Moving toward responsibility

It used to be that turning a profit and increasing share price were the only things a company had to worry about. Those days are long gone, however, and companies are increasingly being asked to act as good corporate citizens as well. As the trend has developed over the past few years, so too have disclosure requirements. In the US, many companies are now required to disclose environmental risk factors that are likely to have an impact on their business. In most other cases, even when it is not required by statute, leading practice sees listed companies discussing their role as corporate citizens and the steps they are taking to improve the world around them – or at least not damage it any more than they have to. It is a massive business, and there are a number of sizable investment funds that buy and sell shares based on the degree of CSR in the companies they cover.  

The trend has now arrived in Canada, and new disclosure requirements could be just around the corner. As you read this, the minister for finance and the Ontario Securities Commission (OSC) are considering expanded CSR disclosure requirements.

Aggressive proponents argue that prescriptive rules are required to force companies to disclose social and environmental policy and activity. This runs against the traditional Canadian preference for a more flexible regime borrowed from the UK’s comply or explain model.

A report from Jantzi-Sustainalytics and York University’s Jay and Barbara Hennick Centre for Business and Law, which was sent to Finance Minister Dwight Duncan and the OSC, suggests ways in which companies can begin to improve
disclosure of their social practices and what role the commission should play. The report, entitled Corporate Social Reporting Initiative, was produced with the assistance of the Association of Certified Chartered Accountants.

Material world
Current disclosure requirements are ambiguous, with most of the confusion resulting from the materiality clause. As with other disclosure rules, companies are required to report material information to investors,
but how far this extends to environmental, social and governance (ESG) issues is unclear. Companies and their lawyers currently take a narrow interpretation of the rules; as a result, the report recommends that the OSC clarify the existing disclosure obligations.

While companies may not support mandatory  disclosure, there are data to suggest a stricter regime is required. A recent survey by Corporate Knights found that only 10 of the 60 companies in the S&P/TSX 60 Index disclose detailed information on four environmental factors the group considers important – energy consumption, carbon footprint, water use and waste production. The highest level of disclosure, at 58 percent, was in relation to carbon dioxide emissions.

This does not tell the entire story, however. Reporting on some other governance-related issues has progressed well. A little under half the companies in the group tie executive compensation to sustainability to some extent; and almost 60 percent have a board-level committee tasked with overseeing ESG issues.

No change
At the moment it seems the status quo will remain, insofar as the OSC will not formally require companies to disclose ESG risks beyond the current ‘materiality’ standard – although it is likely that materiality will be more clearly defined in the near future. The OSC has previously expressed concern that mandatory disclosure would place excessive costs on smaller companies at a time when any additional expenditure could be damaging to long-term performance.

While Canadian companies are likely to escape mandatory disclosure (at least for this year), they should remain vigilant. In the US, many companies resisted expanded disclosures, which led to Congress and the SEC taking measures to correct the problem. By taking a proactive approach, Canadian firms will minimize the appetite of regulators to impose stricter standards.

As the report highlights, ‘At some point in the future, it may be that prescriptive norms for disclosure will become appropriate. At this stage, however, leadership and guidance is more appropriate.’