As the team lead of Aird & Berlis’ ESG and Sustainability Group, Melanie Cole details the latest in voluntary ESG and sustainability reporting and how counsel can help guide their clients through it.
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Greg Hudson [00:00:07] Hello, I'm Greg Hudson, welcome to Lexpert TV. New global standards are being formulated in regards to environmental, social, and governance related disclosures. It's a reporting landscape that has long been criticized for being overly complex. What are the current implications for Canadian businesses? And what lies ahead? How can legal counsel best assist their clients in this emerging field? Today, I'm speaking with Melanie Cole, Leader of the ESG and Sustainability Group at Aird & Berlis, this new practice area is a cross disciplinary group formed to recognize the increasing importance of ESG solutions, and to ensure their seamless integration into the business practices of clients. Melanie, thank you so much for being with us.
Melanie Cole [00:00:53] Thank you for having me.
Greg Hudson [00:00:55] Why are ESG and sustainability issues important to your practice, and the clients who serve?
Melanie Cole [00:01:01] Well ESG these kinds of matters, as you mentioned in the introduction, are becoming so much more important to so many different types of stakeholders. So governments investors, you know, both private and public companies and their stakeholders. And so as a result, questions from our clients regarding ESG. And both mandatory and voluntary measurement and disclosure are becoming a lot more frequent. And so ESG is sort of one set of tools that as lawyers we can apply to, to assist our companies. And they're used to sort of evaluate the sustainability, but also the ethical impact of an entity or an investment. And so as lawyers, we can help add, as part of our legal services, additional value, to the extent we have an understanding of these tools, and we have an ability to help our clients navigate what can be, as you said, a very confusing landscape. I think another reason this is becoming increasingly important to our clients is because it's industry agnostic, you know, it's applying to every industry and clients of all sizes and stages. So not just industries whose practices and disclosures have been sort of scrutinized, and sometimes highly publicized for, you know, direct environmental or social impacts, you know, thinking about a sector such as the mining sector, but it's starting to impact all industries, those that aren't traditionally attracting that kind of stakeholder attention, even, you know, technology companies, that kind of thing. And it's also as a result, affecting all the practice areas of our firm. So from real estate to litigation, to you know, our lending lawyers, and intellectual property tax. So it's sort of permeating all of these different areas of practice and ways we're helping our clients. I think, also, from a legislative perspective, a lot of jurisdictions, both in Canada and abroad, and our clients do business all over the world, they have begun developing or increasing the types of legislation that will require disclosure of a company's procedures and their practices around ESG. So we're seeing legislative change that, you know, our clients need to be aware of, I think, you know, from, from my perspective, we're, you know, we're in a service industry, and important part of my practice, I work a lot with public companies, and their disclosure practices, and, you know, lawyers in general, we're, you know, our job is to help our clients navigate risk and mitigate it. But also, you know, on the other hand, is to capitalize on opportunities. And I think ESG, you know, there's opportunities for both. And it's important to look at both sides. from a risk perspective, it's not just understanding the direct financial impact of these risks and how they sort of play out, including, you know, direct financial loss, but it's also looking at things that are that are broader, like reputational damage, you know, damage to a company's licensed to operate. And I think a lot of the discussion on ESG can focus on risks, and in particular, environmental risks. And this is part of why I think ESG, and the discussion around ESG has become a little polarized and politicized in some cases, you know, we've seen that'll, in particular in the US, but I think, as I mentioned, one of the most important things we can do for our clients is to look at ESG as a way of capitalizing on opportunities. And I think this is where we're seeing a real shift in the market and in the discourse, and it's looking at the link between ESG and opportunity identification. So part of the advantage of companies being aware and fully aware of the risks they face. You know, they're better positioned to spot opportunities, you know, opportunities to optimize your operations. Take advantage of new funding sources and tax credits, strengthen your, you know, position within the community and distinguish your business from those in the same sector or either similarly sized businesses.
Greg Hudson [00:05:13] So what's your advice to clients who aren't yet at the stage where they have sophisticated ESG measurements?
Melanie Cole [00:05:20] That's a good question. Because I think, you know, we see a lot of large companies who are have the kind of resources that they need to have dedicated ESG teams or an even an individual and then, you know, sort of C suite position who's dedicated to tracking and measuring and reporting on ESG metrics. But many of the businesses that I work with both public and private, they would have a general understanding or awareness of ESG as a concept. But their businesses aren't necessarily at the stage where they're, you know, they've grown to a size and scale, or a level of resources where they have that kind of dedicated individual or team. So for companies, a lot of our companies who are in this more early stage, the emphasis is, and rightly so on, on growth on scaling the business on investor returns. And, you know, a lot of these companies have to consider, you know, their early stage investors and what the expectations of those investors are from a financial perspective. So I think, in that context, the world of ESG, can be really tough to navigate. And I think part of this, and part of the reason for this, and again, you mentioned this in the introduction is that it's there's a lack of standardization. And although this is changing, there's various bodies globally have developed standards. So there's the Global Reporting Initiative, there's the Task Force on climate related disclosure, there's the Sustainability Accounting Standards Board. And so there's this sort of, you know, plethora of reporting and measurement frameworks to choose from. And what that's led to, is, it's very difficult in the context of disclosure, for example, to make an apples to apples comparison between companies and their ESG measurement and performance. So this has caused confusion, and for a company that doesn't have the resources to dedicated resources for ESG. Recording, this can cause a lot of confusion and make it a tough area to navigate. So, you know, for those companies that are at that stage, you know, what I tend to do is, you know, before you sort of consider reporting and what that might look like, we want to work with our clients to figure out what ESG means for them and their business in particular. And part of that is being cognizant of the resources that a company has, and how to integrate those ESG considerations in a practical way, just like any with any legal advice, you need to tailor it, you need to meet the company or the entity where it is, I think, one piece of advice is, you know, it can it be can be good to sort of work backwards, to sort of pick a reporting framework that can essentially for the smaller companies serve as a checklist. So you can highlight what the entities should be aware of in their operations from a sustainability based perspective. So the first step in my view is to identify the issues from an ESG perspective that are most relevant to a particular company. And part of that is, you know, to do a sort of the materiality and or gap analysis, and to sort of populate that, that checklist, so to just substantively determine where the company should be. And part of that is looking at peers in your industry of different sizes, at the same size to see sort of how companies are navigating this, you can look to external experts, what are external experts to say about the industry? Are there certain forecasts, or, you know, ways that you can remain competitive? Are there industry benchmarking standards in your particular industry, I think another really important thing is talking to your actual stakeholders. So understand what your stakeholders are seeking, not just your investors, but also your regulating bodies, your lenders, your banks, and your employees, and also the community that you're operating in the community that you're relying on for your business to be successful, the broader community. And so once this is done, it can help you to sort of identify, Okay, what are the tools we need to track and measure these very important things to our business. And so once you've done that sort of analysis, you can sort of work on the other half. So and that takes a lot of internal coordination to do to integrate this into your strategic planning. And so you can either once you've identified those important issues, you can sort of move from that starting point. So where an entity is to where they want to be or should or maybe shouldn't be, and this involves an honest consideration that we're a company is and you know, a transparency and an openness about where you are, it's not a standard of perfection. And I think it's important to say that ESG, and this kind of framework is something that is evolving. It's like a living thing, right? It's something that needs to be refreshed over year over year, it's not something that you said, Okay, well, we've, you know, checked a ESG box, and we can now not worry about it anymore. You know, as an entity grows, as it goes into different areas of business, it can commit more resources to its ESG, and also measure it more accurately and report in a more forthright manner. So, you know, and I think it's just important to mention, maybe before we move on to the next question, that ESG disclosures aren't about achieving a level of perfection, it is something that evolves. And so, you know, there's a lot of, you know, disclosure or discourse out there about greenwashing. And there's lots of articles. And we've written an article here in Aird & Berlis about greenwashing. And, you know, the tendency of companies to overstate their accomplishments. And I think the way that you can avoid this is by having a very solid strategic foundation. On the other hand, there are companies that are afraid to disclose they're afraid to sort of wade into the waters in ESG, because concerned about criticism, and afraid to disclose what it is they're doing and what they have not yet been able to do. So I think we need to understand that this is starting from a place of honesty, and, you know, forward looking perspective is really important. I think that would probably what I'd say to that kind of stage of company.
Greg Hudson [00:11:34] What are the current ESG related requirements for Canadian companies? for public companies?
Melanie Cole [00:11:40] So public companies, you know, there's a robust disclosure framework, as you know, in place for Canadian public companies. And I think that disclosure of risks and how they may impact company's ability to meet their business objectives and milestones is something that's sort of embedded in, in disclosure requirements already in in Canada, both in continuous and in periodic disclosure requirements. So I think that that's already part of what companies are considering or should be considering when they're drafting key disclosure documents and press releases and things like that, and their communications with their investors in particular. But from an ESG reporting perspective, specifically, it's largely still a voluntary exercise. So there are a few key and emerging sort of areas that are, you know, becoming important, but generally speaking, robust ESG reporting is something that's done by very large, sophisticated companies, largely those that are traded on large exchanges. However, I think there's what's the legal requirement? And there's what, what is the expectation? So what do investors expect? What does the general public expect watchdog agencies, investor, you know, institutional investor advisors? What are the expectations of those parties? And I think that is a different question. Because for many of these companies, ESG disclosure, and measuring and monitoring has been sort of become sort of market. And so I would say that there's kind of a soft law obligation where the penalty for failing to disclose in particular for these larger companies, it's a failure to meet external and sometimes even internal expectations. It can be just an opportunity cost, or there could be reputational damage. I think in terms of what are the mandatory ESG disclosures from a governance perspective, public companies, both those listed on large exchanges, and those on Junior exchanges do have governance, reporting obligations that they need to put each year in their management information circular, that are evolving over time. And the CBCA, the Canadian Business Corporations Act has recently included mandatory disclosure of diversity. So there are some legislative changes that are happening. I think, something that, you know, is timely, because it's going to sort of in the next few months by early 2024, become very relevant for companies is new legislation. It's called Bill S-211. And it's legislation introduced by the federal government to combat forced labor and child labor in a company's supply chain. And so this legislation sets out new import bans. And it requires not just federal government agencies, but also a broad range of other public and private entities, including international companies that conduct business or hold assets in Canada over a certain threshold to report on the steps that they've taken to reduce but also prevent the risk of forced labor and child labor in their supply chain. And so this is a new requirement. And so entities that are going to need to report, you know, what's happening in their supply chain from a forced and child labor perspective, although it's not required under the law, it is required in certain legislation, for example, legislation at of the UK companies, they have a reporting obligation, but there is an actual due diligence obligation. And I think a lot of companies in putting together this report are going to want to think about what kind of due diligence they're going to want to do, even though it's not mandated by the legislation, to sort of track the effectiveness of their frameworks. And to look at the real risks of forced labor and child labor or labor and how they can be reduced. You know, I think companies are increasingly putting in place supplier codes of conduct and things like that. And I think that there will be some, you know, I think companies as they're needing to put these kinds of reports together, entities are going to want to train their directors, they're going to want to change their officers and their internal personnel who are focused on the supply chain, to, you know, understand these obligations, and perhaps proactively review and update their contracts with their existing suppliers, to ensure that, you know, any risks that are associated with this type of labor are really promptly addressed and mitigated. There's also, it's not yet enforced, but there's in companies should be mindful that there's upcoming legislation, national instrument 51-107 by the Canadian Securities administration, which involves disclosure of climate related matters. So, you know, there's I won't go into it in too much detail. But there's a number of proposed mechanisms in the proposed legislation. So governance recommendations, risk management strategies to mitigate climate change issues, and the goals the entity has set for reducing its greenhouse emissions of different types. So I think that that's something that is likely to come into force in the next while that will involve additional reporting, in particular on, you know, from a climate change perspective.
Greg Hudson [00:17:15] What are some other trends that you see happening with ESG? Reporting? And where do you where do you see ESG? heading in the future?
Melanie Cole [00:17:22] Yeah, I mean, I touched on it a little bit in the previous questions, but I think creasing number of jurisdictions internationally, and even in Canada, they're making ESG reporting and disclosures mandatory, we tend to lag a few years behind the EU in the UK on these matters. But I think we can probably expect that our legislation will continue to move in the direction of mandatory disclosure and measurement. And I think not only this, but I think it's an important way that Canadian businesses can stay competitive in a global marketplace. I think ESG reporting is important, because it's about remaining transparent to a wider range of stakeholders. And I think this can lead you, like I said, other opportunities. And I think risk management and looking at that, and, you know, in a global sense can be very attractive to potential investors, you know, particularly younger investors who are thinking about some of the social and environmental government's impacts of their investments. And I think it's important to, to show again, that Canadian companies have the same kind of level of sophistication as their international peers, and that they can operate at that same level. I think we'll see also continued escalation of some sustainable financing opportunities. ESG investing, for example, and I think there are a number of sustainable finance instruments, we did put it in our article about this inevitable list again, about, you know, some interesting sources of funding, looking at sustainability, linked loans, sustainability, like bonds, green crown, crowdfunding, social impact bonds, that kind of thing, that are, you know, increasingly sort of coming into the consciousness of lenders and others, I think we'll continue to see, you know, like we saw in last year's budget, increased sort of government incentives and opportunities to invest and incentivize sustainable products and services and business that is conducted, you know, with ESG, front of mind. I think also, this will all become more prescriptive over time, not only requiring the disclosure, but you know, for example, looking at the supply chain issue, mandating practices, diligence and other concrete actions that companies need to make and not just disclosing the sort of more of a complier explain kind of model. I think biodiversity is something that we're hearing a lot about, and I think we'll see an increased focus on how to protect and restore biodiversity and particular for certain industries. I think from our corporate statute perspective, I think we'll see increased revisions in Canada to reflect the growing ESG focus. You know, just like for the CBCA mandatory diversity disclosure, I think we'll probably see increased shareholder proposals in the ESG space. So particularly around diversity inclusion issues, which time to be, you know, these kinds of proposals from shareholders and public company sense, tend to be some of the first indications of a shift in terms of investor sentiment, you know, such as, you know, tying executive compensation to the achievement of ESG goals. And I do think we'll see, and we're already seeing with the ISSB guidelines, and the Canadian guidelines that are sort of to follow will see an increase standardization of these frameworks to make this space, less confusing, easier to navigate, and something that companies can apply to their operations and to their strategic planning from an early stage in a more clear way. So I think that those are some of the trends that we'll see. And I think it's a it's a rapidly evolving space and one that I'm really happy to be involved in.
Greg Hudson [00:21:18] Well, thank you so much for giving us this insight into this rapidly evolving space. Thank you for taking the time, Melanie,
Melanie Cole [00:21:25] Thanks very much. I really appreciate having me.
Greg Hudson [00:21:27] My name is Greg Hudson for Lexpert TV. Have a great day.