On January 13, 2022, Fasken and Laurel Hill Advisory Group ("Laurel Hill") hosted a webinar on environmental, social and governance ("ESG") considerations, with a focus on the climate change aspects of ESG that will be relevant to public companies. The webinar's panelists were Cheryl Gasparet of ATS Automation Tooling Systems Inc. ("ATS"), Bill Zawada of Laurel Hill, Tanneke Heersche and Kai Alderson of Fasken and was moderated by Gordon Raman of Fasken.

For a further discussion of these items, please see the Fasken Proxy Season Preview 2022 webinar to watch the webinar and the Timely Disclosure: Proxy Season Review 2022 for a write-up on recent developments in corporate governance.


For a number of years, the "E", or "Environment", in ESG has been a major focus for companies in industries that have traditionally had environmental impacts. Such companies include those in extractive, petroleum, industrial and chemical industries. Today, the scope of environmental matters has broadened and climate change in particular is increasingly becoming an overarching topic that impacts all companies. There is a greater focus on greenhouse gas ("GHG") emissions and the ability of companies to address how climate change may impact their business. Investors expect accurate climate-related disclosures from companies in order to assess companies on several dimensions, including their environmental impact, how resilient their profits will be when faced with the impact of climate-related environmental and regulatory change, and to identify which companies are best positioned to seize opportunities presented by climate change.

The "S", or "Social", in ESG addresses issues that relate to the "rights, well-being and interests of people and communities" as described by the United Nations Principles for Responsible Investment ("PRI"). How companies manage their relationships with various stakeholders such as employees, communities, suppliers, customers, etc., is becoming increasingly important. Investors are particularly interested in, and differentiate based on, companies that are managing these relationships in a more sustainable manner over the longer-term. COVID-19 in particular has caused investors and companies to focus on their employees' health, safety and well being, and this is expected to carry through into the future.

The "G", or "Governance", in ESG addresses the oversight role of boards of directors. Key indicators of good governance in companies include the independence of directors and the proper oversight by the board of directors over management, the purpose and culture of the organization, risk management efforts, executive compensation, and appropriate reporting and disclosure. Good governance not only inspires investor confidence, but also potentially a favourable view by regulators, thereby helping enhance the "brand" of the company.

What has evolved this past year from the perspective of Investors and Companies


The most notable evolution over the last year has been the intersection of ESG and shareholder activism. Activism has largely been driven by financial and governance considerations, but recently the environmental and social issues have become key drivers. Global events, including the pandemic, severe climate disasters, the Black Lives Matter movement, as well as efforts to advance Indigenous reconciliation in Canada, have galvanized stakeholders to seek greater accountability and disclosure for climate change and equity, diversity, and inclusion. The trend has also found support with large institutional investors who have become very receptive to ESG activist ideas, not only because of the positive benefits for society, but because of the perceived potential for greater returns, especially over the longer term. As a recent example of the activism trends in practice, a new ESG activist hedge fund, Engine No. 1, with only 0.02% stock ownership of Exxon Mobil, was able to install three directors onto the board that had stronger environmental credentials by campaigning and influencing the vote of large institutional shareholders.

Investor View

Investors across the globe have been flocking to ESG assets, with the consensus now being that responsible investment and strong ESG practices lead to lower risk and better long-term returns. In the past year, according to the PRI, ESG assets under management have grown by 17% and could reach a third of all projected capital markets assets by 2025. In addition, the number of signatories under the PRI has increased by 26% since 2020. The growing interest in responsible investment, spearheaded by initiatives such as Say-on-Climate and Climate Action 100+, have led to shareholder proposals being put forth specifically related to climate change. In Canada, environment and social issues were the dominant factor in shareholder proposals, accounting for over 60% of them in 2021. The average support amongst voting shareholders on these proposals has also seen a steady upward trend in the past five years.

Proxy advisory firms, Institutional Shareholder Services ("ISS") and Glass, Lewis & Co. ("Glass Lewis") have also kept pace with the increased attention on shareholder activism and ESG. Although ISS and Glass Lewis do not make voting recommendations based solely on ESG considerations, the have begun to include internally developed ratings in their reports to enable shareholders to make their own decisions on the company and management.

Corporate View

Companies in Canada are working hard with investors to respond to the changing landscape and are actively engaging on ESG issues. They are putting in place the frameworks to meet investor needs. As found by Millani's 5th Annual ESG Disclosure Study: A Canadian Perspective, in 2020, 71% of TSX composite companies issued a dedicated ESG report which is up from 36% in 2016.

Companies are now attempting to meet in the middle on these issues. For example, there was a recent shareholder proposal involving the TMX Group to report on programs and policies related to Indigenous employment, community relationships, and procurement. The proposal was initially opposed by management, but after some negotiation, a less prescriptive proposal was endorsed by management and overwhelmingly supported by shareholders. Although there has been a willingness by issuers to meet in the middle on many issues, there still appears to be a gap between investor desire and corporate response. While two-thirds of TSX Composite Index issuers are reporting on GHG emissions, only 27% of these issuers have established targets relating to these emissions. In addition, only a quarter of TSX Composite Index issuers have aligned their reporting with the Task Force on Climate-Related Financial Disclosures ("TCFD") recommendations. The TCFD was created by the Financial Stability Board to make recommendations to help mitigate climate-related risks in the financial system. While progress has been made and companies are making certain commitments, there are still improvements that can be made with the way companies interact with ESG. In discussing how ATS navigated sustainability, Cheryl Gasparet of ATS stated "[ATS] held a Kaizen event – a global event where we invited global leaders in human resources, health, safety & environment from different parts of the company to really sit down and think through what people are asking for but more importantly, really define what it is that we need to do to make sure we're protecting the sustainability of the company. We started looking at the United Nations sustainability goals and thinking about how they impact us and how we influence them, and then through the Kaizen process we defined and aligned really what our framework around sustainability needed to be for our company and that's where we defined our four major themes around people, ethics, responsible manufacturing and social responsibility."

Climate Change

The Paris Agreement is an international treaty that commits its signatories to take action to limit long term global temperature increases due to the impact of human activity to well below 2 degrees above pre-industrial levels, and to preferably limit the increase to 1.5 degrees. The Paris Agreement leaves it to signatory nations to set their own targets and devise policies to curb national emissions. In order to achieve the targets set by the Paris Agreement, countries will need to reduce global GHG emissions rapidly by 2030, and reach net-zero GHG emissions by around 2050. The expectation of a rapidly changing climate, and regulatory environment is driving companies and their investors to look more seriously at the climate issue.

Shareholder Expectations

The say-on-climate initiative was launched in 2020 by a United Kingdom hedge fund that works with non-governmental organizations, asset managers and asset owners. Its goal is to put forth say-on-climate resolutions and proposals at companies globally. These proposals create annual or periodic disclosure obligations by companies about their impact on the climate including GHG emissions, and what their plan is to manage those emissions. Disclosure with respect to these climate plans would then allow investors to evaluate management and the company's performance against their stated plan each year. In Canada, there have been successful proposals submitted and approved at large issuers including Canadian National Railway and Canadian Pacific Railway. However, reservations have been expressed by, among others, proxy advisory firms, that say-on-climate proposals and votes could insulate directors from accountability and that certain investors may have limited capacity or technical ability to properly assess these plans.

Securities Regulators Propose Disclosure Regime

On October 18, 2021 the Canadian Securities Administrators ("CSA") released proposed National Instrument 51-107 Disclosure of Climate-related Matters ("NI 51-107") and its companion policy for public comment. NI 51-107 would require mandatory climate-related disclosures by most Canadian public issuers including venture issuers, but would exclude investment funds and certain foreign issuers. If NI 51-107 is implemented by December 31, 2022, it would begin to impose mandatory climate-related disclosure obligations on non-venture issuers by March 2024 in respect of the 2023 fiscal year. For venture issuers, the mandatory climate-related disclosure obligations would apply by April 2026 in respect of the 2025 fiscal year.

The CSA proposed NI 51-107 as a means of enhancing the consistency and comparability among issuers in respect of disclosures related to climate-change and climate-related risks. In particular, the CSA highlights the following benefits of mandatory climate disclosure:

  • improve issuer access to global capital markets by aligning Canadian disclosure standards with expectations of international investors;
  • assist investors in making more informed investment decisions by enhancing climate-related disclosures;
  • facilitate an "equal playing field" for all issuers; and
  • remove the costs associated with navigating and reporting to multiple disclosure frameworks.

NI 51-107 would focus on the four main areas of climate-related disclosures that were recommended by the TCFD. The four main areas for climate-related disclosure under the TCFD framework are: Governance, Strategy, Risk management, Metrics and Targets.

  • Governance: Issuers would be required to disclose their board governance processes for managing climate-related risks and opportunities. These disclosures could include discussion of whether and how the board of directors integrates consideration of climate issues when deciding issues of corporate strategy and processes for monitoring implementation of climate plans and tracking against goals and targets. All issuers to which NI 51-107 applies would need to disclose information on governance, whether or not the issuer views this information as material.
  • Strategy: If material, companies would be required to disclose the impact of climate-related risks and opportunities on their business and financial planning based on short, medium, and long-term considerations.
  • Risk management: Companies would be required to disclose their processes for identifying, assessing, and managing risks as they relate to the company's business. These disclosures would require commenting on how the company assesses the significance of climate-related risks in relation to the other risks they disclose.
  • Metrics and Targets: If material, companies would be required to disclose the metrics the company uses to assess its climate-related risks and opportunities and the targets it has set to manage those risks. Reporting on actual GHG emissions would be on a "comply or explain" basis. An issuer would be required to disclose, or to explain why it is not disclosing its Scope 1 emissions (i.e., direct emissions by the company, such as from facilities and transportation), its Scope 2 emissions (i.e., energy, heat, cooling, and steam purchased by the company), and its Scope 3 emissions associated with its operations (i.e., indirect emissions that include the use and processing of products sold into the market, etc.). In addition, the CSA are seeking comments on an alternative approach to GHG emissions disclosures, in which all issuers reporting under NI 51-107 must report their respective Scope 1 emissions, with and disclose Scope 2 and Scope 3 emissions on a "comply or explain" basis.

Currently, issuers often disclose climate change-related information in voluntary sustainability or ESG reports rather than in mandatory securities disclosures. In contrast, NI 51-107 would require climate-related disclosures on governance to be included in an issuer's Management Information Circular, or if the issuer is not required to prepare one, its Annual Information Form ("AIF"), or its Management Discussion and Analysis ("MD&A"). Climate-related disclosures relating to the other three elements, strategy, risk management, and metrics and targets would be required to be included in an issuer's AIF or MD&A.

The CSA is seeking public comments on NI 51-107 by February 16, 2022. They have requested specific feedback on a wide variety of issues, such as whether emissions disclosures should need to be audited and the potential introduction of climate-related disclosures into prospectus requirements.

Net Zero Targets

The wave of public companies setting "Net Zero" targets in the run-up to COP26 last year shows no sign of peaking. Companies have been adopting climate targets for years, whether by promising to reduce absolute GHG emissions or GHG emissions intensity by a certain amount as compared to a baseline year, or by committing to "carbon neutrality", i.e. promising to purchase sufficient carbon offsets each year to balance the carbon dioxide emitted from their operations that year. In contrast, recent "Net Zero" commitments are more holistic, ambitious, and longer term.

"Net Zero" commitments are intended to be audacious: a corporate "moonshot" that will take many years to achieve. By adopting a "Net Zero" commitment, a company is promising that by a fixed date in the future, usually 2050 but sometimes earlier, the company will track the full range of GHG emissions that result from its business operations, reduce those GHG emissions to the extent feasible through its own internal efforts, and then finance sufficient climate-positive activities through voluntary carbon markets or otherwise to compensate for the climate change impacts of its residual GHG emissions. "Net Zero" targets are not about deferring action to the distant future. In order to credibly commit to "Net Zero" at a future date, companies must announce detailed climate action plans, monitor their performance against interim targets, and make staged investments in equipment and processes to lower their GHG emissions over time.

Why are companies adopting "Net Zero" targets if such targets go above and beyond what is legally required? Companies are proactively adopting such "Net Zero" targets to satisfy growing demands from institutional investors, financial markets and financial intermediaries who are concerned about the potential impact of climate change on company profits. And making credible commitments to "Net Zero" targets can also help to address concerns raised by the advocacy groups and ESG activists who are increasingly threatening divestment or climate-related proxy-voting campaigns.

Whether adopting a "Net Zero" target is meaningful to investors will depend on many factors including the nature of the industry in which a company operates. But the simple fact that a company is setting a target, and is taking climate-related risks seriously, may be the most meaningful outcome for many investors.


Greenwashing could occur in the climate space when companies publicize their climate-based initiatives in an attempt to comply with market-based climate demands and pressures but express their climate-related targets or performance in manner that is false or misleading. The risk of greenwashing allegations in respect of corporate climate claims is relatively high because the words and phrases used to describe such commitments often have a technical meaning, and climate policy is heavily contested in the public sphere.

Greenwashing may have legal implications under securities and competition law. The rise of environmental representations to the public have led to increase in consumer protection investigations and public and private enforcement. While the enforcement of greenwashing claims is evolving and there is no definitive bright line, companies can begin to address greenwashing risks in respect of their climate-related claims by ensuring that their climate targets and performance metrics are aligned with well-recognized methodologies and frameworks, they make no claims without adequate substantiation, and they have climate-related targets and performance claims that are evaluated by internal or external experts with technical knowledge who can identify when claims are potentially misleading. Most importantly, companies can reduce greenwashing risks by understanding what they are committing themselves to and then "doing what they say".

As boards of companies evaluate their approach to ESG issues and climate change in particular, they should continue to evaluate their approach regularly and critically. An example of the types of questions that boards could ask themselves has been suggested by a large portfolio manager in the article "The ESG Opportunity for Corporate Directors: 5 Questions for Board ESG Oversight":

  1. Is our Board focussed on the right issues?
  2. Does our Board have the appropriate skills and governance process for effective ESG oversight?
  3. Is the company taking a strategic or tactical approach to ESG?
  4. Is the company setting appropriate ESG key performance indicators and aligning incentives to them?
  5. How is your company reporting ESG issues?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.