ESG Reporting Outlook: Four leading indicators of legal risk
Pender attended the recent World ESG Communications Summit in Toronto. Among the many insightful presentations, Connor Chell, Head of ESG Practice Group at MLT Aikins LLP, spoke about changes to the ESG regulatory environment in Canada and four key leading indicators of legal risk affecting companies today. Highlights from his talk are presented below.
Risk #1: Public Sentiment
As the risks of climate change are better understood, public sentiment and expectations from companies have shifted. Sentiment trends are often a leading indicator of risk. Lenders such as banks, investment firms, and insurers are in the spotlight and under increasing public pressure to demonstrate how their lending practices align with net-zero goals.
Risk #2: Regulatory environment
Back in 2005, ESG reporting was done on a volunteer basis, primarily for promotional reasons using internal filters and qualifications. Companies could cherry pick what and how they wanted to disclose their ESG frameworks and metrics with an emphasis on ‘good news stories’. Legal reviews and audits were rare. There was a lack of reliable and credible data.
Today, the ESG reporting environment is very different. It is no longer ‘by appointment only’, it is a mandatory requirement enforced by such institutions as the Office of the Superintendent of Financial Institutions (OSFI) and Canadian Securities Administrators (CSA) and more closely mirrors financial and securities reporting: Risks are quantified, scenarios are analyzed, and there are comprehensive audits of data-supported milestones and targets. By 2024, ESG disclosures will become mandatory for all Canadian companies. These include the following: public companies will be subject to CSA Rules (NI-51-107), and banks and insurance companies will be subject to the incoming OSFI; and companies doing business with organizations in other jurisdictions where mandatory ESG reporting exists will be subject to other rules, e.g. US (SEC Rules) and Europe (EU’s CSRD).
Risk #3: Peers and competitors
Currently, numerous ESG standards are in draft form and expected to be published in the latter half of 2023. It is increasingly likely that Canada’s ESG rules will evolve to have greater alignment with key rules and regulations in important jurisdictions.
Risk #4: Shareholder Activism
Shareholder activism is also on the rise. The top issues are climate change, political activities, and amendments to company policies. During the period from 2013-2023 in the Canadian energy sector and affecting companies such as Shell, Exxon Mobil, and Suncor, there were 340 instances of shareholder demands relating to environmental issues, 268 for governance, and 193 for social. In Canada there have been investigations by the Canadian Competition Bureau of the Canadian Gas Association’s representation of gas as being ‘clean’, and Royal Bank of Canada’s claims to support the climate while investing in financial fossil fuel development. To date, the oil and gas and financial industries have been the largest target of the majority of this legal action and cases are expected to rise sharply following mandatory reporting. Past cases have resulted in the revision of historical ESG disclosures and large. Claimants are also targeting company directors and officers.
