG, coupled with regulatory initiatives to collect and review information on international ESG standards, it may be only a matter of time before further ESG disclosures are required – especially in light of the regulators’ heralded openness to further disclosure obligations.
 Gunnar Friede, et al., “ESG and financial performance: aggregated evidence from more than 2000 empirical studies” (2015), Journal of Sustainable Finance & Investment, Vol. 5, No. 4, 210–233.
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The author would like to thank Saam Pousht-Mashhad, articling student, for his assistance in preparing this legal update.