Canadian Capital Markets, ESG Reform, and the Moral Investor

Environmental, social and governance (“ESG”) disclosure is an important consideration for both institutional and retail investors.[1] While there is no explicit requirement for disclosing ESG in Canadian securities laws, some material aspects of disclosure may capture parts of ESG. Nevertheless, it is becoming a practice among companies to voluntarily disclose ESG information. In this essay, I explore the relationship between the “moral” (e.g., environmental ethics) features of ESG and policy rationales behind securities legislation.[2] More specifically, I explore the rationale behind the legislation around securities disclosure requirement and how this disclosure information is supposed to assist investors in their decisions to purchase securities. The purpose of this essay is therefore to consolidate the conceptual thinking around ESG, morality, and securities disclosure regulations in Canada. I argue that increases in access to information through technology has made investors more sensitive to moral issues in their investment decisions, and the securities law ought to respond to these changes in their regulation around ESG considerations.

In the first part, I provide some brief context on Canadian securities law and trace the evolution of attitudes toward ESG disclosure. I explore some of the reasons why ESG has become the center of many present conversations and, more specifically, explore the role of morality in ESG, disclosure, and investment decisions. In second part, I explore the scholarship around arguments claiming that higher ESG scores attract more investors, and I compare this with the policy rationale in securities legislation around disclosure and why ESG in itself is not explicitly required to attract more investors. In the third part, I build an argument around the role of morality in investing decisions and what this means for ESG regulations. I explore how more information has led to more morally savvy investors and how regulators can respond to this through ESG reform. I conclude with a brief glimpse into how other jurisdictions may offer solutions and speculate on how Canadian securities regulators can operationalize ESG reform.

Canadian Securities Law and ESG

The current securities regulatory framework in Canada reflects its commitment to federalism by having provinces and territories regulate their capital markets.[3] In the words of the Supreme Court of Canada (“SCC”), “It is open to the federal government and the provinces to exercise their respective powers over securities harmoniously, in the spirit of cooperative federalism.”[4] The aspirations toward harmonization are presently in disarray. There are partially harmonised securities national instruments as well as guiding national policies, and the Canadian Securities Administrators (“CSA”) provides some national cooperation—still, there is no accountability that is fully national.[5] Notably, the SCC noted that Federal Parliament and provinces may exercise their combined powers to collaboratively create a national cooperative capital markets regulatory system.[6] To this end, in 2020, Ontario’s Capital Markets Modernization Taskforce recommended to implement a single piece of legislation to apply across Canada.

Procedurally, to distribute securities in Canada, a prospectus is required (or, for private placements, an offering memorandum) and must provide “full, true and plain disclosure of all material facts relating to the securities issue.”[7] The prospectus must include a description of risk factors in the issuer and its business. Any new material changes must be disclosed in a news release and a material change report.[8] The existing disclosure regime gives companies a high amount of discretion and little guidance insofar as what is material enough to be disclosed. The rationale behind the current framework addresses the variability in companies in terms of industry, size, and business type which inform varying factors in determining risk and materiality.[9]

Currently, the existing ESG disclosure framework is outlined in CSA Staff Notice 51-333 (Environmental Reporting Guidance)[10] and CSA Staff Notice 51-358 (Reporting Climate Change-related Risks),[11] but factors of materiality are highly context sensitive. For example, a corporation’s Annual Information Form must disclose any information that will influence a reasonable investor’s decision on the issuer’s securities. However, this is not the test for materiality in Canadian securities law; rather, the materiality of information depends on what would be reasonably expected to have a significant effect on the market price of securities.[12] This means there is a gap in disclosing what shareholders might care about and what directors are obligated to disclose as material. In this vein, boards often make vague representations about managing risks, corporate culture, and internal policies, and a lack of regulatory guidance can partly explain the problematic vagueness in disclosure.

The Ontario’s Capital Markets Modernization Task Force’s final report recommends a mandatory ESG disclosure for all non-investment fund issuers, which is consistent with the recommendations of the Task Force on Climate Change-Related Financial Disclosure.[13] The CSA proposed National Instrument 51-107 (Disclosure of Climate-related Matters)[14] whereby reporting issuers would be required to disclose their governance around climate risks and opportunities in the Management Information Circular; additionally, reporting issuers must disclose the impacts of climate-related risks on the company’s business and financial planning, how the company plans to manage risks, and the metrics and targets for managing risks. [15] In terms of timeline, the recommendation starts with the largest issuers (500 million in market capitalization) to comply within two years, and the smallest issuers (150 million in market capitalization) to comply within five years. The disclosure requirements would apply to all reporting issuers and entail “governance, strategy and risk management” as well as varying “scopes”[16] of green house emissions on a comply-or-explain basis. The task force also called on the CSA to impose similar standards across Canada.

With a basic sketch of Canadian securities regulation in place, we can now shift the discussion to exploring the market practices and attitudes around ESG. ESG investing came from the socially responsible investing movement in the 1980s, and it was based on effects other than investment returns, such as moral considerations around divestments from South Africa’s apartheid regime.[17] However, ESG investors evolved to argue that positive moral outcomes can be tethered to positive investment returns. For example, instead of arguing fossil fuels are a bad investment due to the environmental effects, ESG investors have shifted to arguing fossil fuels are a bad investment due to the risks of litigation, regulation, and sustainability; as such, the ESG investor may argue that renewable energy has better risk-adjusted returns and the positive environmental effects are an incidental positive outcome.[18]

Following ESG trends, institutions are working on standards for ESG criteria in the investment process, such as the Sustainability Accounting Standards Board, the Global Reporting Initiative, and the UN Sustainable Development Goals.[19] There are many prominent ESG rating agencies which attempt to provide a standardized ESG rating similar to credit rating agencies.[20] What is notable about these private firms is that their pecuniary interest is tied to the propagation of ESG. Such interests and motivations for ESG should be subject to skepticism and scrutiny. While it is too idealistic to expect firms to have purely altruistic motivations in connection with ESG, one should be wary of whether financial motivations and moral motivations can conflict—for instance, maximizing ESG may be inconsistent with maximizing economic gain.[21] The lesson here is that readers ought to be sensitive to pecuniary interests associated with ESG and try to disentangle the morality of ESG from the money in ESG. Currently, there is a strong case for attributing the rise in voluntary ESG disclosure by companies to selfish motives of attracting investors, bolstering public relations, and strategically addressing climate risks.[22]

There are a number of studies outlining the efficacy of ESG for financial performance. Some have shown that increased corporate transparency on ESG information has positive correlations with corporate efficiency. One meta-study noted that 88% of sources find that companies with robust sustainability practices have better operational performance translating into cashflows.[23] The ultimate thesis of these studies is that ESG and profitability are compatible and complementary. In other words, ethical investing and strong financial performance can go hand-in-hand.[24] Others have taken a more attenuated approach and note that ESG as an investment strategy is too varied to compare.[25]

Some finance experts are radically skeptical towards the value ESG really adds.[26] They note that increased value should be reflected through higher cash flows or a lower discount rate, but none of these are increase solely by ESG; rather, there is a false correlation between profitability and the perceived “goodness” of ESG. At best, the goodness of ESG can penalize bad companies so investors do not buy their shares, but it is more difficult to establish a positive benefit with ESG itself. The correlation between ESG and increased valuation can instead be attributed to the gamification of ESG by large companies.[27]

To take stock, Canadian regulatory reform around ESG disclosure have been largely focused on targeting companies and using stricter, more detailed rules to provide clarity and to incentivise compliance. Companies, however, have been largely responsive to market forces demanding more ESG from companies and this has sparked a trend of voluntary ESG disclosure. The primary market force influencing companies are potential investors. While one explanation of why these external investors pursue ESG is for profit maximization and the perception that ESG adds to the value of a company, it is possible that the relationship between ESG and increasing value is temporary. If this is true, then once ESG stops providing value, investors would stop caring about ESG. However, there may be other more permanent reasons that investors care about ESG.

ESG and the Moral Investor

We can make further distinctions to clarify what external investors really care about in deciding on potential investments: first, ESG as a moral end in itself; and, second, ESG as being an instrument for higher returns and more money. An attractive feature of ESG is that it has the potential to solve a dilemma for investors, that is, investors no longer need to choose between money and morality. In 2020, there were an estimated 300 ESG funds which had the benefit of building wealth while also contributing to ethical practices.[28] Recently, since the COVID-19 pandemic, the trends have been that investors are incorporating ESG as a premium in their valuing of companies.[29] In response, companies pledging to be climate-neutral have doubled since the pandemic.[30] Nonetheless, these notions of guilt-free investing might be exaggerated. While sophisticated investing decisions are often determined by incredible amounts of financial analysis and modelling, retail investors often take a more subjective and personal approach. This can include personal morality. Due to their lack of sophistications, retail investors are susceptible to misinformation, manipulation, and misdirection, and their vulnerability needs to be protected.

Returning to the idea of guilt-free investing, it may indeed be too good to be true. Without consulting exact details and poring over disclosure documents, retail investors may buy into corporate virtue signalling.[31] Virtue signalling is the act of portraying a good moral character to others. This can be problematic if one does not genuinely hold such moral beliefs and acts disingenuously. We can see how this applies to ESG: companies may signal that they are allies of ESG to lure investors with their perceived moral character yet fail to operationalize any principles of ESG. ESG virtue signalling can take the form of promising both morality and money, and, while this in itself is not repugnant, it can be harmful if their promises are anything less than the truth and intended to deceive investors.

ESG virtue signalling may partly explain how ESG became a fad. By claiming they maximize both morality and financial gain, they have the moral high ground against their competitor companies who only focus on financial gain. Latching onto this trend, more companies may try to signal their virtue through ESG and creep into the lines of dishonesty and deception. ESG, currently conceived, is too easy a solution to the dilemma of morality and money, and the recent fads are propagated by people in the ESG space profiting from this trend. Deceptive practices which prey on an investor’s moral sentiments, information asymmetry, and false perception of competitive advantage needs to be penalized.

Nevertheless, there are strong arguments for why ESG needs to be the primary aim, in and of itself—that is, apart from any financial gain. ESG can combat risks of poor governance and practices which threaten the sustainability of our global capital markets. Additionally, it addresses broader existential threats caused by global inequality, climate change, and rights violations. This may invoke debates about weighing short-term versus long-term issues and what needs to be properly prioritized. However, we can sidestep these vexing debates and concede that there are short-term issues which ESG policies can address. There are current damages and risks in businesses related to climate change, current human rights violations in supply chains, and current inequities in corporate governance. It is odd to think of such moral claims in financial terms. While financial gain can be an incidental effect of attending to these moral claims, these moral claims should still be pursued at no financial gain or even at a short-term financial loss. These are issues in front of us that ESG can address.

It is at this point we must deal with an objection. If the relationship between financial gain and morality can be challenged, then, in the case that the ESG fad dies down and ESG no longer adds value to investors, investors may then no longer care about the morality of ESG. This may be framed as an empirical question: in other words, would investors still pay a premium for good behaving companies? One might assume through economical models that investors do not care about morality and only care about maximizing their investments. However, even sophisticated investors are increasingly adding moral considerations into their investing decisions.[32]

One interesting area where morality and investing have a tight relation is equity crowdfunding.[33] Crowdfunding can support businesses that cannot access traditional sources of small business financing and present this business as an attractive investment opportunity to a wider range of people.[34] With crowdfunding, businesses have the added flexibility to choose virtually any kind of business. Businesses do not have to be concerned with high growth, rather they can choose something like personal passion or social impact and still attract investors.[35] This is just one example of investors being more morally conscience when given the opportunity.

Technology and access to information through the internet have had profound impacts on investing behavior and its relation to morality.[36] The internet and other information technologies have certainly lowered information costs, and this can benefit all parties. Since its advent, some have been optimistic about the role of technology for enhancing risk disclosure.[37] Technology not only lowers the cost of disclosure it also speeds it up. For example, press releases of material updates are instantly accessible and company websites often contain detailed ESG reports. Sophisticated institutional investors also have modes of instant communication to assist in understanding risks. However, the sheer amount of readily available and free information can pose a challenge for parsing out the quality of information.

Many have been worried about an “information overload.”[38] More information can counterintuitively worsen investment decisions and potentially lead to immoral or amoral decision-making. For example, imagine having to sift through a box full of diligence materials on a company within a week; then, imagine having to sift through fifty boxes full of diligence materials within a week. In the latter instance, one is more prone to be overwhelmed, confused, and unable to effectively process the information. Simply believing more information and disclosure leads to more informed investors ignores psychological limitations. Discussions around the density of information in prospectuses and the opaqueness of some legal or financial jargon suggest the need for simplified information for retail investors. Thus, a necessary part of disclosing information is also ensuring that it can be processed effectively. This can be achieved through clearer and more manageable disclosure that is easily searched and digested, which must be a policy aim for any reform of the securities disclosure regime.

One should also be wary about misinformation available through technology.[39] It can further manipulate the perceived moral character of companies. Search engine algorithms have become increasingly sophisticated and tailored or targeted content can skew information. Most retail investors do not have sophisticated means of attained reliable information, and negative information about companies or material risks will not necessarily be the most salient or readily accessible on the internet. Even blogs and social media platforms can affect an investor’s decision.[40] There are certainly sophisticated tools to assist in analysis and self-education resources available, but these are no replacement for the expertise of a professional. Retail investors often act without consulting intermediaries and are frequently unequipped to filter out unreliable or biased information.

The availability of information and globalization has certainly led to some moral progress.[41] In the last century, we have seen the gradual acceptance of progressive attitudes towards homosexuality, anti-racism, and gender equality. This moral evolution can be partly attributed due to technological advances. Granted, technology also cuts the other way and contributes to tribalism and other moral failures.[42] Nevertheless, we do not need to go as far as saying that technology contributes to the development of our morality; rather, more modestly, we can say that technology facilitates our existing morality by providing information as the raw material to inform our decisions. For example, without media to distribute information, we may have never learned about the human rights violations of Nevsun Resources Ltd.[43] It is not that the information provided by media sources changed our moral judgments, rather that we were only able to exercise our moral judgements once we had adequate information. An investor may make this judgment and choose not to invest in a company involved in morally repugnant behavior. In this sense, the advent of more freely accessible information can lead to a more morally conscience investor.

ESG Reform and the Future of ESG in Canada

Since investors can influence companies to be moral with their wallet insofar as deciding which shares to purchase, we should be cautious about having legislation step in. The suggested upshot is that we do not need strict legal intervention; we can keep letting the morality of external investors influence the morality of companies. To this end, principles-based regulation—aiming at high-level rules rather than more detailed prescriptions—can be an effective approach for reform.[44] Rules should be designed by market participants rather than regulators as this would be more efficient and have stronger rates of compliance. Regulator should certainly still act to protect consumers or protect against market failure, but they should only implement prescriptive rules when there is clear evidence of harm. This would assist in the growth of Canada’s capital markets and reduce limits on the speed or volume of transactions. Prescriptive regulations always lag a bit behind innovations and changes in the market, so it is important to have a more flexible approach to regulation. Thus, principle-based regulation is a natural fit for ESG reform rather than the rules-based approach to regulation.[45] It recognizes the variability in businesses in terms of size, sector or industry.[46] We can look at the success of principle-based regulation through an outcomes-based approach.[47]

Rather than trying to influence corporations, regulatory reform could be better served by targeting other market players. We have discussed external investors, but there are also internal investors—that is, the present shareholders of a company—who can influence the direction of a company. The Capital Markets Modernization Taskforce had ESG related recommendations focusing on board composition and governance.[48] Corporations should not be viewed as mindless profit maximizing machines. By changing how we think about a director’s responsibility—metaphorically, the workings of the corporation’s brain—we can understand the corporation beyond a profit maximizing machine and move towards a more morally sensitive corporation.[49] In the corporate governance context, the incentives are directly aimed at the duties of directors and their accountability to current shareholders. The directors are incentivised to behave well by the potential of being ousted by shareholder actions or incurring liability through a breach of fiduciary duty. Through this lens, directors are still concerned about the overall value of the company and potentially attracting new shareholders, yet these concerns are secondary to the primary incentive of keeping internal shareholders happy. This broadening of a director’s fiduciary duty to include ESG is entirely possible— investment consultants and asset managers, for instance, already have a duty of care to raise ESG considerations with their client.[50]

This approach to ESG of targeting director’s duty can be fruitful, but there are other market players to target as well. Interestingly, creditors could also demand ESG and influence a company’s decisions on developing their ESG. Environmental risks are a part of the profile of a company and inform their creditworthiness.[51] Creditors may be more generous with their terms if companies meet a standard of ESG. Of course, creditors have to be motivated and incentivised to move companies in this direction. It may appear that we just moved the problem of incentives backwards instead of addressing it, but it may be worth thinking about how incentives for creditors are different from that of the company.[52]

By and large, the ESG disclosure regime remains problematic in Canada. The CSA reported that, despites the guidance provided in NI 51-333, 22% of sampled issuers made no climate-related disclosure at all and 22% included only boilerplate disclosure.[53] There are a number of conclusions one might draw from this. First, clarity in the disclosure procedures is not the issue when it comes to voluntary disclosure; rather, it may be a problem of incentive. Second, this may indicate that mandatory disclosure is necessary for detailed climate-related disclosure and issuers need to be incentivised by stricter regulation standards. Third, if firms are not voluntarily disclosing climate-related disclosure, the value it brings to the company or its role in attracting investors might be minimal or at least lower than the costs of the disclosure. Whatever the case may be, stricter laws are not the answer.

Another worry with stricter ESG disclosure policies is that it will add to costly over-disclosure that may obscure useful information.[54] Overcomplexity is certainly counterproductive for ESG.[55] The aim of investor protection should make disclosure as accessible as possible, but the information must first be adequately disclosed before we look at the problem of accessibility. A stricter ESG disclosure regime could also give rise to more litigation. Some have identified an increase in litigation stemming from a company’s conduct not matching their statements about ESG as well as suits directly challenging a company’s performance.[56] The line to navigate here is between companies providing aspirational ESG statements and material misrepresentations.

One may also question the approach of the Modernization Task Force in seeking comments.[57] Third-party professionals offering advice might choose recommendations for political or self-motivated reasons rather than for the quality of the contribution. Similarly, the Canadian government is incentivised to promote ESG for other political motivations. Canada, through the Responsible Investment Association, is looking to lead the world charge for managing climate risks and reaffirm Canada’s place in the global capital markets through establishing the International Sustainability Standards Board in Canada.[58] Notably, this is another way of instrumentalizing ESG—that is, the aim of sustainability and equitable practices is incidental to another valuable target, which, in this case, is not money but political currency. This is problematic because making the actual aims of ESG a mere incidental effect means that the priority is on political gain; in other words, when the aims of ESG and politics conflict, then politics would be prioritized.[59] ESG cannot be used as a guise for some other end like money or political power.

            Many hurdles remain for a unified, possibly global ESG standard. One vexing issue is compliance and combatting the gamification of ESG data and disclosure.[60] The morality of ESG should not be a strategy to cover up ingenuine attitudes toward ESG goals nor should it be instrumentalized for some other end, which is the central issue of greenwashing. This gamification of ESG tries to bolster ESG through massaging scores, finding biased ESG rating agencies, and relying on vague language in disclosure. The game is to maximize perceived ESG—whether it is through scores, ratings, or public image—while minimizing the resources invested into ESG. Another is that the lack of standardization is based on the fact that ESG risks vary by industry, business, and geography. We may look to other jurisdictions for guidance on the future of ESG in Canada.

            In the United States, the Biden administrations announced the appointment of a “Senior Policy Advisor for Climate and ESG for the Securities and Exchange Commission”, and a Climate and ESG Taskforce; in May 2020, the US Securities and Exchange Commission’s (“SEC”) Investor Committee recommended that the SEC start updating reporting requirements to include ESG factors.[61] In December 2020, the ESG Subcommittee proposed recommendations on the disclosure of ESG risks.[62] The acting chair announced in March 2021 an opportunity to comment on climate change disclosure.[63] The issues were around the disclosure of the internal governance of climate issues and risks, and whether disclosure standards should be comparable to financial disclosure requirements (e.g., audit, assessment, certifications). Predictably, Canada followed suit in October 2021.[64] Increasing investor confidence in the capital markets is a clear policy objective. Some have shown that a demanding and actively enforced disclosure system with heavy civil and criminal penalties towards management promote investor confidence. This line of argument is buttressed by American reform through the Sarbanes-Oxley Act and the change in investors’ confidence in financial statements after the Enron scandal.[65]

Other jurisdictions have already operationalized rules to mandate the disclosure of ESG. Overseas, the European Union began a comprehensive mandatory ESG disclosure regime.[66] The “EU Taxonomy Climate Delegated Act” introduced disclosure obligations for companies based on expert criteria on contributors of climate change; moreover, the “Corporate Sustainability Reporting Directive” is supposed to act as a uniform reporting standard for sustainability disclosure. [67] The EU also aims at reinforcing fiduciary duties and corporate governance regulations to promote sustainability. EU securities regulators have adopted a scheme of mandatory disclosure through the “Sustainable Finance Disclosure Regulation” and called for increased oversight of ESG ratings to address “greenwashing” and other gamifying practices.[68] Others have pursued their own scheme of mandatory ESG disclosure, such as the UK[69] and New Zealand[70] which have slightly longer timelines. Australia has had some interesting developments, such as its June 2021 ASIC targeted surveillance of “greenwashing.”[71] Additionally, there have been several examples of litigation around climate risk disclosure, which is an important lesson for other jurisdictions.[72] Nevertheless, Canada’s capital markets are unique, and it is not clear that transplanting another nation’s laws will be the appropriate fix. As investors are becoming more sensitive to moral factors connected to ESG in their investment decisions, it is important to think about how this can be used to incentivise companies to devote more attention to ESG.[73]

To conclude, it is important to define the scope of this essay, which have been modest and only suggestive. I have provided a sketch of Canadian securities law as it relates to ESG, and I noted some emerging attitudes towards ESG as a temporary trend. I discussed the utility of ESG as a means of increasing returns for investors and distinguished it from ESG as a mere moral consideration, which I suggest more investors are turning their minds toward. I argued that even apart from the utility of ESG, investors are becoming more sensitive to the morality of their investment decisions, especially with increased access to information through technology. The suggestion is that even if the instrumental value of ESG wanes, investors will continue to be attracted to the moral value of ESG and thereby influence companies to have a more robust ESG policy. The ultimate conclusion is that stricter legal rules around ESG is the wrong approach, and that regulator should think creatively about tackling reform through other capital market players.

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[1] It is important to distinguish ESG from the related concept of corporate social responsibility (“CSR”). CSR arose in the United States in the 1970s by the Committee for Economic Development. ESG is distinguishable from CSR in that ESG is focused on measurable criteria applicable to specific targets, like diversity, supply chains, and climate change. CSR is aimed at general accountability of business across a wide variety of sectors with little measurability; in other words, CSR is more applicable in the context of a high-level mission statement or business commitments. While much of what this essay covers can apply to CSR, for clarity and precision, this essay will focus on ESG. 

[2] It is important to further define some terms and comment on the scope of this paper. The distinction between “moral” and “ethical” is not important for the purposes of this essay and are used interchangeable unless otherwise indicated. The same goes for “duty” and “obligations” as well as “company” and “firm” for all intents and purposes.

[3] Thus, there are 13 securities regulators accountable to 13 governments, and each regulator is supposed to reflect the different strategic priorities for their jurisdiction.

[4] 2011: Reference Re Securities Act, 2011 SCC 66, at para 9.

[5] There are approximately 130 national instruments, 11 multilateral instruments, and 800 local rules.

[6] Reference re Pan-Canadian Securities Regulation, 2018 SCC 48.

[7] Securities Act, R.S.O. 1990, c. S.5.

[8] Moreover, National Instrument 51-102 requires periodic disclosure of material information in its Annual Information Form (including risk factors influencing an investor’s decision to purchase securities) and Management Discussion and Analysis (including risks or uncertainty for the business’s future performance).

[9] However, too little guidance can have the effect of companies innocently failing to identify material risks or potentially shirking their disclosure obligations. More explicit and clear regulation can also assist in offsetting information costs for companies; by providing guidance, companies do not need to waste resources in trying to discern what the requirements for disclosure are, and often these requirements can be generalized through categories of industry, size, or the type of business. This general approach to policy focuses on stricter rules and penalties to achieve certain aims in the capital market.

[10] Canadian Securities Administrator, CSA Staff Notice 51-333 – Environmental Reporting Guidance (October 27, 2010).

[11] Canadian Securities Administrator, CSA Staff Notice 51-358 – Reporting of Climate Change-related Risks (August 1, 2019).  

[12] Kerr v. Danier Leather Inc., 2007 SCC 44.

[13] The final report contains 74 recommendations and is the product of consulting with over 110 stakeholders and 130 comment letters.

[14] Canadian Securities Administrator, CSA Staff Notice 51-358 – Consultation Climate-related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument 51-107 Disclosure of Climate-related Matters (October 18, 2021).  

[15] Alternatively, this can be in the AIF or MD&A

[16] Scope 1 refers to direct GHG emissions, Scope 2 refers to indirect GHG emissions from purchased energy. and Scope 3 refers to indirect GHG emissions not covered by Scope 2.

[17] John H Langbein & Richard A Posner, “Social Investing and the Law of Trusts” (1980) 79:72 Mich L Rev.

[18] Andrew W Lo & Ruixun Zhang, “Quantifying the Impact of Impact Investing” (2021), online SSRN: https://ssrn.com/abstract=3944367.

[19] In 1998, the International Labour Organization passed the Declaration on Fundamental Principles and Rights at Work, which were the precursors to the 2011 UN Guiding Principles on Business and Human Rights. Global efforts have been focused on implementing these UN principles.

[20] Florian Berg, Julian F Kolbel, & Roberto Rigobon, “Aggregate Confusion: The Divergence of ESG Ratings” (2020), online SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3438533.

[21] Ideally, maximizing ESG would also maximize economic gain; while some suggest there may be some minimal correlation between the two, maximizing ESG will not maximize economic gain.

[22] As we shall see, cynical attitudes towards ESG argue that ESG is a fad that is extremely profitable for those involved in it while failing to produce any actual good or contributing minimally to ESG’s aspirational goals.

[23] Gordon L Clark, Andres Feiner, & Michael Viehs,” From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance” (2015), online SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2508281.

[24] Tamas Barko, Martijn Cremers, & Luc Renneboog, “Shareholder Engagement on Environmental, Social, and Governance Performance” (2021), J Bus Ethics (forthcoming).

[25] Dana Brakman Reiser & Anne Tucker, “Buyer Beware: Variation and Opacity in ESG and ESG Index Funds” (2020) 41:5 Cardozo L Rev 1921.

[26] Bradford Cornell & Aswath Damodaran, “Valuing ESG: Doing Good or Sounding Good?” (2020) online SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3557432.

[27] Aswath Damodaran generally argues that ESG does very little for increasing the value of a company. He further notes that outsourcing one’s conscience to corporate boardrooms is not the solution and that boardrooms should be focused on building the business.

[28] John Hale, “Sustainable Fund Flows in 2019 Smash Previous Records” (2020) online Morningstar: https://www.morningstar.com/articles/961765/sustainable-fund-flows-in-2019-smashprevious-records.

[29] Maura Souders, “Survey Analysis: ESG Investing Pre- and Post-Pandemic” (2020) online ISS ESG Solutions: https://www.issgovernance.com/file/publications/ISS-ESG-Investing-Survey-Analysis.pdf.

[30] Ecosystem Marketplace, “EM Global Carbon Hub” (2021) online: https://www.ecosystemmarketplace.com/carbon-markets/.

[31] Tyge G Payne, Curt B Moore, Greg R Bell, & Miles A Zachary, “Signaling Organizational Virtue: an Examination of Virtue Rhetoric, Country‐Level Corruption, and Performance of Foreign” (2013) 7:3 Strategic Entrepreneurship Journal 230-251.

[32] Duffy Morf. “Shifts in corporate accountability reflected in socially responsible reporting: A historical review” (2013) Journal of Management History.

[33] There has been a recent prospectus exemption granted for equity crowdfunding in Canada.

[34] A useful analogy that academics use is that crowding funding is a combination of crowdsource (i.e., combining contributions from many people to achieve a goal, like Wikipedia) and microfinancing (i.e., lending small amounts of money to poor borrowers who don’t have access to traditional funds, like purchasing new nets for financially struggling fishers).

[35] Christopher H. Pierce-Wright, “State Equity Crowdfunding and Investor Protection” (2016) 91 Wash. L. Rev. 847.

[36]Brad M Barber & Terrance Odean, “The internet and the investor” (2011) 15:1 Journal of Economic Perspectives 41-54.

[37] Donald C Langevoort, “Toward More Effective Risk Disclosure for Technology-Enhanced Investing” (1997) 75:2 Wash U L Q 753.

[38] Troy A Paredes, “Blinded by the Light: Information Overload and Its Consequences for Securities Regulation” (2003) 81:2 Wash U L Q 417.

[39] Josh Lerner & Peter Tufano, “The consequences of financial innovation: a counterfactual research agenda” (2011) 3:1 Annu Rev Financ Econ 41-85.

[40] Chong Oh & Olivia Sheng, “Investigating predictive power of stock micro blog sentiment in forecasting future stock price directional movement.” (2011) Thirty Second International Conference on Information Systems.

[41] Peter Singer, The expanding circle: Ethics, evolution, and moral progress, (Princeton: Princeton University Press, 2011).

[42] Jonathan Haidt, The Righteous Mind : Why Good People Are Divided by Politics and Religion, (New York: Vintage Books, 2013).

[43] Nevsun Resources Ltd v Araya, 2020 SCC 5.

[44] Julia Black, Martyn Hopper, & Christa Band, “Making a success of principles-based regulation” (2007) 1:3 Law and financial markets review 191-206.

[45]Brigitte Burgemeestre, Joris Hulstijn, & Yao-Hua Tan, “Rule-based versus principle-based regulatory compliance” (2009) Legal Knowledge and Information Systems IOS Press 37-46.

[46] One interesting example of integrating ESG into the capital markets is through a more focused approach, like fixed income investments.

[47] To illustrate, if ESG metrics set by regulators are not met, and there is clear evidence of harm (e.g., environmental), the regulators would need to step in for more prescriptive measures to address the harms.

[48] First, corporate board diversity requirements for executive officers who identify as women, BIPOC, persons with disabilities, and LGBTQ+. The taskforce recommends that issuers aim for 50% women (implemented over five years) and 30% of the other named groups (implemented over seven years). Second, board tenure limits for most board members. Third, a mandatory (non-binding) say-on-pay votes on executive compensation. Fourth, mandatory annual director elections on uncontested elections.

[49] The aims of fiduciary duty and ESG disclosure regulation overlap in important ways. In sum, they aim at incentivising good behavior from corporations and disincentivized bad behavior through penalties. In the public disclosure context, the incentives are aimed at avoiding regulatory sanction while also attraction new investors. The directors are incentivised to behave well by the potential of investors choosing another company that has higher ESG outcomes or regulators punishing them for lying about their falsely disclosed ESG outcomes. However, they achieve these aims through different means. One way to illustrate this is by tracking the relationships of incentive and duty.

[50] Paul Watchman et al, “Fiduciary Responsibility: Legal and practical aspects of integrating environmental, social and governance issues into institutional investment” (2009) Asset Management Working Group: United Nations Environment Programme Finance Initiative.

[51] ESG risks can be important in the bond market for credit analysis (e.g., green bonds, social bonds, sustainability bonds).

[52] A clear example of this is the case of the creditor being a government—governments are not private parties incentivized by profit, and governments can directly implement these policy aims through public funds. This can be further reason to think that ESG is not just a fad.

[53] Supra note 6.

[54] Virginia Harper Ho, “Disclosure Overload? Lessons for Risk Disclosure & ESG Reform from the Regulation S-K Concept Release” (2020) 65:1 Vill L Rev 67.

[55] Granted, it remains that under-disclosure is currently the problem.

[56] David Hackett et al, “Growing ESG Risks: The Rise of Litigation” (2020) 50:10 Envtl L Rep 10849.

[57] Douglas Sarro, “Incentives, Experts, and Regulatory Renewal” (2021) 47:1 Queen’s Law Journal.

[58] Ontario Securities Commission, “Canadian securities regulators strongly support the establishment of the International Sustainability Standards Board in Canada” (2021) online: https://www.osc.ca/en/news-events/news/canadian-securities-regulators-strongly-support-establishment-international-sustainability-standards.

[59] The worry here is that instrumentalizing ESG would lead to suboptimal outcomes and, if we believe ESG is just a fad, it may no longer be discussed or operationalized.

[60] Another related and salient issue is defining materiality and trying to balance between generally applicable rules while also being flexible.

[61] U.S. Securities and Exchange Commission, “Recommendation of the SEC Investor Advisory Committee Relating to ESG Disclosure” (2020) online: https://www.sec.gov/spotlight/investor-advisory-committee-2012/esg-disclosure.pdf.

[62] U.S. Securities and Exchange Commission, “Asset Management Advisory Committee Potential Recommendations of ESG Subcommittee” (2020) online: https://www.sec.gov/files/potential-recommendations-of-the-esg-subcommittee-12012020.pdf.

[63] U.S. Securities and Exchange Commission, “Public Input Welcomed on Climate Change Disclosures” (2021) online: https://www.sec.gov/news/public-statement/lee-climate-change-disclosures

[64] Ontario Securities Commission, “Canadian securities regulators seek comment on climate-related disclosure requirements” (2021) online: https://www.osc.ca/en/news-events/news/canadian-securities-regulators-seek-comment-climate-related-disclosure-requirements

[65] John C Coffee, Jr, “Understanding Enron: “It’s About the Gatekeepers, Stupid,” (2002) 57 Bus. Law. 1403.

[66] European Commission, “Sustainable Finance and EU Taxonomy: Commission takes further steps to channel money towards sustainable activities” (2021) online: https://ec.europa.eu/commission/presscorner/detail/en/ip_21_1804.

[67] Robert G Eccles et al, “Mandatory Environmental, Social, and Governance Disclosure in the European Union” (2012) Harvard Business School Accounting & Management Unit Case No 111-120.

[68] European Securities and Markets Authority, “ESMA Calls for Legislative Action on ESG Ratings and Assment Tools” (2021) online: https://www.esma.europa.eu/press-news/esma-news/esma-calls-legislative-action-esg-ratings-and-assessment-tools.

[69] HM Treasury, “A Roadmap towards mandatory climate-related disclosures” (2020) online: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/933783/FINAL_TCFD_ROADMAP.pdf.

[70] David Clark, “Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 (2021/39)” (2021) online: https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/document/BILL_109905/financial-sector-climate-related-disclosures-and-other

[71] Australian Securities & Investments Commission, “21-295MR ASIC and ATO engage with directors as part of ASIC’s Phoenix Surveillance Campaign” (2021) online: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-295mr-asic-and-ato-engage-with-directors-as-part-of-asic-s-phoenix-surveillance-campaign/.

[72] In Mark McVeigh v Retail Employees Superannuation Pty Ltd (REST), McVeigh claimed that REST failed to disclose risks which prevented him from making an informed decision about the fund’s performance. This case was settled and REST undertook to adopt TCFD reporting recommendations. In Australian Centre for Corporate Responsibility v Santos Ltd, a shareholder advocacy group alleged misleading and deceptive conduct in Santos’s 2020 report claiming natural gas as a “clean fuel.” They also claimed that Santos’s plan to achieve net zero emissions by 2040 is misleading because it was based on undisclosed assumptions about carbon capturing.

[73] This also lends further support to approaching regulatory reform from the viewpoint of broader principles rather than more granular rules.