The Modern Environment

The legal landscape relating to ESG in Canada, like many other jurisdictions, continues to evolve. Seemingly disparate regulatory initiatives are increasingly being merged, reflecting the interconnectedness and interdependency between the environmental, social, and governance (ESG) pillars. This interdependency has been further highlighted by the occurrence of extreme climate events, such as wildfires, flooding, and record high temperatures. Many governments have announced additional budget allocation for, or initiatives relating to, climate mitigation and adaptation, food security, land and water use planning informed by Indigenous knowledge, cumulative impacts, mandatory ESG disclosure obligations, and infrastructure resiliency.

ESG developments in Europe and the US continue to influence Canadian actions. 2023 saw foundations being laid for significant future progress towards meaningful and complete disclosure. Developments included:

• introduction of new federal legislation to require mandatory reporting on the risks of forced labour and child labour in supply chains;
• investigations into alleged human rights abuses by Canadian companies operating abroad;
• Canadians being granted a “right to a healthy environment”;
• continued efforts to achieve net zero by 2050, including proposed draft Clean Electricity Regulations;
• proposed adoption of mandatory ESG and climate-related disclosure requirements;
• responses to the call to broaden diversity in corporate governance beyond gender diversity through mandatory disclosure requirements;
• ongoing implementation of the objectives outlined in the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP); and
• promotion of more rigorous disclosure of ESG information, including in response to ESG-related litigation internationally.

Supply chains transparency

On 11 May 2023, the Fighting Against Forced Labour and Child Labour in Supply Chains Act (the “Supply Chains Act”) received Royal Assent. It introduces a public reporting regime as well as additional amendments related to forced labour and child labour. Certain entities must now submit a public annual report explaining the steps they have taken to prevent and reduce the risk that forced labour or child labour is used at any step of the production of goods in Canada or elsewhere by the entity, or of goods imported into Canada by the entity. The Supply Chains Act is similar, but not identical, to Australia’s and the UK’s supply chain reporting laws.

Reporting entities

Reporting entities include all Canadian federal government institutions and departments, Crown corporations and their wholly owned subsidiaries, as well as any other private sector “entity” that is:

• producing, selling, or distributing goods in Canada or elsewhere;
• importing into Canada goods produced outside Canada; or
• controlling an entity engaged in any activity described in points 1 or 2, with control defined broadly as any direct or indirect control or common control “in any manner”.

An “entity” is defined as a corporation or a trust, partnership, or other unincorporated organisation that:

• is listed on a stock exchange in Canada;
• has a place of business in Canada, does business in Canada, or has assets in Canada and that, based on its consolidated financial statements, meets at least two of the following conditions for at least one of its two most recent financial years:
1. it has at least CAD20 million in assets;
2. it has generated at least CAD40 million in revenue; and
3. it employs an average of at least 250 employees; or
• is otherwise prescribed by regulations, which have yet to be enacted.

Required reporting information

The private sector annual reports, which must be approved by the reporting entity’s governing body (ie, board of directors or similar), must include the following information for each entity subject to the report:

• the entity’s structure, activities, and supply chains;
• its policies and its due diligence processes in relation to forced labour and child labour;
• the parts of its business and supply chains that carry a risk of forced labour or child labour being used and the steps it has taken to assess and manage that risk;
• any measures taken to remediate any forced labour or child labour;
• any measures taken to remediate the loss of income to the most vulnerable families that results from any measure taken to eliminate the use of forced labour or child labour in its activities and supply chains;
• the training provided to employees on forced labour and child labour; and
• how the entity assesses its effectiveness in ensuring that forced labour and child labour are not being used in its business and supply chains.

The reporting obligations for government institutions include similar content requirements.

Additional amendments and legislation

Along with the public reporting requirement, the Supply Chains Act also includes a number of other amendments to clarify and expand the scope of existing forced labour laws.

• It extends the import ban under Canada’s Customs Tariff to goods that are “mined, manufactured, or produced wholly or in part” with “child labour” in addition to goods produced with “forced labour” and “prison labour” which are already prohibited.
• It codifies a Canadian definition of both “child labour” and “forced labour”, adopting the definitions from Article 3 of the International Labour Organisation’s (ILO’s) Worst Forms of Child Labour Convention, 1999 and Article 2 of the ILO’s Forced Labour Convention, 1930, respectively.
• It introduces a definition of “production of goods” meaning “the manufacturing, growing, extracting, and processing of goods”.
• It gives new enforcement powers to the Minister of Public Safety and Emergency Preparedness, including powers of search, inspection, and seizure of documents and evidence.
• It creates personal liability for directors and officers, among others, who direct, authorise, assent to, acquiesce in, or participate in an offence under the Supply Chains Act.

The Canadian government has promised additional supply chain legislation which would go beyond reporting on due diligence of supply chains to mandating due diligence of supply chains.

Penalties and fines

Entities or individuals who fail to comply with the obligations under the Supply Chains Act or make false or misleading statements, or provide false or misleading information to the Minister (eg, in an annual report) can be subject to summary conviction and fines of up to CAD250,000.

Responsible business conduct

The Canadian Ombudsperson for Responsible Enterprise (CORE) investigates complaints respecting alleged human rights abuses arising from the operations of Canadian companies abroad in the garment, mining, and oil and gas sectors. The CORE was created in 2019 and complaints can be made by anyone in the world.

Admissibility criteria

There is a low threshold for a complaint to be admissible. It must:

• allege an adverse impact on an internationally recognised human right;
• arise from the operations abroad of a Canadian company in the garment, mining, or oil and gas sector; and
• have allegedly taken place after 1 May 2019, or if it allegedly occurred before 1 May 2019, remain ongoing.

Investigations

In July 2023, the CORE announced the first two investigations ever into allegations that Uyghur forced labour was used in the supply chains and operations of two Canadian companies (a garment company and a mining company). The CORE also published two Initial Assessment Reports. Since then, the CORE has launched several additional investigations into Canadian companies over alleged human rights abuses.

The complaint against the Canadian garment company alleges that the company has supply relationships with several Chinese companies that allegedly use or benefit from Uyghur forced labour. The complaint asserted that there was no indication that the garment company had taken any concrete steps to “ensure beyond a reasonable doubt” that there is no forced labour in its supply chain. The garment company maintains that it no longer has ties with the companies identified, and provided information on its due diligence processes.

The complaint against the Canadian mining company alleges that it holds a majority interest in business operations in northwest Xinjiang, China, that allegedly use or benefit from Uyghur forced labour. The mining company has responded that it does not have operational control over the mine and that these allegations arose after it had left the region.

These two complaints are the first to advance beyond the intake and initial assessment stages of the CORE’s process. Although the process is voluntary, not collaborating in good faith could result in withdrawal of trade advocacy support and jeopardise future Export Development Canada financial support. The reputational harm and potential legal risk created from a lack of co-operation with the CORE is a significant deterrent.

The CORE’s investigations have highlighted the importance of supply chain transparency and for companies to test the robustness of their due diligence mechanisms. It would not be surprising if the current voluntary nature of the CORE’s process becomes mandatory and additional powers are granted to the CORE, including limited powers to compel evidence.

Net zero emissions and zero waste

Canada’s commitment to achieving net zero emissions by 2050 has required that it steadily target each of its largest sources of its emissions – energy, transportation, agricultural, industrial process and product use, and waste. In 2023, Canada released its long-anticipated draft Clean Electricity Regulations setting out its approach to mandating a net zero emissions power grid by 2035. The Clean Electricity Regulations are controversial, including with respect to their constitutional validity.

Policymakers have tried to balance three primary objectives when it comes to electricity: decarbonisation, reliability, and affordability. While the Clean Electricity Regulations include specific exemptions for small generating units under 25 MW or for emergency circumstances to preserve a reliable power supply, the regulations are far-reaching in scope and will create a new federal regulatory regime that applies to the majority of existing and future natural gas, coal, and hydrogen-fired electricity-generating capacity.

The Clean Electricity Regulations, once finalised, will come into force on 1 January 2025, but their primary implication – the emissions intensity limit – will not take effect until 1 January 2035. The Clean Electricity Regulations set out a default emissions intensity limit of 30 tonnes of CO2 (or CO2 equivalent) per gigawatt-hour (GWh) of electricity generated, with several exceptions. They also establish the methodologies to quantify the emissions intensity of generating units.

Compliance will be primarily assured through detailed reporting obligations. The Clean Electricity Regulations also include amendments that designate any violation of the emissions intensity limits as offences under the Canadian Environmental Protection Act, 1999, and subject to financial penalties. Accordingly, owners or operators of generating units that do not meet the emissions intensity requirements may be directed by grid operators or provincial officials to operate their units, which may expose those private entities to liability if the federal minister disagrees with the province’s characterisation of the emergency.

While often overshadowed by action on emissions reduction, governments have also steadily taken measures to address waste by:

• prohibiting the manufacture, import, and sale of certain categories of single-use plastics;
• reviewing extended producer responsibilities; and
• creating a proposed federal plastics registry for producers of plastics products.

While most efforts have focused on recyclability, the policy trends will continue to drive not only the reduction of waste (eg, through consideration of right-to-repair initiatives) but also the elimination of waste itself. The development of new initiatives in this area in Canada may also be impacted by ongoing litigationand debateregarding the federal government's constitutional jurisdiction to regulate certain environmental issues.

A right to a clean environment

Canada has amended its environmental legislation, the Canadian Environmental Protection Act, 1999 (CEPA), to include an express recognition “that every individual in Canada has a right to a healthy environment”. CEPA requires the federal government to protect the right to a healthy environment and uphold related principles, including “environmental justice”, “non-regression”, and “intergenerational equity”. The federal government will be required to develop an implementation framework to set out how the right to a healthy environment will be considered in the administration of CEPA. As such, it remains unclear how the right will be implemented and enforced, as well as balanced against other factors (eg, economic, social, and health). Despite this uncertainty, these amendments are likely to be part of the arguments raised by plaintiffs in future climate-related litigation.

Climate-related disclosures

In October 2021, the CSA published the proposed National Instrument 51-107 – Disclosure of Climate-related Matters (NI 51-107) for comment. The proposed climate-related disclosure under NI 51-107 largely aligns with the four core disclosure elements of the Task Force on Climate-Related Financial Disclosures (TCFD) and included proposals for mandatory disclosure by issuers of:

• actual and potential impacts of climate-related risks and opportunities on the issuer’s business, strategy, and financial planning;
• how the organisation identifies, assesses, and manages climate-related risks; and
• metrics and targets used to assess and manage relevant climate-related risks.

In October 2022, the Canadian Securities Administrators (CSA) advised that they were “actively considering international developments”, including the release by the United States Securities and Exchange Commission (SEC) of proposed amendments to rules that would require registrants to disclose certain climate-related information in their public disclosure and the release of the International Sustainability Standards Board’s (ISSB’s) proposed sustainability disclosure standards. In particular, the CSA announced that it was revisiting comments it received on its own climate-related disclosure requirements proposed in NI 51-107.

Following the publication in mid-2023 of the ISSB’s first two sustainability disclosure standards (“ISSB Standards”), which the CSA commended, the CSA announced they would be conducting further consultations to adopt disclosure based on the ISSB Standards, with modifications considered necessary and appropriate in the Canadian context and will engage and collaborate with the Canadian Sustainability Standards Board with respect to the ISSB Standards.

It is expected that a further market update from the CSA will be provided in late-2023/early-2024, which may include revised climate-related disclosure proposals.

Corporate governance diversity disclosures

Since 2014, non-venture issuers in most Canadian jurisdictions have been required to comply or explain their approach to gender diversity disclosures. Legislators have started to respond to the strong interest – including from proxy advisors – in and expectations relating to, diversity in corporate governance. The CSA is proposing to amend Form 58-101F1-Corporate Governance Disclosure (Form 58-101F1) of National Instrument 58-101-Disclosure of Corporate Governance Practices (NI 58-101) and to alter National Policy 58-201-Corporate Governance Guidelines (NP 58-201) (collectively, the “Proposed Amendments”). These relate to disclosure of board and executive officer diversity, as well as board renewal and director nomination processes.

With the Proposed Amendments, the CSA is seeking to expand the scope of diversity disclosure to include other demographics, and to increase the disclosure obligations regarding diversity. The CSA has put forward two alternative approaches to the disclosure requirements for consideration, indicating a divergence of views among CSA members.

Both versions of Form 58-101F1 being proposed for comment, Form A and Form B, are intended to increase the reporting transparency of issuers’ diversity policies. However, the forms contemplate different approaches to the reporting of those policies and associated diversity metrics. Both Form A and Form B would maintain the existing disclosure requirements pertaining to women on boards and in executive officer positions.

Form A requires that an issuer disclose its approach to board and executive officer diversity, but does not dictate which specific demographics, other than women, must be included. Form A provides the issuer with the discretion to determine and report on its chosen diversity objectives, as well as how to measure progress towards achieving those objectives. This discretion includes the ability to choose the demographics to address in its diversity policies and disclosures, as well as the metrics used to report progress. The CSA has stated that the intent of this framework is to afford issuers the flexibility needed to tailor their policies and disclosures to their specific industry, strategy, or corporate circumstances.

In contrast to Form A, Form B is a more prescriptive framework and mandates that five designated groups must be included in diversity disclosures: women, Indigenous peoples, racialised persons, persons with disabilities, and LGBTQ2S+ persons. The use of designated groups is consistent with the disclosure requirements currently in place for federally incorporated public companies as a result of the 2020 amendments to the Canada Business Corporations Act (CBCA) – though, the groups mandated by the CBCA did not include LGBTQ2S+. The diversity data under this framework would be based on voluntary self-disclosure by directors and executive officers. Issuers can also voluntarily expand their diversity policies and disclosure beyond the five required demographics. Under Form B, issuers would need to disclose their strategies, policies, and objectives for achieving and maintaining diversity throughout its board and executive officer positions. The CSA has stated that this more prescriptive method is intended to promote consistency and comparability between disclosures and issuers.

Varying views on the proposed disclosure alternatives have been advanced during the CSA’s comment period (which closed at the end of September 2023) and the reporting requirements that may ultimately be adopted by the CSA remain undetermined.

UN Declaration on the Rights of Indigenous Peoples

Indigenous peoples have occupied what is now known as Canada prior to European settlement. They have inherent rights, which are constitutionally protected. The Crown is obligated to act in a fiduciary capacity with respect to Indigenous peoples. As governments continue to take action to reconcile the pre-existing Indigenous rights with the assertion of Crown sovereignty, there are important implications for ESG when it is a tenet of a decision-making framework, including informing disclosures.

The governments of Canada and British Columbia have each passed legislation that requires them to implement UNDRIP. Among other things, the legislation requires the governments to take all necessary measures to ensure provincial laws are consistent with UNDRIP. Each government is required to prepare and implement an action plan to achieve the objectives of UNDRIP.

The commitment to UNDRIP, underpinned by Indigenous peoples’ constitutionally protected rights, has led to an evolution in the legislative process and statutory decision-making. Canada and British Columbia have increasingly focused on using land-use planning and regulatory processes to advance self-determination by Indigenous peoples and advance consensus-seeking or consent-based decision-making approaches to regulatory milestones. The governments have also shifted their focus from consultation during the process with Indigenous peoples to consultation on the process and a role in the process itself.

The developments in legislation and government processes to include Indigenous values, voices, and considerations, present value-creation opportunity and, if ignored, can also destroy value. For example, Canada can unlock immense opportunities if the current barriers to financing and economic participation by Indigenous peoples (such as taking up equity ownership opportunities relating to projects, including on their territories) are addressed.

Rigorous reporting

Threats of litigation or reputational harm arising out of ESG disclosures, or lack thereof, including progress to ESG strategies and targets, continue to trend upwards. ESG-related class actions are an emerging litigation risk. Most class actions have alleged inadequate or misleading disclosure, and breaches of regulatory requirements, such as requirements imposed under securities and environmental statutes. Non-government plaintiffs are increasingly using litigation to achieve desired ESG outcomes – even where the claims are novel and may not have a significant prospect of being successful.

Actions are being taken against companies as well as governments (eg, Sierra Club of British Columbia Foundation v British Columbia (Minister of Environment and Climate Change Strategy) 2023 BCSC 74, Sierra Club Canada Foundation et al v Minister of Environment and Climate Change Canada et al 2023 FC 849 (CanLII), and Mathur v His Majesty the King in Right of Ontario, 2023 ONSC 2316 (CanLII)).

Regulators are also continuing to take action on greenwashing and misleading disclosures, including in response to complaints of deceptive marketing practices based on alleged false or misleading environmental representations. Much of the risk stems from inadequate and inaccurate voluntary disclosure. The litigation and legal risks of such disclosure, and awareness relating to the same, have seen a trend towards more strategic, accurate, and transparent voluntary disclosures, which aligns with the material issues and potential risks to achieving any stated targets or actions. Organisations face enormous pressures to disclose relevant ESG information, and to treat such disclosures as a stakeholder engagement exercise. Yet, as the consolidation of ESG frameworks and standards starts to take place, data integrity, transparency, and disclosure oversight will continue to drive the push towards more accurate and comprehensive disclosures.