1 Setting the Scene – Sources and Overview

1.1 What are the main substantive ESG-related regulations?

There are a variety of ESG-related regulations applicable to federally and provincially incorporated companies; however, the focus of this chapter will be on public companies that qualify as "reporting issuers" under applicable Canadian securities and corporate laws, with references to general Canadian corporate law and specific section references to the federal Canada Business Corporations Act ("CBCA").

In compliance with the CBCA, corporate directors are required to manage, or supervise the management of, the business and affairs of a company; and in doing so, directors must comply with their fiduciary duty and duty of care. The duty of care standard requires directors to act honestly and in good faith with a view to the best interests of the company as it relates to both near-term and long-term goals. Considerations applicable to this standard of care may also require the contemplation of certain factors such as environmental, land and water impact and conservation and/or stakeholders' interests, which could include individuals and organisations such as shareholders, employees, retirees and pensioners, creditors, consumers, governments, and the affected communities. When exercising their duty of care and taking corporate action that will affect stakeholders, directors should treat each stakeholder group equitably and fairly and, in resolving competing interests, the directors should evaluate and assess stakeholder interests alongside the best interests of the company with the view of creating a "better" company.

As ESG incorporation relates to the consideration of environmental, social and governance considerations in respect of a business, a directors' fiduciary duty, broadly speaking, could encompass a duty to manage and oversee ESG-related matters relevant to the company, especially in the application of risk management, risk mitigation and governance, which may include actively addressing certain challenges and opportunities in the context of specific environmental and social ("E&S") matters.

In Canada, the regulation of capital markets is a matter of provincial and territorial jurisdiction, and while each province and territory has its own securities laws, regulations and rules administered by a local securities regulator, these local securities regulators who form the Canadian Securities Administrators (the "CSA") have adopted national instruments and policies that apply in all Canadian jurisdictions. Collectively, these securities laws, policies, rules and instruments are referred to in this discussion as the "Canadian securities laws".

Substantive ESG-related requirements are prescribed by the CSA under applicable Canadian securities laws and the rules of the Toronto Stock Exchange (the "TSX") and, for the most part, securities laws relating to ESG-related requirements, disclosure and best practices have been harmonised through national instruments and national policies adopted by all of the Securities Commissions. Corporate governance disclosure and best practices are governed by National Instrument 58-101 Disclosure of Corporate Governance Practices (the "Corporate Governance Rule") and National Policy 58-201 Corporate Governance Guidelines (the "Corporate Governance Guidelines").

By mandating corporate governance-related disclosure, which is generally to be included in an issuer's management proxy circular, the goal of the Corporate Governance Rule is to provide greater transparency on how issuers apply various corporate governance principles. While the CSA require issuers to disclose how they deal with certain matters, they also recognise that many corporate governance matters cannot be prescribed in a "one size fits all" manner and neither the Corporate Governance Rule nor the Corporate Governance Guidelines are intended to prescribe or restrict specific governance matters. The Corporate Governance Guidelines are thus meant to reflect "best practices" that have been formulated with desirable corporate governance principles in mind. Issuers can choose to apply or follow the best practices as set out in the Corporate Governance Guidelines, in whole or in part, depending upon their own unique circumstances, or to explain how they achieve the goals of the related corporate principles.

The "best practices" set out in the Corporate Governance Guidelines include the requirement to adopt a written code of business conduct and ethics, which applies to not only the employees but also the board of directors of the issuer. Although the content and tone of the code are left to the issuer's discretion, the Corporate Governance Guidelines recommend that the following matters be covered by the code: conflicts of interest; protection of corporate assets; confidentiality of corporate information; fair dealing with security holders and others; compliance with laws; and reporting of illegal or unethical behaviour. While these subject areas may be seen to form the

core "ethical" components of an internal ESG framework, given the broad scope of matters covered by ESG, a number of social and governance matters have evolved to be covered expressly under applicable codes of conduct or ethics. These include human rights protection, anti-harassment and workplace wellness, supply chain governance and community relations as well as anti-bribery and corruption. However, these are often if not always accompanied by more specific ESG-related policies, reports or disclosures.

The TSX also substantively regulates governance through various policies or restrictions. These include requirements relating to director independence, as well as restrictions against staggered boards and slate voting through the requirement for annual elections for individual directors. The TSX also requires its listed companies to adopt majority voting policies, which require voluntary resignation by directors who fail to garner a majority of "for" votes in director elections.

1.2 What are the main ESG disclosure regulations?

Reporting issuers are subject to specific reporting requirements in periodic disclosure documents required to be filed under applicable Canadian securities laws. These include Financial Statements (in accordance with the International Financial Reporting Standards ("IFRS")), Management's Discussion & Analysis ("MD&A", under Form 51-102 F1), Annual Information Forms ("AIFs", under Form 51-102 F2), and Information Circulars (under Form 51-102 F5) which include Executive Compensation (under Form 51-102 F6) and Disclosure of Corporate Governance Practices (under Forms 58-101 F1 and F2).

In addition to these periodic disclosure requirements, reporting issuers are also required to make timely disclosure of material changes (under Form 51-102 F3) and, under applicable TSX Rules, timely and accurate disclosure of material information. These general periodic and timely disclosure requirements encompass various disclosures relating to ESG issues under Canadian securities rules, and the CSA encourage reporting issuers to demonstrate ESG considerations in their applicable disclosure filings. Certain of these requirements are discussed in further detail below.

Pursuant to the Corporate Governance Rule and Form 58-101 F1 Corporate Governance Disclosure ("Form 58-101 F1"), reporting issuers are required to disclose certain prescribed information relating to board and committee duties and responsibilities as well as board independence, composition, education, and board and committee self-assessments (which requirements differ among venture companies and those listed on the TSX or other non-venture exchanges). While these requirements have remained relatively static since inception, they were substantively expanded to include prescribed disclosure with respect to the representation of women on boards of directors (the "Diversity Disclosure").

Generally, the Diversity Disclosure follows a "comply or explain" model, which does not require issuers to adopt any particular form of policy with respect to board appointments and the appointment of senior management. Rather, the approach provides flexibility and allows issuers to determine the considerations and policies with respect to board nominations and the appointment of senior management that are appropriate to their particular circumstances.

Under these rules, an issuer is required to include disclosure as set out in Form 58-101 F1 in its management information circular any time that the issuer solicits a proxy from a security holder for the purpose of electing directors to its board of directors (or the equivalent).

Under Form 58-101 F1, each TSX-listed reporting issuer to whom the Corporate Governance Rule applies, is required to disclose the following:

  • Whether the board has adopted term limits for directors or other mechanisms for board renewal, and, where adopted, a description thereof.
  • Whether the issuer has adopted a written policy relating to the identification and nomination of women directors, and, where adopted, a summary of its objectives and key provisions, the measures taken to ensure that the policy has been effectively implemented, annual and cumulative progress by the issuer in achieving the goals of the policy and whether and, if so, how the board or its nominating committee measures the effectiveness of the policy.
  • Whether and, if so, how the board or nominating committee considers the level of representation on the board in identifying and nominating candidates for election or re-election to the board.
  • Whether and, if so, how the issuer considers the level of representation of women in executive officer positions when making executive officer appointments.
  • Whether the issuer has adopted targets for women on the board and in executive officer positions, and, if adopted, disclosure of the target and the annual and cumulative progress of the issuer in achieving such target(s).
  • The number and proportion (as a percentage) of directors on the issuer's board and of executive officers of the issuer and its major subsidiaries who are women.
  • Where an issuer has not adopted any of the components described above (i.e., term limits, policies, targets) or does not consider the representation of women on its board or among its executive officers in identifying candidates for such positions, the issuer must disclose why it has not done so.

Under the Corporate Governance Rule and Corporate Governance Guidelines, the CSA may periodically review compliance with these requirements and may order prospective and/or corrective disclosure, but also have the authority to enforce these through other enforcement mechanisms.

While the Corporate Governance Rule focuses on gender representation, amendments to the CBCA that came into force in 2020 expand annual disclosure requirements respecting term limits, diversity policies, and statistics regarding representation of women to include Aboriginal peoples, persons with disabilities and members of visible minorities. These amendments to the CBCA are further discussed in questions 1.4 and 2.2.

With respect to specific issues related to environmental compliance, risks and opportunities, the CSA have published guidance under Staff Notice 51-333 Environmental Reporting Guidance to provide insight on satisfying existing continuous disclosure requirements with respect to environmental concerns. In the context of a wide range of environmental issues, Staff Notice 51-333 focuses on the following types of disclosure:

  • Environmental Risks and Related Matters. The five key disclosure requirements in National Instrument 51-102 that relate to environmental matters are: environmental risks; trends and uncertainties; actual and potential environmental liabilities; asset retirement obligations ("AROs"); and the financial and operational effects of environmental protection requirements, including the costs associated with these requirements.
    • Environmental Risks: Issuers are required to disclose risk factors relating to the issuer and its business under item 5.2 of Form 51-102 F2. These risks include litigation risks, physical risks, regulatory risks, reputational risks, and risks relating to business model.

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