SOURCE	POSITION	THESIS	ARGUMENT STRUCTURE	COMMENTARY
Curtis Bridgeman, “Contracts as Plans” [2009] 2009:2 U III L Rev 341.	A theory of contracts based on philosophy of action and legal theory (mostly Scott Shapiro and Michael Bratman).	Contracts as a plan to solve a “coordination problem” and better accounts for how societies might use contract law to achieve good ends.	The author surveys the current theories of contract law and notes weaknesses in each theory. The author then explains the relevance of Bratman’s work and how Shapiro uses it to build a general legal theory; finally, the author applies Shapiro’s legal theory to contracts.	While creative in many ways, the real upshot seems to be that practical reasoning needs to be looked at more closely by contract scholars.
A Mitchell Polinsky, “Risk Sharing through Breach of Contract Remedies” (1983) 12:2 J Leg Stud 427.	An economic, efficiency argument that leads to liquidated damages as a the principled (based on risk sharing) remedy, but expectation damages as the practical one (since risk sharing is not the only metric for law).	“The risk allocation effects the choice of remedy for breach…” (p 428) If we consider the effects of risk in affecting remedies, we find that liquidated damages is always optimal and that the expectation remedy is optimal “only if the seller is risk neutral.” (429)	The author considers scenarios illustrating how risk affects the choice of remedy, especially with respect a party’s tolerance for risk. Then the author looks at five remedies and models them in terms of risk allocation.	While this is an interesting addition to Shavell’s paper (1980), it is mostly an economics paper.
Ian Ayres & Gregory Klass, “Promissory Fraud without Breach” (2004) 2004:2 Wis L Rev 507.	An (economic) argument for money damages over specific performance based on options valuation.	Money damages are best understood as an option to buy back performance.	This article responds to transaction costs and how they lead to scenarios of excessive breach and excessive performance. Money damages as options makes sense of this by looking at a parties ex ante preferences (of valuing the option and tolerance to risk).	This is an economic piece that moves towards a more sophisticated economic model of contract law analysis.
Anthony T Kronman, “Contract Law and Distributive Justice” (1980) 89:3 Yale LJ 472.	A normative theory of contracts based on distributive justice.	“I argue that the non-distributive conception of contract law cannot be supported on either liberal or libertarian grounds, and defend the view that rules of contract law should be used to implement distributional goals whenever alternative ways of doing so are likely to be more costly or intrusive.” (474)	This article looks at the moral legitimacy of redistribution and the failure of both liberal and libertarian views that contract is a bad instrument for distributive justice. Voluntary agreement is to be understood as a distributional concept and it is perfectly compatible as a legitimate instrument for redistribution (in the way taxation is viewed).	A very convincing argument for redistribution through contractual regulation (e.g. minimum wage laws). The structural similarities with taxation make this a viable alternative and consistent with political liberalism (see 500 for discussion on Rawls).
Lionel D Smith, “Disgorgement of the Profits of Breach of Contract: Property, Contract and Efficient Breach” (1994) 24:1 Can Community LJ 121.	A doctrinal argument in favor of disgorgement for breach of contract.	Breach of contracts where the plaintiff suffers no loss but the defendant’s breach provides gain need to allow disgorgement for breach of contract.	The author engages the question of whether disgorgement is available for contracts – that is, a damage measure not based on the loss suffered by the plaintiff, but rather based on the gains by the defendant.	There is an interesting discussion of efficient breach as a counterargument for disgorgement.

SOURCE	POSITION	THESIS	ARGUMENT STRUCTURE	COMMENTARY
Alan Schwartz & Robert E Scott, “Contract Theory and the Limits of Contract Law” (2003) 113:3 Yale LJ 541.	A pluralistic (but mostly efficiency based) methodological clarification.	Contract law must be sensitive to the nature of contractual relations and how fairness differs. Efficiency theories, for one, indeed apply to contracts between firms and looks at what contract laws best fit relation between firms.	“A transaction involves a seller (whether of goods or services) and a buyer. Parties to transactions can be partitioned into individuals and firms. This yields four transactional categories: (1) A firm sells to another firm, (2) an individual sells to another individual, (3) a firm sells to an individual, and (4) an individual sells to a firm.” (544) If we take seriously what kind of laws firms want, mandatory rules often undercut their aims.	While this paper is highly influential, it is not directly relevant for expectation damages. Its ingenious move is narrowing the scope of contracts to commercial firms so efficiency can come to the fore (and other concerns of obligations can be sectioned off to non-commercial entities).   What might be interesting to think about is how the Hegelian view of contracts might treat these categories. The authors here broadly categorize Hegelian rights-based theories under autonomy theories. Are the property relations the same for firms? The authors’ focus on firms seems to make contract law disjointed (in a way that the rights-based views do not).
Nathan B Oman, “Markets as a Moral Foundation for Contract Law” (2012) 98:1 Iowa L Rev 183.	A further critique of economic theories; an argument for a pluralistic, promissory theory of contracts.	“My thesis is that contract law exists primarily to support markets and that the moral and political value of markets as a social institution undergirds its justification.” (187)	Promise-based views need to incorporate markets into their theory. The author claims to provide a justification of the “good of markets,” understood in three ways: “reinforcing a liberal political order,” generating “social goods,” and promoting relational virtues. (187) Promissory obligations are instrumentally good for promoting markets, and contracts orders the legal structure of markets, so of course contracts will reflect promissory obligations.	The author ties contracts to the promotion of markets, then provides a moral analysis of markets. This is a unique spin, but it takes away a lot of the deontological force away from promises by making promises instrumental for markets.
Randy E Barnett, “Contracts is Not Promise; Contract is Consent” (2012) 45:3 Suffolk UL Rev 647.	A modification to promissory views (mainly, Fried): the author suggests consent and “public” morality as the basis of contracts.	Fried’s promissory theory cannot account for the objective theory of assent and cannot account for default rules, but consent can explain these features.	On Fried’s view, subjective agreement between parties can be idiosyncratic, but consent looks at the objective relation. Second, “gap-filling” (default) rules are awkward to think of as a promise, rather they are better put in terms of a “manifestation of intention to be legally bound,” or consent (662).	Tier 2   This builds on the author’s previous influential paper (1986) where the author notes that morality-based theories need a broad notion of consent in order to capture all the elements of contract law. Here, the author makes explicit the comparison between the limited scope of promises and the larger scope of consent. This seems like a form of the rights-based view.
Melvin A Eisenberg & Brett H McDonnell, “Expectation Damages and the Theory of Overreliance” (2002) 54:5 Hastings LJ 1335.	Economics approach to defending expectation damages; in-house clarification on the theory of overreliance	A widely held assumption is that expectation damages provide inefficient incentives – because of overreliance – is generally untrue.	The question and issue Overreliance is contingent upon institutional considerations which are unlikely to occur; in the remaining cases of overreliance, expectation measure does not insure a promisee’s reliance and related modification to the expectation measure is unnecessary.	This paper vindicates the economic approach to expectation damages by dispelling the problem of overreliance. There is a nice discussion of the concept of reliance and this builds into an explication of the considerations from the buyer’s and seller’s points of view.
Tess Wilkinson-Ryan, “Do Liquidated Damages Encourage Breach – A Psychological Experiment” (2010) 108:5 Mich L Rev 633.	Empirical study on breaching behavior.	Moral judgments affect breaching behavior, as demonstrated by the preference to breach in contracts with liquidated-damages clauses.	Contrary to economists, people are not wealth-maximizers, rather their behavior is sensitive to incomplete contracts and sanctions. Experiments show that liquidated-damage clauses induce the belief that breach is less immoral and thereby encourages breaching behavior.	This paper may support Hegel’s idea that contracts separate the value from the material thing by suggesting that people’s decision procedure already works like this.   The author has numerous papers in this area of experimental jurisprudence, notably “Breach Is For Suckers” (2010) and “Moral Judgment and Moral Heuristics in Breach of Contract” (2009).
Steven Thel & Peter Siegelman, “Wilfulness versus Expectation: A Promise-Based Defense of Wilfull Breach Doctrine” (2009) 107:8 Mich L Rev 1517.	Doctrinal investigation into willful breach.	The relevance of willfulness for courts is not to pick a more generous definition of the promisee’s expectations, rather it is to deprive the promisor of incentives to breach and grant the promise full expectation.	A promisee’s expectation interests seem to have little conceptual connection to the willfulness of breach by a promisor, yet courts often take willfulness into account. Willful breach doctrine is best understood as a screen for breaches with no benefit to the promisor (and perhaps no net benefit to the parties).	This paper takes expectation damage measures for granted (although there are some suggestions for supercompensatory remedies) and tries to find a coherent fit for the willful breach doctrine. Moreover, it also largely silent on cases of efficient breach.
Richard Craswell, “Promises and Prices” (2012) 45:3 Suffolk UL Rev 735.	Critique of non-economic approaches; survey of economists’ and philosophers’ approaches, particularly with respect to how they deal with pricing.	“Philosophers,” or the broad category of non-economic approaches, often omit the significance of pricing in their analysis, so it seems the economists’ approach is more complete.	The discussion on “price” is focused on price effects or the normative impact pricing has on contracting parties. The significance of pricing can be overlooked by the methodological approaches of non-economist (philosophers), notably in impermissible choices, default rules, tacit understandings, deductive logic, entailments of promises, scope of contract law, impermissible rationales, and cultural effects.	This paper is very interesting and raises a lot of important questions, but it does not provide a sustained analysis of one particular area of weakness by the non-economist. Rather it opts for breadth and covers a large range of how economists and philosophers think differently.
Richard RW Brooks, “The Efficient Performance Hypothesis” (2006) 116:3 Yale LJ 568.	Economic approach to specific performance; modification informed by moral intuitions	Promisee should be given the power to weigh costs and benefits of performance. This is more consistent with moral intuitions while remaining efficient.	“Perform or pay” describes the economic choices and not the legal character (i.e., the power vs the right), economic efficiency is not the foundation for the disjunctive duty in law. A look into contract doctrine reveals how courts craft remedies. A framework can be developed in terms of enforcement, efficiency, and distribution. Using this framework, we can arrive at the conclusion that efficiency and moral intuitions can be satisfied by giving promisee’s the power to weigh costs/benefits.	There is an interesting look into separating the rules courts use (for contract remedies) and the decision procedure to choose a rule (or a combination of rules). The author argues that the court is trying to “realize the equivalent of some counterfactual state.” (p 578) Generally, this is a strong economic argument for specific performance that takes morality into consideration. More specifically, if, all things equal, performance and breach are equally efficient, then performance is preferable given moral considerations.
Robin Kar, “Contract as Empowerment” (2016) 83:2 U Chicago L Rev 759.	A theory of contract based on empowerment (and not efficiency or morality based).	Contract as empowerment “has interpretive advantages over competing theories of contract.” (761)	The paper starts by unpacking the empowerment view. The interpretive advantages of contract as empowerment are in expectation damages, consideration, and the intention of parties.	Contract as empowerment is a fascinating and intuitive starting point. The discussion on expectation damages (starting on 785) is based on which remedy is more empowering. The author also replies to the idea that specific performance or punitive damages might be more empowering (792), but the argument becomes a bit muddy at this point.
Charles J Goetz & Robert E Scott, “Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach” (1977) 77:4 Colurn L Rev 554.	Economic-based criticism of penalty doctrine and in favor of penal damages.	The current rationale behind the penalty doctrine – namely, inefficiently overcompensating the non-breaching party – it wrong and results in unfair remedies by failing to account for procedural costs.	Penalties can be useful ways for parties to negotiate and protect from breach, but the current penalty rules constrain this process and make it inefficient. This is seen in cases of idiosyncratic losses where expectation damages are often inadequate.	The focus of this paper is more on penal damages than expectation damages.   It is nevertheless interesting to think about the disjunctive obligation (to perform or pay) with respect to penalties. What is a Hegelian view of penal damages?
Edward Yorio, “In Defense of Money Damages for Breach of Contract” (1982) 82:7 Colurn L Rev 1365.	A response to advocates of specific performance.	Despite popular issues (e.g. undercompensation), both morality and efficiency support the claim for money damages as the default rule due to its flexibility and responsiveness as a remedy.	This paper responds specific performance (mainly, Schwartz 1979) arguments from both the moral and economic camps. The author notes that a more attenuated form of money damages can account for the purported gaps that specific performance arguments claim to fill. Further, specific performance is less satisfactory than money damages in terms of fairness and efficiency.	This generally buttresses the case for expectation damages, but it is more about vindicating money damages from the suggestion that specific performance is more fair and more efficient.
Yuval Feldman & Doron Teichman, “Are All Contractual Obligations Created Equal” (2011) 100:1 Geo LJ 5.	A critique of instrumental (generally understood as economic) views of disjunction obligations by an empirical investigation into individual’s decisions and motivations.	Three experimental surveys show that people are motivated by non-instrumental forces (e.g. morality), and this undercuts the economic analysis of contracts.	Participants given efficient breach scenarios were sensitive to things like uncertainty of paying damages and the form of contract. So, economic incentives are not the only variable for determining breach and performance.	Tier 2   The disjunctive is looked at in terms of “options” to perform or breach. Experimental jurisprudence is useful in looking at individual attitudes towards breach, but it does not clarify what the obligations are in contracts. Moreover, as many economists point out, their views on efficient breach are based on models, so one must accept their starting points. These authors outright reject these starting points, then provide an empirical justification – in this respect, they seem to be talking past each other.
Charles Fried, “The Convergence of Contract and Promise” (2007) 120 Harvard L Rev Forum 1.	A response by Fried to Shiffrin; an in-house discussion on the promissory view.	Expectation damages and mitigation are consistent with promissory morality.	Fried disagrees with Shiffrin on specific performance and mitigation. Friend suggests expectation damages fills the gap for a lack of explicit bargain. He further suggests expanding morality from promises to include a duty to rescue.	The picture of morality Fried suggests is a bit puzzling, especially when he speaks about normative economics furthering similar ends to morality (see p 9).
Andrew S Gold, “A Moral Rights Theory of Private Law” (2011) 52:6 Wm & Mary L Rev 1873.	A rights-based account of private law, primarily responding to corrective justice and civil recourse theories.	The morality of rights has to do with the legitimate use of coercion. The state enforces these rights through a private right of action, and this model helps us understand elements of private law.	The author starts with a number of issues for the corrective justice and civil recourse approach. Then the author outlines the moral rights approach on an abstract level and elaborate on how it addresses the issues of the other approaches. The second half of the paper then tries to spell out the application of the rights approach for legal theory and legal doctrines.	What is particularly interesting is the incorporation of political theory and tying in ideas of social contract into an account of private law. There is also a clear section on methodology.
Peter Linzer, “On the Amorality of Contract -Remedies Efficiency, Equity, and the Second Restatement” (1981) 81:1 Columba L Rev 111-139.	A morality-based approach for specific performance.	A broader understanding of efficiency supports morality-based approaches to contracts.	The author makes an early distinction between commercial and noncommercial transactions, then argues that remedies need to be sensitive to this distinction. More specifically, in a noncommercial setting, specific performance should be liberally applied.	Tier 2   This is an important paper that is in the general camp of Fried and Shiffrin. One crucial difference, however, seems to be the concession for efficient breach in commercial settings.
Nathan B Oman, “Failure of Economic Interpretations of the Law of Contract Damages” (2007) 64:3 Wash & Lee L Rev 829.	A critique of economic theories of contract in favor of a pluralistic theory.	“Economic accounts of the current doctrine governing contract damages have failed, and the nature of that failure places limits on the role of economics in an integrated theory of contract law.” (832)	Economic theories cannot account for the “bilateralism” of contract law. The bilateralism of explains why overreliance is such a problem for economic theories: simply, it fails as a complete theory for contracts. We need an alternative that places autonomy in the center and uses efficiency as a guide to doctrine.	The author makes a compelling case for why damages must go to the injured party rather than the state – it does seem like an issue for economic theories, and an advantage for promissory and rights-based theories.   The author covers their bases by address the minimal scope of their argument, noting that the “failure of economics as an interpretive theory is trivial.” (p 861)
Eric Posner, “Economic Analysis of Contract Law after Three Decades: Success or Failure?” (2003) 112 Yale LJ 829.	A critique of the normative shortcomings of economic theories.	“This Essay has two purposes: to document the failures of economic models to explain contract law or to justify reform, and to provide an explanation for these failures. The explanation centers on the difficulty of developing a model of contractual behavior that can be tested and that does not make unreasonable assumptions about the cognitive abilities of contractual parties.” (830)	The author notes that this article is merely a critique and does not purport any normative alternative. This is strictly doctrinal and looks at how economics fails to make sense of contractual doctrines.	What is notable here is Part III’s discussion on incomplete contracts and the economists’ solution. The author suggests economic theories are on their “way out,” and this conclusion seems to hold in current day.
Avery Katz, “Virtue Ethics and Efficient Breach” (2012) 45:3 Suffolk UL Rev 777.	A critique of moral argument against efficient breach and a proposal for a new kind of moral argument (based on virtue ethics).	“It argues that the standard deontological objections to efficient breach do not substantially undermine its basic analysis, because they can generally be addressed by reinterpreting or revising the underlying contract so that paying a money substitute in lieu of specific performance is explicitly authorized.” (779)	This article sketches the current views on efficient breach and categorizes them into the three main normative ethical theories. The author then suggests that, while intuitions may clash, most would not take efficient breach as a virtue.	This article puts a new line of arguments onto the table: “aretaic” or virtue based.
Charles J Goetz & Robert E Scott, “Enforcing Promises: An Examination of the Basis of Contract” (1980) 89:7 Yale LJ 1261.	A doctrinal analysis of contracts that pushes in the direction of utility/social welfare (but not an economic theory).	Contract theory needs to take a closer look at which doctrines yield the optimal social benefit with respect to the benefits and harms of enforcing some promises over others.	The author is interested in contracts as a legally enforceable promise and how the rest of contract law doctrine can make sense of this. The author further suggests that social welfare is the guiding principle. There is an important separation of the benefits of performance and the harm of breach for the calculus of social welfare.	This is a very detailed doctrinal account. There is a brief discussion of the expectation damage measure (starting on 1265). There is a development of Fuller & Perdue’s views (1284) from an ideal standpoint (i.e. perfect measurement and no transaction costs), then looks at it from a more practical standpoint (1288).
Nathan B Oman, “Consent to Retaliation: A Civil Recourse Theory of Contractual Liability” (2011) 96:2 Iowa L Rev 529.	An interpretive theory of contracts understood as consent to retaliate.	“This Article argues in favor of a simpler, rawer claim: contractual liability consists of consent to retaliation in the event of breach.” (531)	The author looks at the issue of accounting for contractual liability and rejects the approach that there are existing promissory duties. Rather, civil recourse empowers injured parties to acquire remedies.	There is a fascinating move in the argument that suggests the threat of retaliation against the breaching party is a better solution than third-party enforcement of obligations.   Another notable point is that the theory views expectation damages as a limit on retaliation rather than an incentive to perform or compensate for the value of the promise; here, the theory supposedly better explains deviations from the expectation measure better than the alternatives.
Menachem Mautner, “A Justice Perspective of Contract Law: How Contract Law Allocates Entitlements” (1990) 10 Tel Aviv U Studies in L 239.	A normative theory of contracts as a tool for distributive justice and resource allocation.	“My major concern in this paper will be with thejustice aspects of contract law in its role as a normative system governing the use of contract as an instrument. I shall offer a normative model of thejustice principles that lie at the basis of many contract law doctrines.” (240)	This article looks to the works of Nozick and Rawls, and then builds a view of contracts based on “desert” (which is understood as a criterion of distributing resources, along with “equality” and “need”). (245)	This article has received almost no scholarly attention, but it makes an interesting claim about the instrumental use of contracts for realizing claims of distributive justice. It also suggests efficiency can converge with the goals of justice.   This seems like a rigorous piece of scholarship, but why was it ignored?
Barry E Adler, “Efficient Breach Theory through the Looking Glass” (2008) 83:6 NYUL Rev 1679.	A doctrinal look into negative damages, which helps us understand the expectation remedy.	“The objective of this Article is to explore the potential benefits and costs of an award to the party in breach and to determine whether a justification for the current law exists within the framework of efficiency theory. In addition, the Article sheds new light on express contractual alternatives to expectation damages as well as on the mitigation doctrine.” (1681)	“Doctrinally, a party who breaches cannot sue for damages on the contract and thus cannot collect any benefit conferred by the breach. One might ask why this should be so. Such a suit surely would offend those who find it immoral for a person to profit from her broken promise. But efficient breach theory is amoral by nature.” (1681)	Negative damages have an interesting link to the morality of cooperative behavior and disclosing breach for the benefit of the other party.
Marco J Jimenez, “The Value of a Promise: A Utilitarian Approach to Contract Law Remedies” (2008) 56:1 UCLA L Rev 59.	A critique of economic approaches to efficient breach from a utilitarian lens.	“And because its foundations are utilitarian, the use of L&E-rather than utilitarianism-to determine contract law remedies often results in an misallocation of resources, which is not only anathema to wealth maximization theory, but should cause us to reject this approach outright when applied to contract law remedies on efficiency grounds alone.” (61)	The question the author focuses is on is whether efficient breach can be defended on utilitarian grounds (rather than criticizing the idea of wealth maximizing). Surprisingly, the author further suggests that utilitarian theories have better application to law over economic theories.	It is hard to grasp exactly where economic theories cannot incorporate utilitarianism into their views. The author seems to suggest that utility and wealth are distinct, and utility is increased is every contract whereas wealth is not; however, it is not clear why the economist would need to make this distinction.   There is an interesting claim about expectation damages (107) on the endowment effect and also the marginal value of the dollar to less wealthy parties. The subjective value might not translate into dollar amounts.
Thomas S Ulen, “The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies” (1984) 83:2 Mich L Rev 341.	An efficiency-based argument for specific performance over money damages.	“If specific performance is the routine remedy for breach, there are strong reasons for believing, first, that more mutually beneficial exchanges of promises will be concluded in the future that they will be exchanged at a lower cost than under any other con- tract remedy, and, second, that under specific performance post- breach adjustments to all contracts will be resolved in a manner most likely to lead to the promise being concluded in favor of the party who puts the highest value on the completed performance and at a lower cost than under any alternative.” (343-344)	This article looks at efficiency breach and the economic arguments surrounding it. It then shifts the advantages of specific performance, and how it might be more efficient in formation and post-breach negotiation. The crux is that economic analyses need to follow transaction costs for determining remedies (factually, parties often have low transaction costs, so specific performance should be the remedy).	The main upshot of this article is that awarding specific performance will protect the innocent party’s future expectations and this leads to an overall efficient result. This is an interesting economic approach to protecting the innocent party and perhaps trying to square efficiency with moral intuitions.
Richard Craswell, “Contract Remedies, Renegotiation, and the Theory of Efficient Breach” (1988) 61:3 S Cal L Rev 629.	A critique of efficient breach arguments based on the aims of contract remedies with respect to compensation.	“Writers who for noneconomic reasons favor remedies that punish breachers, for example, invariably assert that their remedies are not inconsistent with economic efficiency because the parties can always renegotiate to permit an efficient breach. This Article attempts to remedy that error by drawing together the other contractual issues that economics can illuminate, and by showing that these effects do not disappear if ex post renegotiation is costless.” (631)	“Part I describes the early analysis of the perform-or-breach decision, and explains its emphasis on renegotiation costs. The remaining parts describe the other effects of contract remedies, and show that these effects do not depend on the ease of ex post renegotiation.’	The author poses an issue for both economic and non-economic theories that appeal to efficient breach. The efficiency of a remedy does not depend “solely on ex post negotiation costs,” but a variety of other facts.

SOURCE	POSITION	THESIS	ARGUMENT STRUCTURE	COMMENTARY
Daniel Markovits, “Contract and Collaboration” (2004) 113:7 Yale LJ 1417.	Promise-based (generally Kantian) view cast in terms of the value of relationship and the institution of contracts as promoting community (filling out Raz’s view of promises).	The unifying value between promises and contracts is a “relation of recognition and respect,” (1420) which the author defines as “collaboration.” This is intrinsically valuable and explains the structural similarities/differences between contract and promise; moreover, doctrinal elements of contract law.	This paper looks to make sense of promissory obligations and contractual obligations from the approach of relationships instead of traditionally individualistic approaches. Contract foster mutual recognition and respect which in turn foster community.	This paper is around 100 pages long and touches on the philosophy of promise, contractual doctrines, and a general normative theory. It is a novel relational/collaborative account that dissects the steps in entering, sustaining, and terminating a contract/promise. Still, there remains the question of how efficiency is valued and whether other public values (like substantive equality) fit on the author’s picture.   The last section on consideration and expectation remedy sheds light on the values that give texture to contract relations. Notably, the section on expectation damages (1491) is not critical and does not recommend specific performance. Instead, the author argues that expectation damages promotes collaboration because it allows parties to treat each other as ends in themselves (the remedy is respectful rather than instrumental).
Markovitz, D., & Schwartz, A. (2012). The expectation remedy and the promissory basis of contract. Suffolk University Law Review, 45(3), 799-826.	Promissory view building on Fried’s trust-based approach.	The disjunctive obligation to trade or transfer (“dual performance”) fits under Fried’s promissory view of contracts if we understand expectation damages as enforcing the disjunctive obligation.	This paper takes up Fried’s promissory view and looks closely at the “shaky” foundations the obligations generated by promises. For Fried, the two foundational pillars are dignity and fidelity. This paper restates the “dual performance” theory of the previous paper (Markovits & Schwartz 2011) and understands Fried’s view on expectation damages in terms of this theory.	There is a remarkable move: if the promise underlying contracts is understood in the disjunctive, then expectation damages is specific performance of one of these options. Thus, we have all the explanatory power/scope of the disjunctive, the promise, and specific performance.   The rights-based view might have the same explanatory advantages. Although the starting points are different – e.g., it might start with a person’s relation to property – it can, in principle, capture promissory norms and similarly argue that there is no breach (rather, there is specific performance of one of the disjunctives).
Jody S Kraus, “The Correspondence of Contract and Promise” (2009) 109:7 Colurn L Rev 1603.	Promise-based approach defending expectation damages; in-house critique and proposal of an alternative account.	The correspondence of contract law and promissory norms cannot be assessed without first having an account of self-imposed moral responsibility. The most plausible account, coherent with current contract doctrine, is a “personal sovereignty” account.	The starting point is Fried’s view of contracts as legally enforced promises. Promissory norms need some account of self-imposed moral responsibility in order to make sense of the practice of promising. Taking from Feinberg (reminiscent of Rawls’ treatment of Kant), the “personal sovereignty” account is the prime candidate, and it begins with the idea of respecting autonomy as respect for “unfettered voluntary choice” except for “where the interests of others need protection.” This is supposed to make sense of most contract law doctrines, notably areas where there might be divergences between law and morality.	A very unique promise-based view. The author claims that the promissory views (like Shiffrin) have failed to account for the existing default expectation measure. Fried does better, but still lacks a normative framework for promissory morality, and this is the gap the author explores.   There is an interesting move of separating promissory morality from rights to remedy, and the author makes a convincing case for why the content of remedial rights needs to be looked at with respect to moral responsibility.
Stephen A Smith, “Duties, Liabilities, and Damages” (2012) 125:7 Harv L Rev 1727.	A critique of rights-based and “utility” (mostly economic) approaches to damage awards by showing its inconsistency with the common law.	Damage awards are best understood as the court vindicating a right instead of merely enforcing an existing right. The right-based and utility approaches are therefore wrong about damage awards (vis-à-vis common law)	Damage awards can be understood as enforcing a duty (duty view) or generating a duty from a liability (liability view). The right-based and utility approaches are committed to the duty view, but the common law is not structured this way. Instead of enforcing duties, the law (through damage awards) generates them on the basis of vindicating the rights of the plaintiff.	This article has a very interesting look at how to understand damage awards: they are directed towards courts and tells courts how to decide cases. The suggestion seems to be that duties to pay damages are not understood to be generated at the time of breach, but they are generated by the court’s imposition of the remedy of damages.
Aditi Bagchi, “Separating Contract and Promise” (2011) 38:4 Fla St UL Rev 709.	“Separatist” view of promises and contracts only insofar as private promises and contracts.	Private promises and contracts often are in tension because their normative domains are commonly conflated. Contractual obligations are not parasitic of promissory obligations, rather contractual obligations are augmented (i.e., the contract begins “where private promise ends”).	Private promises and contracts share in having a role in moral agency, but private promises function to cultivate personal relationships whereas contracts can be used to pursue our ends in at arms-length with strangers. Consistent with common law, private promises should be legally enforced with great caution, and legal remedies should follow this distinction between promises between intimates and promises between strangers.	A strong argument for the separation of private promises and contracts. This view seems to cohere well with the rights-based accounts and better explains doctrines in common law.
Steven Shavell, “Damage Measures for Breach of Contract” (1980) 11:2 The Bell Journal of Economics 446.	Economic analysis defending expectation damages.	Damages measures substitute performance in incompletely specified contracts.	Expectation damage measures are a good default rule to reflect what parties would have, especially with respect to the costs of specificity in contracts.	This seems to be an early version of Shavell’s views on counterfactual agreements (cf. Shavell 2009). This is an economics paper and most of this paper delivers an economic model (46 open propositions) of the efficiency of expectation damages.
Gregory Klass, “Three Pictures of Contract: Duty, Power, and Compound Rule” (2008) 83:6 NYUL Rev 1726.	The structure of contracts is such that it is both duty-imposing and power-conferring.	While many laws are straightforwardly power-conferring, some lose are structured to function both as creating power and imposing duties. These are called “compound rules.”	The author carves contract law into power-conferring and duty-imposing rules. The power-conferring view is understood as an act of self-legislation and modifying obligations with others. The duty-imposing view is understood as tracking some other obligation, like keeping promises. Compound rules are a third category, which better explains doctrines in contract law.	This is a dense paper that draws a lot from legal theory and philosophy. However, this is fairly removed from the question of expectation damages and more about the nature of contract law. It was particularly interesting to see Raz’s picture of voluntary obligations applied to this view.   The “compound rule” view of contract law, however, is fairly attractive. It seems generally compatible with the Hegelian rights-based approach to contracts.
Daniel Markovits & Alan Schwartz, “The Expectation Remedy Revisited” (2012) 98:5 Va L Rev 1093.	A response to Shiffrin (2012) and Klass (2012).	Methodological critiques do not undermine their previous (2011) argument.	Shiffrin and Klass fail to appreciate the methodology: economic models are theoretical and individuals’ preferences can be predictably revealed.	This is convincing and addresses many of the questions which arose in their original paper. However, I wonder if the scope of their methodology is too small to address the questions in this area; on the other hand, perhaps their paper should be read more modestly.
Gregory Klass, “To Perform or Pay Damages” (2012) 98:1 Va L Rev 143.	A critique of Markovits & Schwartz (2011).	The “dual-performance hypothesis must be an empirical interpretive claim.” (p 145)	Like Shiffrin, the “is” and “ought” distinction comes to the fore. The author wants some further empirical back to prove that most people prefer dual-performance commitments. The author further suggests that the dual-performance model implies an expansion of punitive damages doctrine.	The author notes a number of limitations to the dual-performance hypothesis, but the author mostly agrees and takes a charitable posture.
Richard Craswell, “Contract Law, Default Rules, and the Philosophy of Promising” (1989) 88:3 Mich L Rev 489.	Critique of moral (autonomy based) promise theories.	“My thesis is that such claims on behalf of philosophical theories of promising are greatly exaggerated. In particular, analyses such as Fried’s have little or no relevance to those parts of contract law that govern the proper remedies for breach, the conditions under which the promiser is excused from her duty to perform, or the additional obligations (such as implied warranties) imputed to the promiser as an implicit part of her promise.” (489)	The focus of this article is on promissory accounts of contracts. It begins with the philosophy of promises and further argues that none of these theories can give us the background rules (in contrast to “agreement rules”) in contract. Promises might be helpful for explaining why one ought to follow background rules, it cannot give the background rules themselves.	The author makes an interesting point that autonomy-based theories are content-neutral for filling out default rules, and they need to rely on some other theory (e.g. efficiency) for its default rules. The most illuminating example of autonomy theories deriving default rules in an ad hoc manner is the author’s charge against Fried (517). The author claims that autonomy gives no reasons for favoring the expectation measure over other remedies.
Randy E Barnett, “Consent Theory of Contract, A ” (1986) 86:2 Colurn L Rev 269.	A “consent” theory of contract which uses property rights to buttress promises.	“Properly understood, contract law is that part of a system of entitlements that identifies those circumstances in which entitlements are validly transferred from person to person by their consent. Consent is the moral component that distinguishes valid from invalid transfers of alienable rights.” (271)	This article deals with the common question of which commitments contract law should enforce. The criteria of assessment for contract theories is threefold: “(a) the number of known problems the theory handles as well or better than its rivals, (b) the centrality of the problems that the theory handles well, and (c) the promise that the theory offers for solving future problems.”	A fairly influential article that puts forth a promissory (?) account based on one’s power to consent to transfer property (i.e. property rights). This is a very interesting account of promissory obligations that fits in to the broader question of justifying legal force (author cites Fuller and Nozick).
Shawn Bayern & Melvin A Eisenberg, “The Expectation Measure and Its Discontents” (2013) 2013:1 Michigan State L Rev 1.	A critique of economic (efficiency) approaches to expectation damages.	Economic models cannot work for remedies because efficiency is too difficult to determine, too difficult to practically administer, and the many models themselves conflict in incommensurable goals.	“This Article has a substantive and a methodological aspect. The substantive aspect analyzes the validity of the alternative models and regimes apart from questions of administrability and institutional issues. The methodological aspect examines the administrability of these models and regimes and the congruence between the models and regimes, on the one hand, and institutional considerations, on the other.” (3)	There is a lot packed into this article, but the main upshot seems to be that limitations lead to the expectation measure being less than fully compensatory.
Melvin A Eisenberg, “Actual and Virtual Specific Performance, the Theory of Efficient Breach, and the Indifference Principle in Contract Law” (2005) 93:4 Cal L Rev 975.	An account of why expectation damages are often undercompensatory, while also arguing against efficient breach and for the modification of principles around awarding specific performance.	|A promisee can accomplish virtual specific performance if he can readily find in the market a commodity that he could not in good faith reject as an equivalent of the breached performance, given his demonstrable preferences-by which I mean subjective preferences whose existence can be satisfactorily demonstrated. Cover damages, in turn, should be awarded if a buyer who made a substitute purchase shows that his choice of the covering substitute was made in good faith, given his demonstrable preferences, after he conducted a reasonable search.”	“In Part I, I discuss the principle that the remedial regime for breach of bargain contracts should make promisees indifferent between performance and legal relief. In Part II, I develop the systematic shortfall between expectation damages and the indifference principle. In Part III, I consider the theory of efficient breach. In Parts IV and V, I consider the remedy of specific performance. Finally, in Part VI, I consider the remedy of cover, or virtual specific performance.” (978)	The author makes several interesting claims: first, that efficient breach theories are hardly efficient; second, routine specific performance is not the solution; third, a distinction between “actual” and “virtual” specific performance. The author seems to want to expand notions of fault, the indifference principle, and the practical limitations of expectation damages. The inefficiency point is especially poignant (see starting 1006).

1970

SCC/appellate

R. v. Agozzino, [1970] 1 C.C.C. 380.

• Accused charged with possession of counterfeit money; defence counsel agreement with Crown not to seek imprisonment for guilty plea; Crown appealed claiming inadequate sentence
• Court interprets plea bargain as a contract; accused relied on plea bargain agreement
• Para 5: “There is evidence before us to indicate that had it not been for the position taken by the Crown which was subsequently adopted by the magistrate, the accused would not have pleaded guilty. The circumstances, therefore, dictate a dismissal of the Crown’s appeal as to the sentence even though, had we thought ourselves at liberty to consider its propriety, we probably would have come to a different conclusion.”

R. v. Wood, [1975] 26 C.C.C. (2d) 100.

• Sex offense; Crown visited Judge in chambers to discuss sentencing to avoid jail; held that accused was prejudiced by Crown telling defence that jail sentence not sought
• “a judge has no place in plea bargaining.” (para 34)

Canada (Attorney General) v. Roy, [1972] 18 C.R.N.S. 89.

• Crown suggested $150 fine; 3 principles for plea bargaining
• “1. Plea bargaining is not to be regarded with favour. In the imposition of sentence the court, whether in first instance or in appeal, is not bound by the suggestions made by Crown counsel. 2. Where there has been a plea of guilty and Crown counsel recommends a sentence, a court, before accepting the plea, should satisfy itself that the accused fully understands that his fate is, within the limits set by law, in the discretion of the judge, and that the latter is not bound by the suggestions or opinions of Crown counsel. If the accused does not understand this, the guilty plea ought not to be accepted. 3. The Crown, like any other litigant, ought not to be heard to repudiate before an appellate court the position taken by its counsel in the trial court, except for the gravest possible reasons. Such reasons might be where the sentence was an illegal one, or where the Crown can demonstrate that its counsel had in some way been misled, or finally, where it can be shown that the public interest in the orderly administration of justice is outweighed by the gravity of the crime and the gross insufficiency of the sentence.” (para 17)

R. v. Draskovic, 5 C.C.C. (2d) 186.

• Accused negotiated with officer for guilty plea if others charged dropped; admissibility issue; voluntary and appeal dismissed
• “Without expressing any views as to whether there exists in Ontario or Canada any privilege with respect to discussions between counsel for the accused and counsel for the Crown with respect to what charges will be proceeded with and what pleas will be made, commonly referred to as “plea bargaining”, I am of the opinion that the topic is irrelevant in this case. What occurred was in no sense “plea bargaining” but was simply a volunteered statement made by the accused to the detective, who had no authority to do anything other than report the making of the statement to someone else.” (para 6)

 

Official reports

Ontario Law Reform Commission, “Fourth Annual Report, 1970” (1970). Ontario Law Reform Commission. 70.

• “In our view plea-bargaining can’t be justified. To decide upon a defendant’s guilt or sentence in accordance with what he’s prepared to accept and bargain for is like determining a student’s grade by reference, not to the work he’s done, but the bribe he’s offered his professor” (p 14)

Ontario Law Reform Commission, “Report on Administration of Ontario Courts, Part II” (1973) Ontario Law Reform Commission 88.

• “The abuses which are said to be inherent in this practice are that (a) a false impression is created in the mind of the accused as to the extent of the influence of the prosecutor in securing a specific sentence; (b) there is a tendency towards the habitual laying of charges in a manner intentionally designed to put the prosecutor in the position to offer an apparent concession in the reduction of either the number or seriousness of charges. Overcharging, charging a more serious offence than would appear justified on the facts, and charging offences with a fixed minimum penalty, all fall into this category; and (c) the existence of the practice leads to an expectation on the part of the accused that a “deal” will be offered and he may use delaying tactics (such as dismissing his counsel on the eve of trial or electing trial in another court when he intends to plead guilty eventually), simply for the purpose of exerting pressure on the prosecutor to offer a concession.” (p 120)

Scholarship

Gerald A Ferguson, “The Role of the Judge in Plea Bargaining” (1972) 15:1 Crim LQ 26

• Analysis and argument for the abolishment of judicial plea bargaining
• “The argument would be that the pressure becomes undue when the judge proposes the bargain because there is certainty of differential treatment, whereas when a prosecutor promises he will recommend sentence leniency or even charge reduction, there is not the same certainty of sentence differential, that is to say, the accused can only hope that leniency will result since the prosecutor is not ultimately the person who imposes sentence…” (p 36)

Arthur D Klein, “Plea Bargaining” (1972) 14:3 Crim LQ 289.

• A comparative (England and US) of Canadian approaches to plea bargaining; Canadian caselaw pre-1970
• “In the special lectures given at Osgoode Hall in 1969 and 1970 under the auspices of The Law Society of Upper Canada there were lengthy dissertations on the subject of plea discussions and sentence negotiations, and a great deal of additional ground was covered as to the practice of Crown counsel and defence counsel upon a plea of “Not Guilty”.” (p 300)
• “Under most circumstances it is not necessary, practicable, or desirable, except perhaps in cases of particular prominence, that any statement be made by counsel as to why a certain course is being taken, such as proceeding with certain charges, withdrawing other charges, accepting pleas of guilty to certain charges or to lesser offences, or dis-continuing the prosecution altogether, and, in the light of experience, there is no occasion for a provincial judge to comment on the withdrawal of a charge or the acceptance of a plea of guilty to a lesser charge.” (p 305)

Gerard A Ferguson & Darrell W Roberts, “Plea Bargaining: Directions for Canadian Reform” (1974) 52:4 Can B Rev 497.

• Descriptive overview of plea bargaining in Canada pre-1970s; argues that despite challenges to voluntariness, the accused would feel the same pressure to plead guilty given attractive offers
• “In offering benefits or concessions to accused persons in order to secure guilty pleas, plea bargaining encourage both the guilty and the innocent to plead guilty” (p 544-45)

Howard Shapray, “The Prosecutor as a Minister of Justice: A Critical Appraisal” (1969) 15:1 McGill L J 124.

• Descriptive overview of English and American plea bargaining compared with Canada; early rebuttal to efficiency-based arguments and a lack of a principled approach

Brian A Grosman, “The Role of the Prosecutor in Canada” (1970) 18:3 Am J Comp L 498.

• Descriptive overview of criminal prosecution in Canada; generally concludes that the Canadian system is similar to the US

 

Other jurisdictions

R. v. Turner, [1970] 2 All E.R. 281 (C.A.).

• English Court of Appeal
• Accused charged with theft and pleaded not guilty; counsel advised pleading guilty, and accused only accepted after believing it was the judge’s view; appeal nullified guilty plea because accused was deceived
• Lord Parker: “idle to think that he really had a free choice” (p 284); “could be taken to be undue pressure on the accused, thus depriving him of that complete freedom of choice which is essential.” (p 285)
• Judicial plea bargaining; outlined issues related to plea bargaining and sparked subsequent scholarly commentary

Brady v US, 397 US 742 (1970).

• Not coercion if the defendant accepts plea to avoid death penalty

Bordenkircher v. Hayes, 434 US 357 (1978).

• Not violate due process of prosecutor threatens to indict with more serious charges if plea is refused

North Carolina v. Alford,400 U.S. 25 (1970).

• Alford plea allows the accused to maintain their innocence

Brady v. United States, 397 U.S. 742 (1970)

• Reserving judgment on the constitutionality of plea bargains

American Bar Association, Standards Relating to Pleas of Guilty 3 & 60-62 (Approved Draft, 1968).

• ABA criticizes the use of the terms “plea negotiation” and it suggesting something improper

Herbert S Miller, William McDonald & James A Cramer, Plea Bargaining in the United States (National Institute of Law Enforcement and Criminal Justice: 1978).

• Comprehensive descriptive overview of plea bargaining in the US during the 70s; somewhat critical posture; see executive summary on xii

Albert W Alschuler, “The Trial Judge’s Role in Plea Bargaining, Part I” (1976) 76:7 Colum L Rev 1059.

• Descriptive overview of the role of judges; argues that judges can address bad prosecution and defense

1980

SCC/appellate

Morrison v. R., [1981] 63 C.C.C. (2d) 527.

• Drug sold to undercover officer; Crown repudiating plea bargain agreement in submissions to sentence; court not bound by plea bargain agreement

R. v. Boutilier, [1981] 48 N.S.R. (2d) 179.

• Crown appealed sentence related to plea agreement; leave to appeal dismissed
• “In view of this arrangement and the fact that we do not necessarily have all the facts associated with such a bargain, this Court is not prepared to grant the Crown leave to appeal from the sentence imposed by the trial magistrate.” (para 3)

R. v. Goodwin, [1981] 43 N.S.R. (2d) 106.

• Attempted robbery; Crown not to repudiate plea bargain position on appeal when sentence not grossly insufficient
• “bargain is a bargain and, if the Crown does not wish to be bound by it, the simple solution is to make no bargain at all” (para 267)

Official reports

Canadian Sentencing Commission, Sentencing Reform: A Canadian Approach (Ottawa: Supply and Services Canada, 1987)

• “Commission recommends a mechanism whereby the Crown prosecutor would be required to justify in open court a plea bargain agreement reached by the parties either in private or in chambers.” (p 428)

Law Reform Commission of Canada, Working Paper no 60: Plea Discussions and Agreements (Ottawa: Canadian Law Reform Commission, 1989).

• 23 recommendations (with commentary); summary p 67-71

Simon N Verdun-Jones & Alison Hatch, Plea Bargaining and Sentencing Guidelines (Ottawa: Department of Justice Canada, 1988)

• Comparative look from US law; 17 recommendations

Scholarship

David Vanek, “Prosecutorial Discretion” (1988) 30:2 Crim LQ 219.

• Overview of prosecutorial discretion understood as the freedom of choice exercised in matters of criminal offences in their authority
• “The disposition of criminal charges on the basis of a “deal” made between the Crown prosecutor and defence counsel constitutes plea bargaining. The various vehicles for the exercise of Crown discretion above-discussed, particularly the alleged absolute right to withdraw charges, are the devices by which the criminal law is administered, in large measure, not by decisions of judges in open court, but by Crown prosecutors through settlements made out of court and in secret that the judges are invited to endorse and which they may often stamp with approval as a valid exercise of prosecutorial discretion.” (p 235)

Other jurisdictions

Gene Grossman & Michael Katz, “Plea Bargaining and Social Welfare” (1983) 73:4 The American Economic Review 749.

• Argument in favor of plea bargaining: acts as insurance for risk-averse public and screens the guilty from innocent defendants

Terance D Miethe, “Charging and Plea Bargaining Practices under Determinate Sentencing: An Investigation of the Hydraulic Displacement of Discretion” (1987) 78:1 J Crim L & Criminology 155.

• An early look into the effects of prosecutorial (yet not judicial due to determinate sentencing) discretion in plea bargaining practices in the US; description of a “hydraulic” or zero-sum effect of discretion for policy aims

1990

SCC/appellate

R. v. Halvorsen, [1994] 50 B.C.A.C. 87.

• Armed robbery and guilty plea; accused applied to strike guilty plea claiming prior plea bargain and defense counsel swore affidavit; appeal allowed
•  “In my opinion, the trial judge did not give sufficient weight to the fact that the guilty plea to the robbery charge was conditional upon the Crown not proceeding with the firearm charge.” (para 22)

R. v. Collard, [1997] 123 Man. R. (2d) 154.

• Dangerous driving charge; accused entered plea; changed his mind after entering guilty plea and appealed; appeal dismissed

R. v. Pashe, [1995] 91 W.A.C. 61.

• Criminal negligent; accused pleaded guilty; judge refused to accept recommendations; appeal allowed—trial judge did not have good cause to reject recommendations
• “Plea bargaining has become a routine part of the process of handling criminal cases. The bargaining process is undermined if the resulting compromise recommendation is too readily rejected by the sentencing judge.” (para 11)

R. v. Closs, [1998] 105 O.A.C. 392.

• “The justice system acknowledges and encourages plea-bargaining and must show some resistance to undoing a bargain. Especially one whereby the applicant obtained benefit for his friends and can no longer put that chip back on the table.” (para 11)

R. v. Burlingham, [1995] 2 S.C.R. 206.

• Murder; accused offer plea bargain from police for lesser charge; police should have offered plea bargain to counsel; appeal allowed
• “Furthermore, I conclude that s. 10(b) mandates the Crown or police, whenever offering a plea bargain, to tender that offer either to accused’s counsel or to the accused while in the presence of his or her counsel, unless the accused has expressly waived the right to counsel. It is consequently a constitutional infringement to place such an offer directly to an accused, especially (as in the present appeal) when the police coercively leave it open only for the short period of time during which they know defence counsel to be unavailable.” (para 21)

R. v. Pawliuk, 2001 BCCA 13.

• Murder and joint charge; plea agreement conditional on acceptance of both accused; condition not an abuse of process
• “While this colourful language underscores the notion that a plea bargain is a special sort of agreement between the Crown and the accused, it also suggests that the formation of the agreement is in many ways analogous to the formation of a contract. Once a plea agreement is reached and the accused has fulfilled part of the bargain, it is improper for the Crown to renege on the agreement.” (para 52)

Official reports

Ontario Attorney General’s Advisory Committee on Charge Screening, Disclosure, and Resolution Discussions, Report of the Attorney General’s Advisory Committee on Charge Screening, Disclosure, and Resolution Discussions (Toronto: Ministry of the Attorney General, 1993).

• “properly conducted, benefit not only the accused, but also victims, witnesses, counsel, and the administration of justice generally” (p 281)

Scholarship

Stanley A Cohen & Anthony N Doob, “Public Attitudes to Plea Bargaining” (1989) 32:1 Crim LQ 85.

• Canadian attitudes towards plea bargaining are negative; academics believe it treats the accused unfairly while the public believes it is too lenient on defendants

Other jurisdictions

United States v. Redondo-Lemos, 955 F.2d 1296 (9th Cir. 1992).

• “Such decisions [to plea-bargain] are normally made as a result of a careful professional judgment as to the strength of the evidence, the availability of resources, the visibility of the crime and the likely deterrent effect on the particular defendant and others similarly situated. Even were it able to collect, understand and balance all of these factors, a court would find it nearly impossible to lay down guidelines to be followed by prosecutors in future cases. We would be left with prosecutors not knowing when to prosecute and judges not having time to judge.” (p 1299)

American Bar Association, ABA Standards for Criminal Justice: Prosecution and Defense Function Standards, 3d ed (Washington, DC: American Bar Association, 1993).

• “a prosecutor’s refusal to honor a plea agreement concerning a recommendation to the court after a guilty plea is made undermines the voluntariness of the plea and results in fundamental unfairness to the defendant” (p 89)

Robert E Scott & William J Stuntz, “Plea Bargaining as Contract” (1992) 101:8 Yale LJ 1909.

• Plea bargains conceived through common law contract law doctrine; argument that plea bargains are most coherent when understood through the lens of contract law principles

2000

SCC/appellate

R. v. Sinclair, 2004 MBCA 48.

• Assault causing bodily hard; joint submissions based on plea bargain; Criminal Code provisions in s. 606(1.1) and (1.2) and voluntariness of plea
• “There is a continuum in the spectrum of plea bargaining and joint submissions as to sentence. In some cases, the Crown’s case has some flaw or weakness and the accused agrees to give up his or her right to a trial and to plead guilty in exchange for some consideration. This consideration may take the form of a reduction in the original charge, withdrawal of other charges or an agreement to jointly recommend a more lenient sentence than would be likely after a guilty verdict at trial. Evidence always varies in strength and there is always uncertainty in the trial process. In other cases, plea negotiations have become accepted as a means to expedite the administration of criminal justice.” (para 13)

R. v. B. (J.), 2003 MBCA 92.

• Sexual assault; plea bargain for stay of other counts; sentencing rejected joint submission; appeal allowed
• “Before us the Crown left no doubt that this was truly a case of “quid pro quo,” and that the plea bargain was of considerable benefit to the Crown itself. The certainty it achieved for the appellant was also achieved for the Crown, and the guilty plea resolved the difficulties facing the Crown. The victim, and her sister, were spared having to testify. All this was known by the sentencing judge.” (para 23)

R. v. Oxby, 2000 SKCA 129.

• First degree murder; guilty plea entered but sentenced to 20 years; appealed to expunge guilty plea on grounds of duress; appeal dismissed
• “Mr. Oxby’s diagnosis is that of Antisocial Personality Disorder. It is my opinion although he is intellectually able to appreciate the nature of the interaction with his lawyer and was able to communicate to his lawyer in terms of agreeing to a plea bargain, his denial, rationalization and detachment for the legal process with which he was involved, predisposed him to potentially entering into a plea bargain which from a legal perspective created a vulnerability in terms of his being able to instruct his lawyer fully. It’s also my opinion that he is quite capable of lying, manipulating and being deceitful when it serves his best interests.” (para 16)

Re Ravelston Corp., 2007 ONCA 135.

• Court-appointed receiver recommended guilty plea; civil liability
• “In our view, it was clearly open to the motion judge to accept the receiver’s assessment that a guilty plea to one count and an acquittal on all other counts under this plea agreement carried less risk of exposure to civil liability that a conviction on all counts.” (para 9)

Official reports

Canada, Department of Justice, Victim Participation in the Plea Negotiation Process in Canada: A Review of the Literature and Four Models for Law Reform, by Simon N Verdun-Jones & Adamira A Tijerino (Ottawa: DOJ, 2002).

• A descriptive overview of plea bargaining practices in Canada and its historical evolution; critical of the lack of formal process for plea bargaining in Canada; a comparative look at the US
• Argues for the participation of victims in the plea bargaining process and suggests further ratification in legislation

Ministry of the Attorney General, Resolution Discussions, (Ontario: Crown Policy Manual Resolution Discussions: 2005).

• “The term “resolution discussion” refers to the process during which defence and Crown  counsel discuss the evidence and likely outcome of a criminal prosecution with a view to achieving results that advance the administration of justice. Resolution discussions encompass much more than simply plea negotiations. Resolution discussions include any discussion between counsel aimed at resolving any issues that a criminal prosecution raises.” (p 1)
• “There are some fundamental principles of resolution discussions that are binding directives: • Crown counsel must not accept a guilty plea to a charge knowing that the accused is innocent • Crown counsel must not knowingly accept a guilty plea to a charge when a material element of that charge can never be proven unless that fact is fully disclosed to the defence • Crown counsel must not purport to bind the Attorney General’s right to appeal  any sentence • Unless there are exceptional circumstances, Crown counsel must honour all agreements reached during resolution discussions.” (p 1-2)

Scholarship

Candace McCoy, “Plea Bargaining as Coercion: The Trial Penalty and Plea Bargaining Reform” (2005) 50:Issues 1 & 2 Crim LQ 67.

• An empirical study of case prison terms; jury trial sentences were longer than guilty please after controlling for numerous factors

Gregory Lafontaine & Vincenzo Rondinelli, “Plea Bargaining and the Modern Criminal Defence Lawyer Negotiating Guilt and the Economics of 21st Century Criminal Justice” (2005) 50:Issues 1 & 2 Crim LQ 108.

• A practitioner’s perspective on plea bargaining; provides a descriptive historical overview; argues the need for plea bargaining and suggestive of efficiency-based views

Milton Heumann, “Back to the Future: The Centrality of Plea Bargaining in the Criminal Justice System” (2003) 18:2 Can JL & Soc 133.

• A look into the relationship between case pressure and plea bargaining; argues for a nuanced view and pulls apart this relation, then presents some suggestions

Other jurisdictions

Stephanos Bibas, “Plea Bargaining outside the Shadow of Trial” (2004) Harvard Law Review 117:8 2463.

• Influential conception of plea bargaining; argues against efficiency-based views

Oren Bar-Gill & Omri Ben-Shahar, “The Prisoners’ (Plea Bargain) Dilemma” (2009) Journal of Legal Analysis 1.

• A look into prosecutorial ethics and decision-making given the limitations of the criminal process; argues that inequalities in bargaining power is a collective action problem for the accused
• The upshot of this argument is that voluntariness cannot support arguments for plea bargaining

Michael M O’Hear, “Plea Bargaining and Procedural Justice” (2008) 42:2 Ga L Rev 407.

• An analysis of plea bargaining practices from a procedural (not distributive) justice approach; draws on psychology research for the perception of procedural justice
• Argues that plea bargaining is procedural just insofar as it gives the accused an opportunity to tell their side before making an offer and ensuring they are fully informed of the offer without coercive tactics

2010

SCC/appellate

R. v. O. (B.J.), 2010 NLCA 19.

• Sex assault; joint recommendation rejected; no quid pro quo as result of guilty plea
• “The judge says that 14 months conditional is too lenient, that it undermines deterrence. It is not surprising that the sentence is seen as lenient. That is what results when there is a plea bargain. But, is it so light that it would undermine the deterrent effect of the ordinary expectation of a sentence for such offences? The answer is no.” (para 53)

R. v. Oxford, 2010 NLCA 45.

• Plea bargain of 19 months and 2 years probation; trial judge reject joint submission; accused appealed sentence; appeal allowed
• “Whatever one’s personal views may be as to the appropriateness or utility of plea bargaining in our criminal justice system, the fact remains that for at least the past twenty years it has been judicially sanctioned at the appellate court level.” (para 56)
• “Proper plea bargaining presupposes, of course, full disclosure by the Crown, informed un-coerced consent by the accused to a plea of guilty in return for an agreed submission on sentence with proper procedural safeguards throughout the process, and an accepted factual underpinning supporting the plea. It is in that context that the ensuing comments about the acceptance or rejection of joint submissions must be understood. (para 58)

R. v. Malcolm, 2015 MBCA 75.

• Drug trafficking; judge accepted joint recommendation for CSO; accused appealed and dismissed
• “The sentence imposed results from a true plea bargain and as such cannot be said to be demonstrably unfit” (para 7
• “in this case the essence of the plea bargain and joint submission was placed on the record in open court giving the sentencing judge a solid factual basis on which to make a reasoned decision. The plea bargain was beneficial to the accused. The charge of trafficking was far more serious than the modified charge of possessing proceeds of crime. He does not seek to set aside the plea bargain or his guilty plea, but only to parse out the sentence that stems from that plea bargain.” (para 10)

R. v. Anthony-Cook, 2016 SCC 43.

• Manslaughter; court recognizing plea bargaining as key for efficiency
• “Resolution discussions between Crown and defence counsel are not only commonplace in the criminal justice system, they are essential. Properly conducted, they permit the system to function smoothly and efficiently.” (para 1)
• “Joint submissions on sentence — that is, when Crown and defence counsel agree to recommend a particular sentence to the judge, in exchange for the accused entering a plea of guilty — are a subset of resolution discussions.1 They are both an accepted and acceptable means of plea resolution. They occur every day in courtrooms across this country and they are vital to the efficient operation of the criminal justice system.” (para 2)

R. v. Nixon, 2011 SCC 34.

• Impaired driving; prosecutors given authority to renege on plea deals

Official reports   

Federal Provincial and Territorial Heads of Prosecution, Innocence at Stake (Ottawa: Ministry of Justice, 2018).

Bruce Frederick and Don Stemen, The Anatomy of Discretion: An Analysis of Prosecutorial Decision Making – Technical Report (New York: The Vera Institute of Justice, 2012).

Scholarship

David Ireland, “Bargaining for Expedience: The Overuse of Joint Recommendations on Sentence” (2015) 38:1 Man LJ 273.

• Preventing wrongful convictions; chapter 9 outlines false guilty pleas

Jerome Kennedy, “Plea Bargains and Wrongful Convictions” (2016) 63:4 Crim LQ 556.

Other jurisdictions

Lindsey Devers, “Plea and Charge Bargaining” (2011) Bureau of Justice Assistance.

• “According to the Bureau of Justice Statistics (2005), in 2003 there were 75,573 cases disposed of in federal district court by trial or plea. Of these, about 95 percent were disposed of by a guilty plea (Pastore and Maguire, 2003).” (p 1)
• “To date, two studies have investigated the impact of what happens to the system when plea bargaining is abolished. These studies found an increase in the number of cases brought to trial when plea bargaining was limited, and over time the number of convictions became more consistent (Heumann and Loftin, 1979; Holmes et al., 1992).” (p 3)

David S Abrams, “Is Pleading Really a Bargain” (2011) Special Issue J Empirical Legal Stud 8:200.

Comments and Riders to Existing Sections

RE: ABOUT THIS PROSPECTUS SUPPLEMENT

We should add clear language from the start that the Offering assumes no exercise of the Over-Allotment Option (unless otherwise indicated). For consistency, this should be the default position.

RE: DOCUMENTS INCORPORATED BY REFERENCE

In point (c) of the list, the MD&A should be included for each current annual financial statement (see s 11.1 (1)2 NI 44-101F1), so it should include the MD&A for year end Dec 31, 2019.

RE: SUMMARY OF THE BUSINESS

It may be appropriate to include some more details for a “full” disclosure. There will we some information that is omitted as it cannot be ascertained at this time (see s. 5.6 of NI 44-102), but we should add as much missing information from the base shelf prospectus (see s. 6.1 of NI 44-102). While a short form perspective only needs to provide a “brief summary” of the business “carried on and intended to be carried on” (see s 2.1 NI 44-101F1), it is important to include material (see s. 4.1 of NP 51-201) details about the expansion and growth of the business through the acquisition, as well as the company’s 14 offices and approximate $1 billion in assets. While we noted on the cover page the location of our head office, we should include information about any other reportable segments (see s.1 of NI 52-112).

We can add another subheading for “Recent Developments,” and we can include details about the April 2021 $400 million Goldeen Limited acquisition; additionally, we should also note that the Business Acquisition Report and the Q3 earnings are available on SEDAR (see s. 8 of NI 51-102). Moreover, while the New Credit Facilities are mentioned in the “Details of the Acquisition,” we should also mention “the sale of the Great Lakes gold mine in Ontario, Canada for $100 million completed on September 17, 2021.”

RE: DETAILS OF THE ACQUISITION

We may want to include more details about the acquisition—remember, we are required to disclose any probable acquisitions, as well as related “financial statements or other information” (see s. 10 of NI 41-101F1). In addition to the financial statements, we might add information, for instance, on the nature of the business of Shiny Gold, as the press release notes that it is “one of the largest privately-held gold mining companies in Canada with approximately 325 employees with operations in 10 countries.” Moreover, the reason for the acquisition is that it is “expected to result in significant synergies to Goldmember’s existing gold mines and operations.” This all needs to be disclosed.

While the base prospectus outlines generally what the use of proceeds are, it is important to add the new details of the use of proceeds for the specific purpose of the acquisition. These details can be contained under a separate subsection titled, “Use of Proceeds.” There are already several references to this section throughout this supplement, and it is a necessary part of our disclosure obligations (see generally s. 4 of 44-101F1). Under the “Use of Proceeds,” we should include the following clarifying language: “The Company intends to use the net proceeds of the Offering to finance (i) the Purchase Price; and (ii) the costs of the Acquisition. Alternatively, in the event the Acquisition is not completed following the Offering closing and the closing of the New Credit Facilities, the net proceeds from the Offering will be used to pay down amounts outstanding under the Company’s current credit facilities and for general corporate purposes.” Additionally, in the case that the acquisition is not completed following closing, it is possible that the principal purpose could shift since more the 10% could be used to pay down the outstanding credit facilities (s. 4.3 of NI 44-101F1).

RE: FINANCING THE ACQUISITION

The details of the credit facilities are mentioned, but the other sources of financings should also be disclosed. Since there already is a reference to “Use of Proceeds,” the details of the bought deal offering and Over-Allotment Option can be housed under the section, “Details of the Acquisition.” However, even though we already mentioned “available cash on hand,” we can include a subheading for the “sale of the Great Lakes gold mine,” which we should elaborate in detail because the cash will be used to finance the acquisition; moreover, we can make reference to “see Prior Sales,” as they represent cash and cash equivalents available to us.

RE: PLAN OF DISTRIBUTION

Consider adding language to protect against the scenario where, in a bought deal, the Underwriter passes the risk of unsold shares back onto us: “The Underwriters propose to offer the shares initially at the Offering Price. After a reasonable effort has been made to sell all of the Units at the price specified, the Underwriters may subsequently reduce the selling price to investors from time to time in order to sell any of the Units remaining unsold. Any such reduction will not affect the proceeds received by the Company. The Underwriters will inform the Corporation if the Offering Price is reduced. See Plan of Distribution.”

We should be more specific about the Over-Allotment Option. Here is some language elaborating on the Over-Allotment Option: “The Over-Allotment Option may be exercised to purchase up to an additional 8,000,000 Common Shares. If the Over-Allotment Option is exercised in full, the Company will receive gross proceeds of $580,000,000. Any purchaser who acquires Additional Securities forming part of the over-allotment position of the Underwriters pursuant to the Over-Allotment Option acquires such securities under this Prospectus Supplement and the Prospectus, regardless of whether the over-allotment position is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases.”

We should revise the existing language, “solely to cover over-allocations,” to include market stabilization purposes (see s 6.6 of NI 44-102). Remember that the Canadian Securities Administrators have specific policy rationale for over-allotment options, that is, “solely to facilitate the over-allocation of the distribution and consequent market stabilization” (see s. 2.4 of NI 41-101CP). In other words, the language should have the effect of allowing Underwriters to over-allot to stabilize the market price of the Offer Shares. The Underwriters need to be given discretion to stabilize transactions insofar as shorting both under and over the Over-Allotment Option amount; moreover, the Underwriters should be given flexibility to discontinue or close out any short positions according to the price in the open market.

We should add that, in addition to the Prospectus Supplement being distributed electronically, the Common Shares will also be delivered electronically. Recall that, barring some limited circumstance, shares are usually delivered electronically through the Non-Certificated Inventory system of Canadian Depository for Securities. We should add some language that the transfer of ownership is done through a depository participant (e.g., brokers, dealers, banks, etc.), and that shareholders using this system will not be entitled to a certificate or instrument from us. This language is important because we need to stipulate that shareholders rights as a beneficial owner can be limited by using a system that does not entail them possessing a physical certificate (see generally NI 54-101).

We should confirm compliance with trading securities during distribution (see s. 3 of OSC Rule 48-501). Additionally, we should add in a lock-up arrangement for the customary 90 days after the initial Closing Date. This should already be spelled out in the underwriting agreement (which we can make reference to), but we can specify some exceptions here: “(i) transfers by any such person to its affiliates for tax or other bona fide tax or estate planning purposes, provided that each transferee shall, as a condition precedent to such transfer, agree to enter into a substantially similar undertaking; (ii) in order to accept a bona fide take-over bid made to all securityholders of the Company or similar business combination transaction; (iii) the receipt of a grant of stock options, restricted share units and other similar issuances pursuant to the share incentive plan, restricted share unit plan, and other share compensation arrangements of the Company, provided that the exercise price thereof shall not be less than the Offering Price; or (iv) the conversion, exercise or exchange of any convertible, exercisable or exchangeable securities existing on the date hereof or upon exercise of stock options or restricted share units granted in accordance with (iii) above, provided that any Common Shares or other securities received will also be subject to the lock-up undertaking.”

RE: RISK FACTORS

We should add some risk factors about the implications of COVID-19. As you know, the global financial conditions are quite volatile, and it could affect our specific business in the mining industry. These conditions could materially affect the ability to grow our business and generate revenue, so we should disclose this risk. To this end, we can specify some factors around the slowdown in the financial markets (e.g., consumer spending, employment rates, inflation, tax rates, etc.).

We should also add some language about mineral claims, licenses, and permits. Since we are in the mining industry, we are subject to periodic renewals with limitation periods. I do no suspect we will run into any trouble, but we need to state that there is no assurance in renewal and this risk could impede our business objectives. We also have related legal risks with mining that we should disclose, such as environmental laws, construction laws, and Aboriginal laws. As you know, we should always err on the side of caution and disclose all possible risks.

Additional Sections

CONFLICT OF INTEREST

We should disclosure any possible underwriters’ conflict of interest or if the issuer is “connected” or “related” to any of the underwriters pursuant to NI 33-105 (see also s. 6.5 of NI 44-102). To be safe, we should add a section to explicitly state the relationship between us and the underwriters. Here is some possible language to add: “The decision to purchase the shares by the Underwriters was made independently of their being affiliated lenders, and those lenders had no influence as to the determination of the terms of the distribution of the shares. The offering price of the shares and the other terms and conditions of the Offering were established without involvement of their affiliate lenders. None of Underwriters will receive any benefit from the Offering, other than these Underwriters’ respective portion of the Underwriters’ fee payable as described above. Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the Corporation, for which they received or will receive customary fees.”

CAUTIONARY NOTE REGARDING MINERALS

Since we are in the mining business, we need to ensure compliance with NI 43-101 (see also NI 43-101CP). We need special disclosure for mining projects and we should add a section to reflect our consultation with technical experts and their respective reports. Here is some language to get us started: “Unless otherwise indicated, all mineral resource included in this Prospectus Supplement (including the Prospectus and the documents incorporated herein by reference) have been prepared in accordance with NI 43-101. NI 43-101 contains the rules and codes of practice developed by the Canadian Securities Administrators that established minimum standards for all public disclosure of scientific and technical information an issuer makes concerning mineral projects  Statements relating to “mineral resources” and “mineral reserves” are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions that the mineral resources described can be profitably produced in the future. If, after the date of this Prospectus, the Corporation is required by Section 4.2 of NI 43-101 to file a technical report to support scientific or technical information that relates to a mineral project on a property that is material to the Corporation, the Corporation will file such technical report in accordance with Section 4.2(5)(a)(i) of NI 43-101.”

TAX CONSIDERATIOSN AND ELIGIBILITY FOR INVESTMENT

We should seek advice from our tax law specialists to ensure that our Offering is compliant with tax laws. We should elaborate on the language in the short form base shelf prospectus. While we should largely defer to the expertise of our tax specialists, we should be wary of some standard provisions. For example, there should be language around shareholders in Canada with respect to dividends on Common Shares, disposition of Common Shares, and the taxation of capital gains and losses. Here is some language to get us started: “In the opinion of legal counsel, the following summary describes, as of the date hereof, the principal Canadian federal income tax considerations generally applicable under the Tax Act to a holder who acquires Common Shares pursuant to this Offering. This summary only applies to a holder who, for the purposes of the Tax Act and at all relevant times: (i) deals at arm’s length with, and is not affiliated with, the Corporation and the Underwriters, and (ii) holds, as beneficial owner, Common Shares as capital property. This summary is not exhaustive of all possible Canadian federal income tax considerations and, except for the Proposed Amendments, does not otherwise take into account or anticipate any changes in the law, whether by legislative, governmental or judicial action or interpretation, nor does it address any provincial, territorial or foreign tax considerations, which may differ significantly from those discussed herein or take into account any changes in the administrative practices or assessing policies of the CRA. This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any prospective shareholder, and no representations with respect to the income tax consequences to any prospective shareholder are made.”

Subsequent to our consultation with our tax law specialists, we should add the following language to explicitly state that our shares will be qualified investments, as applicable: “In the opinion of legal counsel, based on the current provisions of the Income Tax Act (Canada) (the “Tax Act”), provided that the Common Shares are listed on a “designated stock exchange” as defined in the Tax Act (which currently includes the TSX), the Common Shares will be, on the date of closing of the Offering, qualified investments under the Tax Act at the time of their acquisition by a trust governed by a registered retirement savings plan, registered retirement income fund, deferred profit sharing plan, registered disability savings plan, registered education savings plan or tax-free savings account, each as defined in the Tax Act. Prospective holders who intend to hold Common Shares in a Deferred Plan should consult their own tax advisors to ensure that the Common Shares that they may acquire will not be a “prohibited investment” in their particular circumstances.”

General Comments

There may be some possible additional sections to add pursuant to the regulations. While it should be spelled out in the underwriting agreement, we should check for termination clauses which allow for the underwriter to terminate their obligations under the agreement. This is important for us to keep track of any material changes or circumstances which could affect this deal. We should also clarify if we deviate from International Financial Reporting Standards; if so, we should have a section explaining this under “Non-IFRS Measures.”

I assume that we are compliant with the surrounding procedural requirements, but we should doublecheck to ensure that we have all of our bases covered. I assume we are an electronic filer (NI 13-101), and we are a reporting issuer with current financials and AIF, filed continuous disclosure documents (NI 51-102), and filed the required documents (see s. 4 of NI 44-101) on SEDAR (e.g., documents affecting the rights of security holders, valuation reports, or template marketing materials). We should check that all filing materials (see s. 12 of NI 51-102), signature pages are in order (see NP 11-202), and that the underwriting agreement is filed (s. 7.4 NI 44-102).

More generally, we should ensure that the underwriter’s compliance departments fulfil the Investment Industry Regulatory Organization of Canada requirements on bought deals. We should also confirm that confirm at least one member of the underwriting syndicate is registered in each offering jurisdiction and has signed a certificate (see s. 7.2 of NP 11-202). We should ensure compliance with general prospective requirements, especially relating to over-allotment and underwriters (see s. 11 of NI 41-101; see also s. 2 and 6 of NI 41-101CP). We should ensure that we have a notice of intention to be qualified to file a short form perspective (see s. 26 of NI 44-101) and we should confirm that all unaudited financial statements have been reviewed by our auditor (s. 4.3 of NI 44-101).

During distributions, we need to have a plan to be compliant with rules around trading during distributions (see s. 3 of OSC Rule 48-501). We should also check that any material change reports we have filed do not contain any confidential information. A possible issue to investigate with the underwriters is that the issued and outstanding shares are 104,810,000 and this bought deal is for 50,000,000 shares; as such, an underwriter’s beneficial ownership of more than 20% of the shares could trigger an inadvertent take-overbid (see NI 62-104). We should also check our website to ensure that any promotion materials are deleted.

In case we want to do some pre-marketing, we can rely on the bought deal exemption (see s. 7 of NI 44-101). We should doublecheck that no exemptions apply (s. 5.5 & 11.2 of NI 44-102). We should also ensure that any term sheets prior to an issuance of a receipt for a preliminary prospectus conform with the regulatory requirements (see s. 7.5 and 7.6 of NI 44-101).

The short form base shelf prospectus dated June 1, 2021 and accompanying documents filed by you on behalf of the above-noted issuer(s) have been selected for a full review. Please note that responsibility for compliance with applicable securities legislation, policies and practices remains with the Issuer and its advisors, and is in no way mitigated by staffs review or the issuance of a final receipt. Our comments are as follows:

Over-allotment Option

1. Please include details about any over-allotment option.
   1. Please see the requirements around disclosure statement for allot-allotment options (see s 1.6.2.1 of NI 44-101F).
2. Please ensure any omissions in this prospectus are contained in a subsequent prospectus supplement.

Marketing Material

1. Please clarify whether any marketing materials or template versions are part of this short form prospectus, and ensure compliance with the general prospectus requirements on adverting and marketing (see s. 13.7 of NI 41-101).
   1. If there is marketing material, please include a section under the heading “Marketing Materials” (see s. 11.6 of NI 44-101F1).
   1. If there is marketing material, please submit them as a part of the “filing requirements” described below (see s. 4 of NI 44-101).
   1. If there is any pre-marketing, please list any applicable exemptions that are sought (see s. 7 and 8 of NI 44-101).

Principal Purpose

1. Please describe in reasonable detail the principal purposes for the net proceeds (see s. 4.2 of NI 44-101F), including business objectives (see s. 4.7 of NI 44-101F).
   1. Please include the reasonable possibility of acquisition, as described below in “updated information,” as a purpose for these proceeds (see s. 4.4 of NI 44-101F).

Mining Terms

1. Please review the Canadian reporting requirements for the disclosure of mineral properties (see NI 43-101; see also s. 9.1 of NI 44-101F1).
   1. Please file any technical mining reports as a part of the below “filing requirements” (see s. 4 of NI 44-101).
   1. Please name any person(s) who provided technical or scientific information regarding mining or mineral resources.
   1. Please file any valuations reports for which consent is required (see s. 10.1 of NI 41-101) of any mineral projects.
2. Please ensure that you are registered as a mining company in Quebec.
   1. Please ensure you have satisfied any regulatory requirements for offerings in Quebec.

Financial Measures

1. Please state whether the financial measures in this prospectus are standardized under the meaning of International Financial Reporting Standards.
   1. If not, please elaborate under a new section, “Non-IFRS Measures.”

Information about the Company

1. Please elaborate on the details of the Company and its business, and any recent updates as applicable.
   1. Please include updated details such as any subsidiaries, the corporate structures, or recent developments.
   1. Please disclose any material contracts in connection with the offering.

Interest of Experts

1. Please name each person or company who is named as preparing a report, valuation, statement or opinion (see s. 15 NI 44-101F1) and ensure they are a qualified person (see s. 5.1 of NI 43-101), as applicable (see s. 4.2.1 of NI 44-101).
   1. Please name any person(s) in filings relating to the Company’s financial year end for continuous disclosure obligations (see s. 4 of NI 51-102).
   1. Please file any expert’s consents as a part of the below “filing requirements” (see s. 4 of NI 44-101; see also s 10.1 of NI 41-101).

Tax Considerations

1. Please expand on this section to include a summarized opinion on the compliance with the Tax Act and any other applicable Canadian tax laws. 
   1. Please provide a summary of the taxation of the Company.
   1. Please provide a summary of the taxation of shareholders.
2. Please include a statement of the Company’s eligibility for investment.

Filing Requirements

1. Please ensure that all filing requirements are met (see s. 4 of NI 44-101).
   1. Please include any documents affecting the rights of securityholders are filed (see s 12.1 of NI 51-102 or s. 16.4 of NI 81-106, as applicable.
   1. Please include copies of any material contracts (see s. 12.2 of NI 51-102 or 16.6 of NI 81-106).
   1. Please include a signed comfort letter with the unsigned auditor’s report.

Updated Information

1. Please ensure that all personal information forms for directors and officers are up to date (see s. 4 of NI 44-101).
   1. Please include personal information forms for promoters and executives of the promotors, as applicable.
   1. Please include any lock-up provisions, options to purchase securities, or insider trading policies (see NI 55-104 and NI 55-104CP)
2. Please disclose any reasonably probable acquisitions (see s. 10.2 of NI 44-101F1).
   1. Please consider your acquisition mentioned in your October 2021 press release.
3. Please ensure that there are no other material facts (see s. 18 of NI 44-101) and no exemptions (see s. 19 of NI 44-101).
   1. Please provide a description of any policies or procedures relating to continuous disclosure of material information.
   1. Please provide an update on the status of any pending applications.

Language

1. Please ensure that a French translation is available (or an exemption is sought).
2. Please ensure that there are no untrue material facts or omissions which would reasonably be expected to have a significant effect on market price (see s. 130-138.14 of OSA).
3. Please ensure the use of everyday language without vagueness or jargon (see s. 56 of OSA; see also s. 4.2 NI 44-101CP).
4. Please ensure that language around future oriented financial information and financial outlook is not problematic (see NI 51-102).

Relationship with Underwriters

1. Please disclose the relationship between the Company and the Underwriters (see NI 33-105).
   1. Please state the independence of the Underwriters and the arrangement between the Company and the Underwriters, and any potential conflicts of interest.

Please deliver a copy of this letter to the Issuer, the Issuer’s auditors, each member of the issuer’s audit committee, the underwriters and the underwriters’ counsel. Please also forward a copy of the issuer’s response to the Issuer’s auditors, each member of the Issuer’s audit committee, the underwriters and the underwriters’ counsel.

We would appreciate receiving your written response to the above comments and all subsequent correspondence addressed to the attention of the undersigned. Additional comments may be raised by staff of the Commission as a result of your responses to the above comments and our continuing review of the file.

You have asked me to write about the issues and potential solutions as we act as underwriter counsel to Buffay Phalange Group in the offering from Bluemingdale. I have made general comments with respect to the possible issues with the deal along with possible solutions, and I also included more specific comments for the bought deal letter and term sheet.

Timing

Public Offering

Currently, the timeframe is too tight between the receipt for the preliminary prospectus and the receipt for the final prospectus. Remember, first comments on the preliminary prospectus are usually issued after about two weeks and the entire review process takes around four to five weeks until the receipt of a final prospectus. To be safe, we should aim for five weeks for the receipt of the final prospectus. As such, we will change the November 22, 2021 final prospectus receipt date to December 24, 2021. We should also update the closing date accordingly and set it to December 31, 2021.

The new dates are also necessary to reflect the constraints around the flow of the deal. I appreciate that we have a tight timeline to raise money for R&D, but we need to ensure that the people on the deal have enough time for their respective roles. For instance, we need to give sufficient time for auditors for the comfort letter, we need to give time for the company to prepare their materials for due diligence, and we need to align with regulatory timelines—many of these aspects are beyond our control. We can consider adding a “time of the essence” provision to ensure that any delays in performance of the contract can contribute to damages against anybody who is late with their respective roles. In any case, we can be timely with things within our control, such as drafting the agreements, prospectus, and conducting diligence.

Private Placement

We only have Geller Funds who is willing to buy shares, so a roadshow for the private placement may not be necessary. If there is more interest in buying under the prospectus offering after the public offering, then we do not need a separate marketing campaign for the private placement.

In case we do need further marketing for the private placement—especially with respect to attracting more institutional investors, as outlined below—we should be wary of the timeline. Typically, the road show usually begins after the preliminary offering memorandum is made available to potential investors and before we land on a price for the securities. Although the concept of “marketing materials” does not apply to private placements, any pitch or communication must be consistent with the preliminary offering memorandum. While there is no requirement to provide investors with the offering memorandum, any information provided to potential investors can trigger disclosure and representation requirements.

The private placement is currently closing concurrently with the public offering, so it will also close on December 31, 2021. However, we do not need the longer timeline for the private placement, especially since we do not need the review and comments from the OSC. Since this is a treasury offering, there should be no issues with respect to coordinating with the public offering.

Roadshow and Marketing

Pre-marketing

While there are restrictions on communications between the deal announcement and the preliminary prospectus receipt (see s 65(2), 66, 67 OSA), we can rely on the bought deal exemptions for pre-marketing (see s 7 NI 44-101). There is no issue with soliciting expressions of interests as long as, before the solicitation, we enter into the bought deal agreement with fixed terms and file a press releasing announcing this agreement. We also need to file a preliminary prospectus within four days after entering the bought deal; once we receive the receipt for the preliminary prospectus, we need to send a copy of the preliminary prospectus to everyone we are soliciting. We can use a standard term sheet to solicit interest, but it cannot go beyond the information in the press release and the prospectus (see s 7.5 NI 44-101). We can also do a road show (see 7.7 NI 44-101), as needed, and use marketing materials during this time (see s 7.6 NI 44-101). However, I suggest we conduct the roadshow during the waiting period—that is, after the receipt for the preliminary prospectus but before the receipt for the final prospectus.

Waiting Period

The waiting period has further restrictions on marketing (see s 13.7 NI 41-101) and we are allowed to conduct road shows during this period (see s 13.9 NI 41-101). There are some requirements to keep in mind for the road show. We have to be careful around the requirements for marketing materials (s 65 OSA). We have to ensure that all contact information is on the marketing material, we need to include cautionary language in bold on the cover page, we need to have it approved by the issuer, and we need to have a template version filed on SEDAR on or the day before the material is presented. We should also be clear that marketing materials are distributed to only folks who qualify for a prospectus exemption and have received a risk-acknowledgement form; if not, we have to include the appropriate legend and collect their information. Even if we pitch to sophisticated institutional investors, it is important to minimize liability (see s 130 OSA).

We should review the contents of the presentation and ensure that any oral presentations are also limited to the language and information in the preliminary prospectus. I also recommend consulting specialists to get the language around this right, particularly in terms of the risks around intellectual property, environmental, and tax. Again, we have to avoid any misleading or untrue statement which would reasonably be expected to have a significant effect on the market price. In the same vein, we should check the company’s website and ensure compliances with restrictions on electronic media (see NP 47-201). Any marketing materials must be clear in its scope and limits.

Representations and Disclosure

We should be careful about any representations we make in our disclosure, especially around financial information (see NP 51-201). Remember, we have a role in seeking out and questioning all relevant material facts to the best of our knowledge, information and belief. We need a full, true and plain disclosure as to why they burn cash quickly and always need more money, and whether they made a real profit or not. We should schedule a meeting to assess the veracity of the CEO’s statements and warn that directors and officers have secondary market liability for any misrepresentations (see s 138 OSA; see also s 122 OSA).

We need to take extra precautions around discussing the potential M&A with Seers Inc, Relaxi Taxi, and the new beauty products arm. This should be disclosed in the prospectus, but, if not, we absolutely cannot discuss beyond what is in the prospectus. Information that conflicts or goes materially beyond the preliminary prospectus can be a misrepresentation, or worse, insider trading or tipping. We need to ensure that any discussions or communications do not contain material non-public information or else any non-public information should be simultaneously disclosed to the public (see NI 51-201). We cannot disclose selectively. We have to ensure that some investors are not able to make a profit at the expense of those who did not have access to the same information, so we cannot give special information to selective investors.

We should also check the marketing material for how non-GAAP or other financial measures are presented (see NI52-112). Please also make sure to include disclaimers for forward-looking statements, and, as applicable, consider the guidelines around the electronic delivery of documents (NP 11-201). Additionally, we should provide notice to purchasers of their statutory rights of action available to them (MI 45-107). Finally, at closing, we should check for the disclosure of any non-public information; at launch, we should check if we need any non-ordinary course filing.

Terms and Business Considerations

Public Offering

There is a potential conflict of interest in our positions in the debt as a part of the syndicate (see NI 33-105). There might be a “connected issuer” conflict since we are part of a syndicate that lent material amounts of funds through the loan facility. While there is no explicit fiduciary relationship between underwriter and issuer—which I assume is made explicit in the underwriting agreement—we need to be explicit about our interest in the use of proceeds and our debtor relationship with Bluemingdale. The use of proceeds in this manner can materially affect the market price of the shares, and we should disclose anything that questions our independence as underwriters or will affect our performance (see NI 33-105CP). If we cannot be independent, then we may need another independent underwriter to participate in the transaction (see NI 33-105).  We should disclose details around the debt, such as the amount, compliance, and secured property; in any case, the financial position of the issuer must be disclosed whether or not the proceeds will be used to pay the debt.

There is also a potential conflict with the CEO doing a merger with her sister’s company. We should remind the CEO of an officer’s fiduciary duty and to disclose all potential conflicts. Importantly, there should be an impartial business justification for the merger.

The compensation arrangement we currently have is not problematic on the face of it (see s 11.1 NI 41-101). To ensure that there are no restrictions on our ability to resell the shares, we need to look carefully at lock-up periods (see NI 45-102). The exemptions allow underwriters to sell in certain cases (see 2.13 NI 45-102). Remember, regulators are concerned about prospectus exempt parties selling their securities and the more onerous resale rules restrict exempt transactions that can be abused (see s 2.5 NI 45-102). The seasoning period requires the issuer be reporting for four months and the date of distribution is not relevant; however, the restricted or hold period requires a holding of security for four months from the date of distribution, and that they are reporting issuer for four months prior to the trade. If they fall under the restricted period, shares are not freely tradeable and must stay within the closed system. We can doublecheck that the company is a reporting issuer for four months and confirm that there is no concern for triggering resale restrictions—here, we can check the date of the initial prospectus.

Strategically, since the company may be upset about the share price, we can consider doing a post receipt pricing to omit the pricing and related information for the offering (see NI 44-103). While underpricing may give us minimal risk in this bought deal, we can hold off on the pricing and make a new assessment. Since the share price closed at $49.50, we can keep Bluemingdale happy by reconsidering the price, and, after we showed reasonable efforts to raise the share price, land back at $45 per share if necessary. For this route, we should review PREP prospectus procedures (see s 3 NI 44-103). However, I am hesitant to pursue this route as we would have to delay completing the underwriting agreement since we are leaving out the price (see s 4.10 and s 9 NI 44-103). This would affect our approach to marketing, as enumerated above (see s 4A NI 44-103). If we still want to pursue PREP, we should consider seeking an exemption from Ontario Securities Commission to PREP requirements (see s 6 NI 44-103).

Alternatively, we may also consider a dual offering in the United States, or even a private placement to qualified institutional buyers. If so, we would be subjective to the multi-jurisdictional disclosure system (see NI 71-101) and need to fill out SEC Form F-10. Perhaps this will increase the demand for the company and allow us to offer the shares at a better price. If we decide against an U.S. offering, we should add a legend, “Not for distribution to U.S. news wire services or dissemination in the U.S.”

Procedurally, I assume we are eligible to file a short form prospectus and that we have a base shelf prospectus filed (see NI 44-101). We should also be wary of testing the waters, Pre-Marketing and Marketing Amendments to Prospectus rules and any recent amendments to NI 44-101. Note also that the offering of 10 million shares exceeds 20% of outstanding securities for an inadvertent takeover bid, but we can sidestep this by relying on the statutory exception (see s 4 NI 62-104).

More generally, we can try to minimize diligence costs and time by doing a thorough diligence of the company for the public offering and using that for the private offering. The ultimate aim is to establish a due diligence defense, and this can be done by going through the diligence process once to check for any material misstatements or omissions. Although, we should be wary of timing and any outdated diligence that we may need to update. We should talk to the client about the scope of the diligence and the threshold for materiality.

Private Placement

We need to ensure that there are no restrictions or hold periods for Geller Funds since they need their shares to be freely resold in Canada (see NI 45-102CP). First trades under exemptions from the prospectus are considered “distributions” unless some conditions are met, and these conditions restrict some resale (see s 2.4 NI 45-106). It is important to remember what the CSA considers a “distribution.” A distribution commences when we discuss the selling of the distribution and it is sufficiently specific or that it is reasonable to expect that we will underwrite them. Since they already hold shares, we can rely on the private issuer exemption whereby they would be subject to a seasoning period for four months; moreover, placements through an offering memorandum counts as an exception (see Appendix D NI 45-106). We should also consider the fact that they are technically a foreign company (see s 2.15 NI 45-102). As such, we should file Form 72-503F on their behalf electronically within thirty days (see OSC rule 72-503).

We should warn Geller Funds that 13 million of the common shares would come close to the 20%—namely 14 million shares—which triggers a takeover bid (see NI 41-101). Therefore, we may need to search more aggressively for institutional investors for subsequent private placements.

We should make sure that your pitch to the bankers about the prospectus offering are acceptable communications, especially with respect to the timing outlined above. Also, they would not need to rely on exemptions to restrictions on resale because they can freely resell under the prospectus.

We may need to get creative with our approach to attracting other institutional investors. The institutional investors who want to help “top up” the company’s balance sheet seem worried about the performance of the public offering and are not willing to accept the risks of the private placement. We may be able to explore the possibility of subscription receipts, since there is a potential M&A with Seers Inc. Investors can hedge risks of the M&A transaction not closing; that is, if it does not close, they can get their money back. Alternatively, we may also consider special warrants (NI 41-101CP). In any case, please remember that we cannot provide for any other option to increase the number of securities purchased, except with an over-allotment option (see s 7.1 of NI 44-101). We should also be wary of TSX restrictions (see s 607 TSX Company Manuals).

Bought Deal Letter

Dates

We should update the dates with respect to the prospectus receipts and closing to reflect the general comments above. The same changes should be reflected in the term sheet below.

Confirmation Clause

A bought deal cannot be conditional on having additional underwriters agreeing to purchase securities from the offering, except for some confirmation clauses (see s 7.4 NI 44-101). To be sure, if a confirmation clause will be used, please provide the issuer with a copy of the bought deal agreement and have them sign it on the same; moreover, it must occur the business day after the bought deal is signed (see s 7.4 NI 44-101). We also need to discuss with the other underwriters regarding their participation and provide notice to issuer confirming the specific terms of the bought deal agreement within one business day after signing.

Liability

We do not want joint and several liability. Joint liability is problematic as it ties us to the actions of the other underwriters. We should specify we will be “severally (and not jointly)” liable. We should be only responsible for our portion and we should not be required to take on any liability for the other underwriters.

Filing

We do not need to obtain a receipt for the preliminary short form prospectus in each jurisdiction is Canada. We have a passport system (see MI 11-102) and only need the receipt from our jurisdictional regulator, the OSC. We can change the language to say, “to qualify the distribution in all the provinces and territories of Canada (other than Quebec).”

We should also add language around closing procedures and further procedural details around the transfer of funds.

Termination

The “ratings out” and “market-out” clauses are not appropriate for bought deals (see s 7.1 of NI 44-101). We should replace them with “disaster out”, “regulatory out”, and “material change out” along with “any other termination that are customary in underwriting agreements.” We should also note that any indemnities and termination rights apply equally to the agreement.

Additionally, for the underwriting agreement, we should consider our registration rights and piggyback rights, as well as other representations and warranties or any lock-up provisions.

Blackout

We may want to specify the additional restriction not to enter into any agreements or arrangement for the transfer or acquisition which have the economics consequence of share ownership. When we start the distribution, we cannot have any market making, communications, or other trading activities (see s. 3 of OSC Rule 48-501). To this end, we can add language to “halt the trading of units of BLUE at the TSX.”

Marketing

We should have explicit language in the letter authorizing us to immediately release a press release upon acceptance of the offer.

Additionally, we should receive authorization to distribute copies of the term sheet to potential investors as well as any other marketing materials.

Diligence

We can be more detailed in our language around diligence. We need broad cooperation from the company in providing information for preparing marketing materials. We should add that the issuer is required to file the marketing material (see s 7.6 NI 44-101). We may also want a termination right tethered to diligence in case we identify some material adverse fact or a failure of their representations and warranties (see s 7.3 NI 44-101).

Term Sheet

Option

We should specify that it is an overallotment option (see s 11 NI 41-101; see also s 2 and 6 NI 41-101CP), or else we could be offside for bought deals. We also need to reduce the 3 million shares to 1.5 million, since any overallotment option cannot exceed 15% of the base offering (NI 41-101).

Use of Proceeds

We can specify that it is for repaying debt and R&D, along with other general corporate purposes.

Resale Restrictions

We should be explicit about resale restrictions and note that shares can be subject to a four month hold period, with some exceptions (NI 42-102). We should also build in lock-ups for directors and officers, since they are also exempt from resale restrictions (see s 2.24 NI 45-106).

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.

ESG Regulatory Reform, Canadian Corporation Governance and Securities Law

Environmental, social, and governance (“ESG”) has been a popular topic in capital markets discussions. Governance—or the “G” in “ESG”—is the outlier from environmental and sustainability concerns.[1] Although they are cast together, it is often thought that there is no strong conceptual tie between governance and environmental or sustainability concerns.[2] What broadly ties ESG together are the aspirational moral aims such as environmental ethics, intergenerational justice, and equality of opportunity.[3] The legal framework around ESG attempt to guide companies towards these aims through various incentives.[4] Many approaches to ESG analysis focus solely on the putative value it brings to a company, such as attracting new investors; less focus has been put on the internal incentives, such as moral considerations or the views of current shareholders on ESG policy.

Corporate governance can have a role in incentivising management to develop and implement an ESG strategy.[5] The duties of directors are one way to influence the decisions of the directors, which is important since directors regulate a company’s strategy, operations, and performance.[6] There is a move towards directors (and officers) having a broader moral duty flowing from their fiduciary duty, or “looking beyond legality, to what is fair, given all of the interests at play” to address what is “wrongful even if it is not actually unlawful.”[7] This move in Canadian jurisprudence towards expanding the fiduciary duty can capture the moral dimensions of ESG while also incentivising ESG compliance. I argue that an expansion of a director’s fiduciary duty can buttress the current reforms to the ESG disclosure regulatory regime. Corporate governance laws can be a fruitful avenue for operationalizing ESG beyond mere disclosure and towards corporations being more morally conscious.

In part 1, I provide an overview of Canadian securities laws as it relates to ESG, and some of the standard market practices and attitudes towards ESG. I take a closer look at the disclosure regime and current discussions around market practices. This leads to a look at some potential weaknesses around the proposed reform with respect to corporate incentives. In part 2, I propose that a closer look at a director’s fiduciary duty can lead us to a more robust ESG regime. I begin by contextualizing fiduciary duty within the framework of current Canadian corporate governance law. I then suggest that the aims of ESG disclosure reform overlap with a director’s fiduciary duty and explore some potential problems with this view. In part 3, I expand on the relationship between corporate governance and securities disclosure laws. I look at the aims of each framework and how they go about incentivizing these aims. I then look at some speculative solutions and explore how other jurisdictions have approached these issues.

1. The Legal Framework Around ESG in Canada

I want to begin by contextualizing this discussion with some background on ESG and the current views surrounding it. The purpose of this section is to provide a basic background of the laws around Canadian capital markets and corporate governance; to this end, I highlight only what is necessary for understanding the relevant legal aspects of ESG. Additionally, I provide further context around ESG market practices and how they relate to the legal framework. In essence, laws and market practices track incentives, particularly around increasing value and avoiding loss, and this results in some problematic outcomes.

1. Securities law, disclosure, and ESG

            To start, it is necessary to briefly outline the legal framework in Canada’s capital markets. The current securities regulations in Canada reflect its federalist commitments. Each of the provinces and territories regulate their capital markets: 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.”[8] Thus, there are 13 securities regulators accountable to 13 governments, and each regulator is supposed to reflect the different strategic priorities for their jurisdiction. There are partially harmonized securities national instruments as well as guiding national policies,[9] and the Canadian Securities Administrators (“CSA”) provides some national cooperation. Despite substantial attempts to completely harmonize the capital markets regime in Canada, there is currently no fully national body for securities accountability. Notably, in response to attempts at harmonization, the SCC noted that the Federal Parliament and each province may exercise their combined powers to collaboratively create a national cooperative capital markets regulatory system.[10] In 2020, Ontario’s Capital Markets Modernization Taskforce (“taskforce”) recommended to implement a single piece of legislation to apply across Canada.[11]

            To take a closer look at the securities disclosure framework, let us narrow the focus to the province of Ontario as a case study. A prospectus is required for public issuers and must be filed with the Ontario Securities Commission. A prospectus must provide “full, true and plain disclosure of all material facts relating to the securities issued.”[12] The prospectus must include a description of risk factors in the issuer and its business. Procedurally, any new material changes must be disclosed in a news release and a “Material Change Report” must be filed on the System for Electronic Document Analysis and Retrieval (“SEDAR”).[13] As a reporting issuer—namely, one who has obtained a receipt for a perspective from their respective regulator—there is also an obligation to continuously disclose information to investors. A corporation’s AIF 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.[14]

Material information relating to ESG can be a part of a number of securities disclosure forms. Some material risks might be disclosed in an issuer’s MD&A, especially as it relates to consumer preferences, supply chain management, or carbon allowances.[15] Material risks can also be a part of an issuer’s AIF, especially as environmental and social policies can affect operations and influence an investor’s decision to purchase securities.[16] It also includes elements of environmental protection requirements and disclosures of risks which can affect the price of securities. It is important for investors to have accurate, accessible, timely and up-to-date information which may have significant impact on the prices of securities. Nevertheless, in terms of ESG, boards often only make vague representations about managing risks, corporate culture, and internal policies.

The CSA has provided some guidance on what environmental information is material for disclosure. Currently, the existing ESG disclosure framework is outlined in CSA Staff Notice 51-333 (Environmental Reporting Guidance)[17] and CSA Staff Notice 51-358 (Reporting Climate Change-related Risks)[18] whereby factors of materiality are highly context sensitive. The CSA noted there is no bright-line test or quantitative threshold for materiality; rather, both quantitative and qualitative factors are considered in light of contextual information.[19] The CSA further notes that that environmental disclosure is only required insofar as it relates to material risks.[20] Current factors for material risk include probability, timing, context, and magnitude of the risk. This gives companies a high amount of discretion and little guidance insofar as what is material enough to be disclosed.[21]

            There are consequences for failing to disclose or misrepresenting information. [22] Institutional penalties take the form of criminal, quasi-criminal, and administrative enforcement. Yet, in theory, civil liability can be the costliest and the most incentivising for companies. Misrepresentation flows from securities statutes and mainly focuses on representations made by the prospectus and the offering memorandum.[23] In the primary market, purchasers may bring a cause of action if they purchased a security during the period of distribution.[24] In the secondary market, misrepresentations can flow from documents related to the prospectus (e.g., annual information forms, annual financial statements, interim financial reports, MD&A) or public oral statements (e.g., press releases, websites, roadshow presentations). The remedy can be damages or recission; when damages are awarded, they are calculated with respect to the real value of the purchases at the time of purchase and the depreciation of the security price.[25] Civil liability is a strong incentive for companies to make full, true and plain disclosure.

The taskforce’s final report recommends 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.[26] The CSA proposed National Instrument 51-107: Disclosure of Climate-related Matters[27] whereby reporting issuers would be required to disclose their governance around climate risks and opportunities in the management information circular (alternatively in the AIF or MD&A); additionally, reporting issuers must disclose the impacts of climate-related risks on the company’s business and financial planning, how the company would manage such risks, and the metrics and targets for managing risks.[28] The disclosure requirements would apply to all reporting issuers and entail “governance, strategy and risk management” as well as varying “scopes”[29] of green house emissions on a “comply-or-explain” basis. The task force also called on the CSA to impose similar standards across Canada.[30]

By and large, the ESG disclosure regime remains problematic in Canada. The CSA reported that, despite the guidance provided in NI 51-333, 22% of sampled issuers made no climate-related disclosure at all and 22% included only boilerplate disclosure.[31] 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 regulations. Third, if firms are not voluntarily disclosing climate-related disclosure, then the value it brings to the company or its role in attracting new investors might be minimal or at least lower than the costs of the disclosure. While there still is no explicit requirement for disclosing ESG in Canadian securities laws, some material aspects of disclosure may fall under the purview of ESG; nevertheless, it is becoming a common practice among firms to voluntarily disclose detailed ESG information.

• Market practice

Market practices are intimately linked to laws and changes in laws can have profound impacts on market practices; conversely, market forces can also impact legal reform and it is important to keep in mind the reciprocity of this relationship. Market practices have led to a trend towards increased voluntary disclosure and the causes of these trends are variegated. There is a strong case for attributing the rise in companies’ voluntary ESG disclosure to selfish motives of attracting investors, bolstering public relations, and strategically addressing climate risk. More idealistically, we might view this practice as corporations becoming better moral citizens and that there is an evolution in the morality of companies, investors, and stakeholders. On the other end, cynical views understand the trend as corporations acting in self-interest and view ESG as a mere mode for maximizing profit. Some remain skeptical about the underlying financial value that ESG can really bring and explain recent trends as a temporary response to market forces.[32]

            More attenuated optimistic views towards the value creation of ESG explain recent trends towards ESG in terms of a welcomed alignment between the financial benefits of ESG with moral considerations.[33] For example, a firm that cares about environmental ethics may be more attractive to shareholders and therefore ESG can become financially advantageous. It is important to disentangle these two motivations as they tend to be conflated. Claims that ESG can both contribute to moral ends while also maximizing returns should be approached with some skepticism.[34] It is difficult to convincingly argue that corporations are being altruistic in their voluntary disclosure of ESG. The more likely explanation is that companies are trying to attract investors and largely concerned about their public perception.

There is some talk about ESG being a fad.[35] The significance of whether ESG is a fad or not is partly due to the idea that ESG creates permanent value for companies. The veracity of this idea is important because if ESG is only creating perceived value on the market without contributing any intrinsic value for the company, then ESG would cease to provide any value when market sentiments shift.[36] In 2020, there were an estimated 300 ESG funds that claimed to build wealth while also contributing to ethical practices.[37] With the prevalence of profitable companies contributing to environmental disasters, human rights violations, and deplorable conditions for their employees, the promise of ESG is that investing can also contribute to positive ethical practices while simultaneously providing increased risk-adjusted returns.[38] Recently, since the COVID-19 pandemic, the trends indicate that investors are incorporating ESG as a premium in their valuing of companies.[39] Whether investors are becoming more morally conscious in their investing decisions or perceive ESG as a mere means for more returns remains to be seen. In any case, companies have been responding to this trend as pledging to be climate-neutral have doubled since the pandemic.[40]

There is a lot of money in ESG. There are many prominent ESG rating agencies which attempt to provide a standardized ESG rating similar to credit rating agencies.[41]  What is notable about these private firms is their pecuniary interest is tied to the propagation of ESG.[42] Such interests and motivations for ESG are suspect. While it is idealistic to expect firms to have purely altruistic motivations in connection with ESG, one should be wary of whether such motivations can conflict—for instance, maximizing ESG may be inconsistent with maximizing economic gain.[43] The lesson here is that readers ought to be sensitive to pecuniary interests associated with ESG and try to disentangle the morality in ESG from the money in ESG.[44]

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, and one meta-study noted that 88% of sources find that companies with robust sustainability practice have increased operational performance translating into cashflows.[45] Some finance experts are skeptical towards the value ESG really adds.[46] Nevertheless, others argue that ESG does very little for increasing the permanent value of a company. 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 lasting positive benefit of ESG.[47]

To tie this all together, market practices and laws around ESG need to be understood holistically. Without clear laws, the markets will be left to its own devices and companies will only chase financial incentives. The ESG trend conveniently brings financial incentives, but it is entirely possible that this is temporary and dependent on market sentiment instead of intrinsic value. At this point, it appears that companies cannot be left to pursue moral ends without financial incentives, and this leaves ESG in a precarious situation.

• Incentives and issues with the current ESG framework 

Reforming the regulations around the ESG disclosure regime may not be the most effective way at incentivising companies to be good, especially since this partly relies on the assumption that ESG will bring short-term returns to a company. In other words, if the fad disappears and ESG no longer brings short-term returns, then companies will no longer attend to ESG.[48] Absent any altruistic motivations, companies may need some other incentive. Rules and penalties are the obvious choice from the perspective of securities regulators. However, detailed prescriptive rules can be too restrictive, inflexible, and inefficient. Moreover, if companies are amoral and indifferently maximize profits, companies may try to gamify such rules.[49] For instance, a company might deem it is less costly to take on the risks of regulatory penalties than comply with expensive ESG changes and disclosure. While this is a cynical view of companies, it is important to address this possibility when reforming the ESG framework.

Another issue with the current ESG disclosure framework is investor protection.[50] Due to their lack of sophistications, retail investors are susceptible to misinformation, manipulation, and misdirection, and their vulnerability needs to be protected;[51] although sufficient disclosure can satisfy legal requirements, it is often not practical enough to protect retail investors.[52] Notably, without consulting exact details and poring over disclosure documents, retail investors may buy into corporate virtue signalling.[53] 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.[54] 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 in their company. ESG virtue signalling can take the form of promising both morality and money, and, while this in itself is not problematic or illegal, it can start to become harmful if their promises are anything less than the truth and deceive investors. ESG virtue signalling may partly explain how ESG became a fad.[55] Latching onto this trend, more companies may try to signal their virtue through ESG and creep into the lines of dishonesty and deception.[56] Deceptive practices which prey on an investor’s moral sentiments, information asymmetry, and false perception of competitive advantage needs to be penalized.

Since its advent, some have been optimistic about the role of technology for enhancing risk disclosure and protecting investors.[57] Technology and access to information through the internet has had profound impacts on investing behavior.[58] The internet and other information technologies have certainly lowered information costs, and this can benefit all parties. However, the sheer amount of readily available and free information can pose a challenge for parsing out the quality of information.[59] Retail investors often act without consulting intermediaries and are frequently unequipped to filter out unreliable or biased information. A related worry with disclosure for retail investors is an “information overload.”[60] More information can counterintuitively worsen investment decisions.[61] 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.[62]

To take stock, returning to the role of securities law intervention, the current laws around ESG disclosure targets only what is material. There is a gap in disclosing what shareholders might care about and what directors are obligated to disclose as material. Recall that the materiality threshold is based on a test of significant impact of market price and not what would affect a reasonable investor’s choice to purchase a security. There is a disconnect between what impacts market price and what impacts an investor’s decision. Market practices have picked up on this and often voluntarily disclose beyond what is legally required in order to attract new investors. 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 more responsive to market forces rather than stricter rules.[63] This suggests that securities laws around ESG disclosures is not the proper incentive for companies; rather, the best incentive for enhanced ESG disclosure must track the sentiments of shareholders towards ESG.

• Expanding the ESG framework

It is important to think about the hypothetical scenario whereby the trends around ESG subside and ESG investing is no longer financially beneficial.[64] Exploring this scenario can be helpful for understanding the effectiveness of the current ESG disclosure regime and whether corporations are sufficiently incentivised to disclose detailed ESG information. In this scenario, it is possible that directors may stop caring about ESG altogether. At this point, we should think about the current shareholders. Ideally, directors would ask for input from their shareholders on ESG matters, but directors currently have no explicit duty to ask their shareholders for input on ESG.[65] Some may argue differently and try to capture ESG under one of the director’s duties to their shareholders, but this view depends on what the role of the directors ought to be.[66]

            Both fiduciary duties and a duty to disclose have the aim of encouraging companies to act in morally beneficial ways. Directors can have a duty of disclosure under securities laws, but we have seen that this is an insufficient incentive and leads to vague, boilerplate ESG disclosure. The better incentive might be achieved through corporate governance law and a director’s fiduciary duty. The relationship between morality and legal duty is vexed, but there is some indication that Canadian courts are becoming increasingly more sensitive to moral considerations in the context of corporate law.

1. Fiduciary duty and corporate governance law

Before exploring the relationship between corporate governance and ESG, I want to sketch out some key relevant laws and developments in Canada. By way of background, the CBCA[67] and OBCA outline the core duties for directors and officers:[68] the fiduciary duty; and, the duty of care, diligence and skill. [69] Courts have read in three duties flowing from the general statutory fiduciary duty: a duty to monitor management of the corporation to address risk and misconduct, a duty to treat stakeholders fairly, and a duty to act ethically.[70] First, a duty to monitor flows from the idea that it is unrealistic to expect directors to directly manage a large business. They must have acted reasonably on an informed basis and includes reasonable steps taken to evaluate ESG performance. This entails environmental and social risks relating to increased risks of litigation; more concretely, the directors and officers must have a process that is documented to verify and oversee ESG performance. This must be done within the backdrop of mitigating financial risk and performance.

            Second, a duty to treat shareholders fairly is captured broadly in Canada as shareholders are understood to be only one of many stakeholders. The SCC’s decisions in Peoples Department Stores Inc. (Trustee of) v. Wise[71] and BCE Inc. v. 1976 Debentureholders[72] marked a shift from a director’s duty to shareholder primacy to acting in the best interest of a plurality of stakeholders. Additional stakeholders include employees, retirees, creditors, consumers, the government, the environment, and the long-term interests of the corporation. One set of stakeholder interests does not override another. Many writers of pointed to the vague and potentially conflicting nature of understanding a director’s duty as owed to multiple stakeholders.[73] It is unclear how directors are expected to ensure each stakeholders’ interest is treated fairly and which circumstances are relevant in prioritizing varying interests. While this vagueness may be understood to defer to the business judgment of directors, it can weaken claims for breaches of the duty and attaining a remedy for damaged parties.

Third, a duty to act ethically implies a director should go beyond mere compliance with laws. In BCE, the SCC noted that the duty of loyalty entails a “duty to act in the best interests of the corporation, viewed as a good corporate citizen.”[74] Fiduciary duties have the broader goal of fostering trust in social institutions.[75] Interestingly, this suggests a broadening of fiduciary duties beyond the scope of legal requirements. We can understand this to mean that directors need to be sensitive to moral considerations affecting the “goodness” of corporations and its place in contributing positively to the norms of society. This final branch of the fiduciary duty has the most potential for expanding into ESG reform.

            Crucially, and consistent with the “business judgment rule,” the fiduciary standard is not about outcome but the process of rationally accounting for relevant issues and the circumstances of the information available.[76] The business judgement rule covers such decisions by the director provided they act on an informed basis, in good faith, and in the best interest of the corporation.[77] If directors breach their duty, shareholders might bring an oppression claim for a broad range of remedies.[78] One should note that decision-making is context-specific and draws on factors like “general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders.”[79] This duty is separate from corporate governance legislation and the duties which flow from them.[80]

It is important to clarify what it means to be “good” in the moral sense and “good” in the legal sense, and how they relate with respect to BCE.[81] Some have balked at the court’s liberal expansion of fiduciary duty and the use of contentious moral terms in BCE.[82] What can be confusing to understand is the separation between legal duty and moral duty. It is possible to follow legal requirements without being morally good or following a moral requirement. A clear example of this is in private law and the use of equitable doctrines in contract law.[83] Even when one has a legal right in common law, equitable doctrines step in to fix immoral or unjust transactions. Despite there being no strict equivalent of equitable doctrines for corporate governance and fiduciary duty, it is important to recognize that satisfying a legal duty like a checkbox is not sufficient. Indeed, the court draws on “concepts of fairness and equity rather than on legal rights.”[84] Directors may have a moral duty owed to the environment that goes beyond their legal duty, which is housed under their fiduciary duty.

            From the lens of securities law, the existing disclosure requirements around corporate governance is clear. However, the taskforce recommends greater corporate board diversity.[85] The governance portion of ESG relates to enhanced disclosure of corporate governance practices. This intersects with topics of board diversity, transparency, and shareholder rights.[86] Governance-related disclosure is required by securities law whereas environmental and social disclosure is not expressly required. The taskforce has specific ESG related recommendations focusing on board composition and governance.[87] The policy rationale for greater diversity is again both moral and instrumental. Morally, we aspire to have a more equitable society free of systemic discrimination and prejudice, and this needs to be reflected in our corporate boards. Instrumentally, diversity can be beneficial for the health of companies and create more value.[88]

The relationship between environmental and social disclosure with governance is significant. The board and management are in charge of overseeing, assessing, and managing environmental risks, opportunities, and related policies. They are naturally accountable for any deficiencies or misstatements in ESG disclosure, and they are responsible for moving the company towards better ESG. Expanding a director’s fiduciary duty to include ESG as a moral rather than financial consideration can be a productive way forward for ESG reform. The SCC have made suggestive indications about expanding the fiduciary duty to include moral considerations that are independent of any material financial risks. This shows that moral on its own has a role to play in the duties of a director, and protecting interests does not always mean maximizing only economic interests. Taken to its extreme, directors must be sensitive to the morality of the company, its shareholders, and other stakeholders in their decisions.

• Expanding fiduciary duty for ESG reform

Directors and officers are responsible for the interests of internal stakeholders, particularly current shareholders.[89] Shareholders can have a profound role in pushing companies to care more about ESG and incentivising directors and officers to invest more into ESG. The line between business risks and environmental risks is becoming blurred. Shareholders want companies to articulate how growth can come from ESG and how companies will address long-term risks. It is becoming increasingly important for management to demonstrate how a company can protect against issues, like a public health crisis or climate change. While this might be more obvious for companies in industries like agriculture or fossil fuel, ESG risks are affecting all industries. Indeed, as issues such as climate change become exacerbated, the business risks start to become existential.[90]

            Corporate governance incentives are a more targeted approach towards directors. It is a core principle of corporate law that corporations have a separate legal entity. While it is clear the current laws would not pierce the corporate veil,[91] we may slowly move in that direction for ESG related violations. Courts have reserved piercing the veil of separate corporate legal personality and holding directors personally liable in the most aggregious cases of fraud, criminality, or objectionable purposes.[92] We should be careful that this is not punitive rather it is for just and equitable ends.[93] A duty of care held by directors and corporations could also extend to be owed to the environment and future generations.[94] The disclosure of morality can be tied to ESG and one might argue that shareholders ought to know about the moral decisions of a company. [95] This moral dimension might be initially introduced through ESG by its relationship to increasing the value of a firm and the general health of a firm, but it may go further to the discrete claim that shareholders ought to know about the moral outcomes of the decisions of the board, as suggested in BCE.

            Directors may also have a fiduciary duty owed to their shareholders to act in the best moral interest of the shareholders. In operation, this can take the form as a duty to consult their shareholders about their moral interests. In the same vein, one aspect of the duty of loyalty is to avoid conflicts. A conflict in morality might be understood in this way.[96] Notably, directors and officers are using other people’s money to act in their best interest of what is moral.[97] A problem arises when the demands of one stakeholder conflict with the judgment of the directors (and officers). For instance, while it can be reasonably said that shareholders defer financial decisions to the expertise of the directors, it is not clear that they defer moral decisions as well, particularly the morality around ESG. BCE suggests a move away from the paradigm that corporations have the sole objective of maximizing profits. The nuances of a corporation’s purpose are reflected in a director’s fiduciary duty and the plurality of stakeholders. Directors must be sensitive to the moral considerations of the company’s stakeholders and cannot paternalistically impose their own morally questionable decisions onto stakeholders.

At this point, one might push back and argue that all this analysis is unnecessary because trends towards ESG are better explained by the moral evolution of corporations, investors, and other stakeholders.[98] These parties are already incentivised by morality and laws do not need to import the presumption from economic theory that agents all seek to rationally maximize their self-interest,[99] so the argument goes. It is certainly within the realm of possibility that ESG is not a fad driven by finances but a lasting change in moral attitudes. Perhaps laws can move to encourage reasonableness or acting with respect to the common good and political morality.[100] These claims should be met with some skepticism. The idea that investors are willing to pay a premium for morality without any added return on their investment is largely speculative and idealistic.[101]

It is also possible that corporations have no role to contribute in morality.[102] It may be more appropriate that businesses should solely focus on profit and thus directors should solely pursue this end amorally. However, we typically attribute moral attributes to corporate persons. For example, we might attribute moral responsibility to the human rights violations of Nevsun Resources Ltd.[103] Even beyond the legality and even if certain actions are technically legally permissible, we believe that there are further moral constraints on corporations in addition to legal constraints, that is, to behave in ways consistent with shared morality such as environmental ethics. Corporations should not be viewed as mindless profit maximizing machines.[104]

To be clear, even if shareholders did not care about moral considerations, they can egoistically care about avoiding long-term existential threats. Imagine if shareholders were only concerned with financial returns and did not care about ESG as a moral consideration. ESG would still be useful to them as far as ESG can combat risks of poor governance and practices which threaten the sustainability of our global capital markets. Additionally, ESG 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 issues 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 immediately address.

In sum, it is currently not clear how courts will continue to expand the fiduciary duty. Some subsequent caselaw have moved in the direction of emphasizing good corporate citizenship.[105] However, further test cases are necessary to clarify the exact relationship between this expansion of the fiduciary duty and its application to ESG matters. It is possible to move this agenda forward concurrently with ESG reform.

• ESG reform

The need for integrating a broader fiduciary duty into ESG reform comes from the worry that corporations will not be sufficiently incentivised to invest in ESG (in the case that the ESG fad dies down). The fad brings a lot of value returns from investing in ESG, but if the returns start to wean it could cause companies to devote less attention to ESG.[106] This can cause ESG to be a mere checkbox to meet regulatory requirements whereas the current voluntary scheme (combined with the current fad) results in more enthusiastic and generous diverting of resources to ESG. Incorporating broader fiduciary duties as a part of the ESG scheme would provide another source of incentives for directors to invest in ESG. More specifically, independent of the ESG fad attracting external shareholders, the current shareholders can keep directors accountable.

1. Combining fiduciary duty and disclosure duties

The aims of fiduciary duty and ESG disclosure regulation overlap in important ways. Both securities and corporate governance regulations work with incentives.[107] However, they achieve their aims through different means. One way to illustrate this is by tracking the relationship between incentive and duty. In the corporate governance context, the incentives are directly aimed at the duties of directors and their accountability to current shareholders.[108] 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.[109] In the public disclosure context, the incentives are aimed at avoiding regulatory sanction while also attracting 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 misrepresenting their ESG disclosure. Remarkably, both fiduciary duty and ESG disclosure regulation target directors.

We can try to speculate on how corporate governance law and securities law can further merge.[110] Reform can try to target other market players that have an influence on directors and officers. Beyond directors, underwriters may be another gatekeeper for scrutiny of ESG disclosure. While directors are better positioned to obtain information about the company, underwriters have a role in seeking out and questioning all relevant material facts to the best of their knowledge, information and belief. In other words, “they are expected to exercise a high degree of care in investigation and independent verification of the company’s representations.”[111] Creditors are another stakeholder for companies and can influence a company’s decisions.[112] Creditors may be more generous with their terms if companies meet a standard of ESG.[113] Of course, creditors have to be motivated and incentivised to move companies in this direction and they need to be similarly incentivised. In some sense, 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.[114] Employees are also more interested in working for sustainable companies; while attracting talent is important, directors should consider current employees as a stakeholder and how employees view ESG.[115] The plurality of stakeholders to which a fiduciary duty is owed opens up a lot of creative modes to implement ESG.

            Principles-based regulation—or, aiming at high-level rules rather than more detailed prescriptions—can be an effective approach for reform.[116] 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 protecting against market failure, but they should only implement prescriptive rules when there is clear evidence of harm.[117] This would assist in the growth of Canada’s capital markets and reduce limits of 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.

            Principle-based regulation is a natural fit for ESG reform rather than the rules-based approach to regulation.[118] It recognizes the variability in businesses in terms of size, sector or industry. We can look at the success of principle-based regulation through an outcomes-based approach. For example, 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. An onerous disclosure regime with prescriptive rules can be inefficient if market participants are already voluntarily disclosing with similar outcomes—prescriptive rules would then punish the majority for the minority of free-riders and bad players. Despite the minority of bad players, the majority will establish a norm of ESG disclosure and create a penalty of reputational risk.[119]

• Speculation on reform from other jurisdictions

Current ESG legal reform in Canada is primarily focused on securities disclosure in terms of making voluntary disclosure mandatory (rather than focusing directly on the duties of the directors). While the disclosure regime is connected to the duties of the director, implementing regulatory reform solely through the disclosure regime is an ineffective way of incentivising ESG. A further worry with stricter ESG disclosure policies is that it will add to costly over-disclosure that may obscure useful information.[120] Overcomplexity is definitely counterproductive for ESG; however, it remains that under-disclosure is currently the problem. 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. Stricter securities regulations may undercut Canada’s competitive edge on the international stage.[121]

            Even without strict and detailed legal requirements, corporate governance practices would survive.[122] Voluntary commitments to environmental policy can be aimed at avoiding high compliance costs in the future. Firms may also try to signal that their governance is also attractive to investors—that is, directors who are transparently ethical and listen to the moral imperatives of their shareholders and other stakeholders. ESG factors can often engage the best interest of the corporation.[123] Increasing investor confidence in the capital markets is a clear policy objective that is tethered to investor sentiments and confidence in directors.[124] Some have shown that a demanding and actively enforced disclosure system with heavy civil and criminal penalties towards management promote investor confidence.[125] 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.[126] Similarly, we may look to other jurisdictions for guidance on the future of ESG in Canada.

The United States fiduciary framework gives primacy to shareholders and this can open up more avenues to pursue insofar as a claim of a breach of fiduciary duty.[127] The argument is that a director or officer pursuing their own morality or benefiting a third party over shareholders is a violation of a duty of loyalty. From this perspective, the need to argue that ESG coincides with maximizing value is necessary.[128] ESG focused investing would be permissible if it benefits the shareholder by improving risk-adjusted returns and if the motives are to obtain this benefit.[129] While American corporate governance is different from the Canadian approach, we can prudently look to American reforms in securities law and ESG reform.[130]

Recently, the Biden administration announced the appointment of a “Senior Policy Advisor for Climate and ESG” for the U.S. Securities and Exchange Commission (“SEC”), and a Climate and ESG Taskforce. In May 2020, the SEC’s Investor Committee recommended that the SEC start updating reporting requirements to include ESG factors,[131] and, in December 2020,[132] the ESG Subcommittee proposed recommendations on the disclosure of ESG risks. The acting chair announced, in March 2021, a chance to comment on climate change disclosure.[133] 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).

Overseas, the European union began a comprehensive mandatory ESG disclosure regime.[134] The “EU Taxonomy Climate Delegated Act” introduced disclosure obligations for companies based on expert criteria on contributors of climate change.[135] The “Corporate Sustainability Reporting Directive” is supposed to act as a uniform reporting standard for sustainability disclosure. The European Union 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.[136] Others have pursued their own scheme of mandatory ESG disclosure, such as the United Kingdon[137] and New Zealand[138] which have slightly longer timelines. Australia has had some interesting developments, such as its June 2021 ASIC targeted surveillance of greenwashing.[139] Additionally, there have been several examples of litigation around climate risk disclosure, which is an important lesson for other jurisdictions.[140] These are useful datapoints that Canadian reform can draw upon.

Many hurdles remain for a unified and possibly global ESG standard. A vexing issue is compliance and combatting the gamification of ESG data and disclosure.[141] The morality of ESG should not be a strategy to cover up indifferences to ESG goals nor should it be instrumentalized, 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. The overarching problem is the lack of standardization based on the fact that ESG risks vary by industry, business, and geography.[142]

In Ontario, nearing the end of 2021, the taskforce is working to receive comments from market participants.[143] This approach is questionable.[144] 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.[145] 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.[146] The primary 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. ESG should not be used as a guise for some other end like money or political power.

• Conclusion

I have tried to offer a conceptual link between ESG disclosure in Canadian securities law and a director’s fiduciary duty being expanded into moral considerations.[147] I have provided a sketch of the legal framework for disclosure under securities law and argued that the main weakness with approaching ESG from this angle is its weak incentives. I suggested that conflating financial incentives with moral incentives can be problematic when financial incentives disappear; in other words, we cannot build a legal framework for ESG by relying on companies to act altruistically. I then outlined how Canadian corporate governance jurisprudence is expanding a director’s fiduciary duty to include moral considerations above and beyond strictly legal requirements.

I argued that ESG can be housed under these moral considerations. The upshot is that ESG disclosure in securities law can be buttressed by ESG considerations as a part of a director’s fiduciary duty in corporate governance law. My aim is to give a modest account of laws relating to ESG in Canada and demonstrate that it is at least possible to connect ESG disclosure reforms with reforms in a director’s fiduciary duty. More work is required to fully paint how a duty to disclose and a fiduciary duty can provide a coherent foundation for fully ratifying ESG into Canadian law. 

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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 true that corporate governance is important for contributing to environmental and sustainability policies, but it is also tempting to cast good governance as a separate aspirational end of enhancing diversity, social equality, and general corporate accountability.

[3] The distinction between “moral” and “ethical” is not important for the purposes of this essay and are used interchangeable, unless otherwise indicated. The same applies for “duty” and “obligations” as well as “company” and “firm.”

[4] Interestingly, incentives such as penalties and punishments assume that companies are self-serving and would not pursue moral aims without regulatory intervention.

[5] As some skeptics suggest, when the ESG fad is over and the link between ESG and the perceived increased value dissolves, we will then need a stronger incentive to promote ESG aims.

[6] If ESG alone cannot get companies to act morally, and if ESG’s adding value is temporary, then we need an alternative way to enforce good behavior.

[7] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, at para 71.

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

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

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

[11] As of the end of 2021, it remains to be seen whether this recommendation will be realized.

[12] Securities Act, R.S.O. 1990, c. S.5, s. 56(1).

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

[14] Mary G. Condon, Anita I. Anand & Janis P. Sarra, Securities Law in Canada: Cases and Commentary (Toronto: Emond Montgomery, 2005)

[15] The MD&A contains a narrative of the financial performance and reflections on the likely future performance of the company. The MD&A assists current and potential shareholders evaluate the value of a company and supplement financial statements.

[16] The AIF is a detailed document disclosing material information about business operations and future prospects.

[17] Canadian Securities Administrators, Staff Notice 51-333 Environmental Reporting Guidance (October 2010) online: <https://www.osc.ca/sites/default/files/pdfs/irps/csa_20101027_51-333_environmental-reporting.pdf&gt;

[18] Canadian Securities Administrators, Staff Notice 51-358 Reporting of Climate Change-Related Risks (August 2019), online: <https://www.osc.ca/en/securities-law/instruments-rules-policies/5/51-358/csa-staff-notice-51-358-reporting-climate-change-related-risks&gt;

[19] For example, emission standards future environmental-related risks can vary a great deal depending on a company’s industry, size, or business.

[20] The CSA has given some guidance as to what environmental information could be material, but again there remains no bright-line test for materiality.

[21] 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. However, too little guidance can have the effect of companies innocently failing to identify material risks or potentially shirking their disclosure obligations.

[22] The distinction between private and public corporations is important to address since fiduciary duty can apply in both contexts but disclosure is more important in the public context.

[23] Securities Act, R.S.O. 1990, c. S.5, s. 130.

[24] The burden is on the plaintiff to establish a misrepresentation of a material fact whereby the defendant failed to conduct a reasonable investigation. A material fact is “a fact that would reasonably be expected to have a significant effect on the market price or value of the securities.” See Securities Act, R.S.O. 1990, c. S.5.

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

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

[27] Canadian Securities Administrators, Consultation Climate-related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument 51-107 Disclosure of Climate-related Matters (October 2021), online: <https://www.osc.ca/en/securities-law/instruments-rules-policies/5/51-107/51-107-consultation-climate-related-disclosure-update-and-csa-notice-and-request-comment-proposed&gt;

[28] The recommendation starts with the largest issuers (500 million in market capitalization) to comply within two years and smallest issuers (150 million in market capitalization) to comply within five years.

[29] 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.

[30] 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.

[31] Canadian Securities Administrators, Staff Notice 51-358 Reporting of Climate Change-Related Risks (August 2019), online: <https://www.osc.ca/en/securities-law/instruments-rules-policies/5/51-358/csa-staff-notice-51-358-reporting-climate-change-related-risks&gt;

[32] Accordingly, the skeptic argues, as market forces die down, the financial creation will also die down; as such, tying the morality of ESG to its value creation is ultimately a fleeting and ineffective way of achieving moral policy objectives such as combatting climate change or addressing rights violations.

[33] Another appeal is ESG having the potential to solve a dilemma for investors of having to choose between money and morality.

[34] We can clarify the competing claims of morality and maximizing returns by imaging circumstances where one exists without the other. For instance, we might ask if investors or corporations would pay a premium for furthering moral aims if it had possibility of returns or even resulted in a net loss—here, it is clear that most are not purely altruistic in this sense. We can ask the opposite question: we can ask if investors or corporations further financial ends that further immoral ends—here, it is clear that egoism is rampant in corporate behavior.

[35] Witold Henisz, Tim Koller, & Robin Nuttall, Five ways that ESG creates value (November 2019), online: < https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value&gt;

[36] Zaghum Umar et al. “A tale of company fundamentals vs sentiment driven pricing: The case of GameStop.” (2021) 30: 100501 Journal of Behavioral and Experimental Finance.

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

[38] Again, these claims of guilt-free investing are often exaggerated.

[39] 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&gt;

[40] Ecosystem Marketplace, EM Global Carbon Hub (2021) online: <https://www.ecosystemmarketplace.com/carbon-markets/&gt;

[41] 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.

[42] Some institutions are working on standards for ESG criteria in the investment process, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the UN Sustainable Development Goals.

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

[44] As we shall see below, 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.

[45] 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&gt;

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

[47] Aswath Damodaran (Ibid) notes 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, Damodaran argues that there is a false correlation between profitability and the perceived “goodness” of ESG. Damodaran attributes the ESG and increased valuation correlation to the gamification of ESG by large companies.

[48] In other words, if the motivation to attracting investors through ESG disclosure is attached to a temporary trend, and if this temporary trend towards ESG disappears, then companies may no longer be motivated to care about ESG.

[49] Miriam A. Cherry, “The Gamification of Work” (2012) 40:4 Hofstra L Rev 851.

[50] The distinction between institutional and retail investor matters here as well. Retail investors can more guided by morality in their investment decisions whereas institutional investors hardly take morality as a factor and focus on the numbers and models. Take the example of an initial public offerings (“IPO”), or a private company’s choice to go public. Communicating an ESG strategy is important for IPOs. IPOs can be a hotbed for misleading investors, especially about ESG. It is often difficult to test the veracity of the company’s claims because private companies have a lower profile and have little history. Moreover, the story that the company spins during their roadshow can add a lot of room to massage ESG claims.

[51] Aaron A. Dhir, “Shadows and Light: Addressing Information Asymmetries through Enhanced Social Disclosure in Canadian Securities Law” (2009) 47:3 Can Bus LJ 435.

[52] 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.

[53] 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.

[54] If firms know that markets are watching them, they are incentivised to act in way that seem desirable to the markets.

[55] That is, by claiming they are more moral and make more money, they have the moral high ground against their competitor companies who may only make money while committing morally repugnant acts.

[56] ESG, currently conceived, is too easy a solution to the dilemma of morality and money, and the recent fads are propagated by professionals in the ESG space profiting from this trend.

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

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

[59] 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.

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

[61] Imagine, for example, having to sift through a box full of diligence materials on a company within a week; now, 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 the psychological limitations.

[62] Disclosure is a means to an end of ensuring investors make informed decisions. Investors do not want information for its own sake; rather, investors want more information to make more informed investment decisions. It can also have the effect of increasing efficiency and reducing agency costs since investors will not have to devote resources to find this information. The policies structure the disclosure system to incentivise disclosure by penalizing nondisclosure.

[63] 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.

[64] After all, according to some skeptics, this is the direction capital markets are headed in.

[65] We can push the scenario further. Imagine the shareholders of a company are only concerned with maximizing immediate returns and do not care about ESG or any moral contributions it makes. Now imagine the director is particularly concerned with moral causes and sincerely believes that going against the immediate interests of shareholders and investing in ESG is the best decision. We know that directors in Canada have a plurality of stakeholders beyond shareholders, but we might question whether the director violated a duty owed to shareholders. At this point, we might question whether moral decisions can be business decisions; moreover, we might question whether a stakeholder’s interests can go beyond money and whether it would be correct to defend a stakeholder’s moral interests.

[66] Stephanie Ben-Ishai, “A Team Production Theory of Canadian Corporate Law” (2006) 44:2 Alta L Rev 299.

[67] It is important to recall the May 2018 amendments to the CBCA, which were supposed to come into effect July 2021. First, some corporations are required to have discrete voting and no longer allow slate voting for elections for directors. Second, public companies are required to implement majority-voting in uncontested elections, which supersede Toronto Stock Exchange majority voting policies; additionally, shareholders can vote for or against nominees in uncontested director elections rather than withholding shares from voting.

[68] Canada Business Corporations Act, R.S.C. 1985, c. C-44 [CBCA]; Ontario Business Corporations Act, R.S.O. 1990, c. B.16 [OBCA].

[69] Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 122(1)(a) and (1.1); Ontario Business Corporations Act, R.S.O. 1990, c. B.16, s. 134(1)(a)

[70] Edward J. Waitzer & Douglas Sarro, “The Public Fiduciary: Emerging Themes in Canadian Fiduciary Law for Pension Trustees” (2012) 91:1 Can B Rev 163.

[71] Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68.

[72] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69.

[73] J. Anthony Vanduzer, “BCE v. 1976 Debentureholders: The Supreme Court’s Hits and Misses in Its Most Important Corporate Law Decision since Peoples” (2010) 43:1 UBC L Rev 205.

[74] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, at para 81.

[75] Hodgkinson v. Simms, [1994] 3 SCR 377, at p. 422.

[76] The business judgment rule gives a fair bit of room for discretionary decision-making which can end up with short-term approaches instead of long-term care towards ESG. If short-term options are within a reasonable range, then in order to counter-act this we need to increase accountability and stringency through laws. Still, directors should have discretion in terms of which issues are material for a sustainability strategy as well as how to integrate ESG factors into operations. The financial market requires a critical mass of investors to invest in companies that have long-term ESG plans. This will create reputational pressures not to freeride or deviate from market norms. Market norms are a powerful tool for self-regulating among market players without the need for legal intervention. However, establishing new market norms among sophisticated parties can be challenging. Often, long-term sustainability undermines short-term returns. Arguably, the prevalent structure of corporate governance incentivises short-term returns. Management is expected to maximize returns in the short-term for investors. Compensation options for directors incentivise short-term actions and shareholders often penalize long-term strategies through their vote in board elections. There remains an issue that current incentives to create short-term returns for shareholder undermines a long-term ESG plan.

[77] See Unique Broadband Systems Inc., Re, 2014 CarswellOnt 9327 (Ont. C.A.), at paragraph 72

[78] Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 241

[79] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, para 72.

[80] Moreover, under section 122 of the Ontario Securities Act, directors and officers can be sanctioned if they authorized a breach by the issuer; if they are found to have acted contrary to public interest, they can be prohibited from acting as a director or officer and be ordered to pay penalties. All actions applicable to financial disclosures, in theory, should apply to ESG related disclosure, such as class action litigations (see section 130 of the OSA).

[81] I should stipulate that I do not aim to dive deeply into philosophical issues or policy analysis.

[82] Li-Wen Lin, “The “Good Corporate Citizen” beyond BCE” (2021) 58:3 Alta L Rev 551.

[83] Jennifer Nadler, “What is Distinctive about the Law of Equity?” (2021) Oxford Journal of Legal Studies.

[84] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, at para 71.

[85] Aaron Dhir, Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity (Cambridge: Cambridge University Press, 2016).

[86] Poonam Puri, “The Future of Stakeholder Interests in Corporate Governance” (2009) 48:3 Canadian Business Law Journal 427-445.

[87] 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.

[88] The heterogeneity and varying demographics can unlock new perspectives, talent, and business acumen which were previously supressed. 

[89] If external incentives of attracting potential shareholders is too weak a foundation to ground the future of voluntary ESG disclosure, then we might look to the internal structure of the corporation for answers.

[90] COVID-19 is one recent example of an unforeseen risk which decimated businesses and had profound impacts on business risk analysis. 

[91] Canada Business Corporations Act, R.S.C. 1985, c. C-44, ss. 83(4), 118(2), 146(5), and 226.

[92] Neil C. Sargent, “Corporate Groups and the Corporate Veil in Canada: A Penetrating Look at Parent-Subsidiary Relations in the Modern Corporate Enterprise” (1987) 17:2 Man LJ 155.

[93] Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2.

[94] Although it is difficult to conceive of this in legal terms because the environment and future generations do not have legal personhood. We might ask who may bring such causes of action. One answer might be the government as they act as the guardians of these interests. Alternatively, we may understand this in slightly more modest terms as stakeholders.

[95] A shareholder might have a right to know about ESG disclosure and a right implies a corresponding duty.

[96] Similar problems are found in the investment sphere where “ESG investing” can trigger a fiduciary duty. ESG investing is a fairly broad term meant to capture an investment strategy that prioritizing a company’s ESG as being ideal for risk-adjusted returns. While directors and officers are not “investing” in the same sense, their decisions in steering the firm and managing its resources has parallels to investing.

[97] Edward J. Waitzer and Douglas Sarro, “Fiduciary Society Unleashed: The Road Ahead for the Financial Sector” (2014), 69 The Bus. Lawyer 1081.

[98] It is also possible to challenge the premise that shareholders actually do care about ESG. Imagine a shareholder population that is adamantly opposed to ESG and aggressively seeks directors that fulfil their anti-ESG agenda. This might lead one to conclude that directors have a fiduciary duty to pursue an anti-ESG agenda. Fortunately, in Canada, shareholder primacy does not inform a director’s fiduciary duty, and ESG can be responsive to multiple stakeholders. Still, even in jurisdictions with shareholder primacy, one can reasonably argue that anti-ESG objectives are oriented towards a short-term strategy and pro-ESG directions may still act in the shareholder’s long-term interest. Directors may still be incentivised to keep shareholders happy so they can avoid being replaced by shareholder votes, but there is little to do about attitudes in the general population that staunchly oppose ESG concerns; after all, in a liberal democracy, we are free to hold views and use our capital power to reflect these views, and forcing the choice to exercise choices of private capital is an unacceptable form of paternalism. 

[99] Paul Halpern, Michael Trebilcock & Stuart Turnbull, “An Economic Analysis of Limited Liability in Corporation Law” (1980) 30:2 U Toronto LJ 117.

[100] Steve Lydenberg, “Reason, Rationality and Fiduciary Duty” (2014), 81 J. Bus. Ethics 365.

[101] One issue that undermines this point is that ESG disclosure is being gamified. For example, stricter disclosure requirements for public companies can incentivize them to go private or change their business structure. This avoidance strategy is just one route companies can take to gamify for their own gain at the detriment of everybody else. Avoidance strategies must be considered for structuring an ESG disclosure regime.

[102] Abraham Singer, “Justice failure: Efficiency and equality in business ethics” (2018), 149:1 Journal of Business Ethics 97-115.

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

[104] By changing the way we think about a director’s responsibility (metaphorically, the corporation’s brain) we can understand the corporation beyond profit maximizing machine and move towards a more morally sensitive corporation.

[105] Icahn Partners LP v Lions Gate Entertainment Corp., 2011 BCCA 228.

[106] Consistent with skeptical views, corporations are largely responding to temporary market forces favoring detailed ESG disclosure, and the resultant positive moral or ethical policy objectives are also contingent on temporary market forces.

[107] In general, they aim at incentivising good behavior from corporations and disincentivized bad behavior through penalties.

[108] We can try to explore how to incentivise both internal and external stakeholders to care about ESG. We should start by distinguishing duties between current shareholders and potential shareholders. This is important because the duties to current shareholders relate to corporate governance whereas duties to potential shareholders relate to securities disclosure regulations. Failing to consider the long-term value of ESG should be understood as a failure of fiduciary duty understood broadly, and this should be disclosed to potential investors on the outside. This becomes an issue of internal corporate governance and disclosing this issue of corporate governance to the public.

[109] 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.

[110] Some understand there to be dilemma arising for directors to either follow corporate law or securities law. For example, it is entirely possible that a director may use ESG regulation to look after long-term interests in bad faith and in violation of fiduciary duties owed to shareholders. However, these cases are marginal and the real issue is harmonizing the objectives between these two legal frameworks.

[111] YBM Magnex International Inc (Re), [2003] 26 OSCB 5285.

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

[113] 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.

[114] 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.

[115] Moreover, specialist employees in charge of ESG should be a welcomed addition to the growth of the company. Incidentally, ESG is also crucial for capital raising and M&A, but it is also important for shareholder activism and executive compensation. 

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

[117] Richard E. Mendales, “Intensive Care for the Public Corporation: Securities Law, Corporate Governance, and the Reorganization Process” (2008) 91:4 Marq L Rev 979.

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

[119] Principles-based regulation can stop gamification of prescriptive rules since it increases the individual accountability for companies and their actions; moreover, this can give a broader scope of enforcement actions and consequently better protect investors.

[120] 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.

[121] An important policy aim is to encourage the growth of the capital markets.

[122] Anita Indira Anand, “An Analysis of Enabling vs. Mandatory Corporate Governance Structures Post-Sarbanes-Oxley” (2006) 31:1 Del J Corp L 229.

[123] A clear instance is in pecuniary or value terms of avoiding future risks or the immediate value-add of ESG; although, this may need more specificity since ESG is such a broad term.

[124] As noted in section 1.1 of the OSA, the statutory and public policy goal of the security regime is investor protection, capital market efficiency, and public confidence in capital markets.

[125] Eric Talley, “Turning Servile Opportunities to Gold: A Strategic Analysis of the Corporate Opportunities Doctrine” (1998) 108:2 Yale LJ 277.

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

[127] Mohammad Fadel, “BCE and the Long Shadow of American Corporate Law” (2009) 48:2 Can Bus LJ 190.

[128] The upshot of this is that in no case should a trustee’s personal morality about ESG be a consideration for investing in ESG. Notably, the fiduciary duty derives the trust law whereby a trustee holds an asset for the benefit of the beneficial owner. In the securities market, intermediaries have this role and owe a fiduciary duty where there is a reasonable expectation.

[129] Max M. Schanzenbach & Robert H. Sitkoff, “Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee” (2020) 72 Stanford Law Review 381.

[130] Cynthia Williams & Jill E Fisch, “Request for rulemaking on environmental, social,

and governance (ESG) disclosure” (2018) Commissioned Reports, Studies and Public Policy Documents Paper 207.

[131] 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&gt;

[132] 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&gt;

[133] 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&gt;

[134] 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&gt;

[135] 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.

[136] 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>

[137] 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&gt;

[138] 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&gt;

[139] 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/&gt;

[140] 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.

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

[142] Different asset classes have different ESG risks and issues. Venture capital, fixed income, private equity or debt have specific strategies that intersect with ESG; more obviously, infrastructure and real estate have environmental concerns. Smaller start-ups have little resources for ESG, but they have a better opportunity to build their board policies around ESG.

[143] 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&gt;

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

[145] 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&gt;

[146] 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.

[147] It is important to note the limitations of this essay. It would be too ambitious to spell out the details of securities law, corporate law, or comparative perspectives. Additionally, many claims around morality or goodness are contentious and required empirical support.