Cory Searcy is a professor and the vice-provost & dean of the Yeates School of Graduate Studies at Toronto Metropolitan University.

ESG has become a contentious corporate and political battleground.

In late September, Republican senators warned bank CEOs to steer clear of ESG (environmental, social and governance) issues. Pennsylvania’s Pat Toomey, a member of the Senate Banking Committee, noted, “I can’t help but observe that when banks do weigh in on highly charged social and political issues, they seem to always come down on the liberal side.” And in May, former U.S. vice-president Mike Pence claimed that ESG is “injecting left-wing politics into business.”

These are strong words for a concept focused on disclosing a company’s ESG performance. The answer, however, is not to drop ESG disclosure; it is to make it mandatory.

ESG disclosure is largely voluntary in many countries, including the U.S. and Canada. Reporting on a company’s carbon footprint, working conditions in its supply chain, and board composition are just a few of the many issues disclosed under the ESG umbrella. These disclosures are often made in response to pressure from investors, customers, employees and other stakeholders under the belief that public reporting may encourage improved performance.

Unfortunately, numerous instances of gross social and environmental malpractices show the limits to voluntary activities. The key problem with voluntary ESG reporting is the gap between corporate claims and actual practices.

Perhaps the most infamous case from the past decade is Volkswagen, perpetrator of the “Dieselgate” emissions scandal, despite previously being lauded as a model of voluntary ESG disclosure. More recently, Deutsche Bank’s offices were raided this past May to investigate “greenwashing” charges in its asset management unit, DWS. The key allegation is that DWS was misrepresenting financial products as green and sustainable. In June, the U.S. Securities and Exchange Commission (SEC) announced that it was probing Goldman Sachs’s ESG funds.

These examples represent just the tip of the iceberg. The continuing emergence of ESG scandals and false disclosures indicate the ongoing seriousness of the disconnect between stated and actual performance.

There is some movement toward mandatory ESG reporting in the United States and elsewhere. The SEC is currently working to make disclosure mandatory. Climate-related financial disclosures are already required for U.K. registered companies and financial institutions. Other mandatory disclosure requirements focus on working conditions in supply chains.

The California Transparency in Supply Chains Act, for example, is focused on preventing human trafficking in supply chains. Other regulatory jurisdictions, including the implemented mandatory disclosures of modern slavery in supply chains. As one final example, the International Sustainability Standards Board is developing an ESG reporting standard that will be mandatory for U.K. companies by 2025 or earlier.

Mandatory ESG reporting is not a panacea and does not guarantee excellent environmental, social and governance performance. There will still be possibilities for errors, misrepresentation and outright fraud. Some companies may choose to accurately report poor performance and take no action to remedy it.

Mandatory ESG reporting does, however, build an expectation for corporate accountability and is likely to increase the authenticity of public disclosures. Most voluntary disclosures are unaudited, and mandatory reporting will invite greater scrutiny and assurance of ESG data. Mandatory disclosure will also signal that ESG is a strategic concern and will discourage practices that decouple stated and actual performance, such as greenwashing.

To be sure, regulators should remember that companies have many positive impacts on society. While many disclosures undoubtedly focus on mitigating negative impacts, disclosures of a company’s positive contributions should be encouraged. This could potentially be grounded in the United Nations’ Sustainable Development Goals, such as the provision of decent work and promoting responsible consumption.

Regulators must also guard against imposing overly burdensome requirements that companies cannot realistically be expected to meet. Mandatory ESG disclosure should be restricted to core issues of greatest interest to investors, consumers and broader society. For example, The Economist recently argued that ESG fundamentally comes down to emissions. Some mandatory requirements could also differ by industry.

ESG is too important to become a partisan political issue. ESG is not about imposing “woke capitalism” or establishing a “climate cartel.” Rather, it is about building better businesses and a stronger society. Mandatory ESG reporting will help guard against unsustainable and unethical corporate practices while also highlighting the many positive contributions business makes to broader society.

There is room for debate about what mandatory disclosures should be, but the time to establish and strengthen mandatory ESG disclosure requirements is now.

The post In defence of ESG appeared first on Corporate Knights.

The return of the Liberal minority government after September’s federal election sets the stage for heightened activity by two recently established advisory bodies: the Sustainable Finance Action Council (SFAC), which comprises key financial institutions, and the Official Sector Coordinating Group (OSCG), a federal–provincial body made up of departmental officials and regulators.

Together, those groups will drive government action on key financial-sector issues to encourage and, in some cases, require Canadian companies to pay more heed to climate-related risks and opportunities.

In an interview last week, SFAC chair Kathy Bardswick told Corporate Knights that the council – which was formed in May – has identified a work plan that is awaiting sign-off from the federal government once Prime Minister Justin Trudeau appoints his cabinet.

Dramatic progress on greening the financial system cannot come too soon. Broadly adopting the principles of sustainable finance is a critical part of the country’s effort to decarbonize our economy and achieve net-zero greenhouse gas (GHG) emissions by 2050. Vast pools of private capital must be harnessed to finance the transition.

The financial system will come under the spotlight at the United Nations’ COP26 climate summit in Glasgow next month. At the request of British Prime Minister Boris Johnson, former Bank of England governor Mark Carney has been rallying the world’s financial companies to make ambitious climate commitments, including net-zero-emission targets by 2050.

Canadian financial firms have notably been absent in Carney’s “net zero alliance,” though they insist that they are committed to its underlying goals. Vancity is the first and only Canadian financial institution to sign on.

Still, there has been a lack of urgency in Canada to date, and that has to change – both within government and among the banks, insurance companies, pension funds and other players in the financial sector.

It’s been more than two years since an expert panel on sustainable finance issued 15 recommendations on how to embed climate change and other environmental issues into the mainstream of Canada’s financial system. That panel was led by Tiff Macklem, who has since been appointed governor of the Bank of Canada.

In a report issued last week, the Institute for Sustainable Finance (ISF) noted that “progress has been too slow” in acting on the expert panel’s groundbreaking report and that there is an “urgent need for execution.”

Of the 15 recommendations, only one – establishing the Sustainable Finance Action Council – has seen significant progress. Eight recommendations have seen minimum or marginal action, while there was “modest” progress on six.

If you were assigning a grade based on the ISF report, the government and industry together would be unlikely to rate above a D, avoiding a failing grade only in recognition of the complications presented over the past 18 months by the COVID-19 pandemic.

There remains resistance in the Canadian financial sector, which is conservative by nature and heavily exposed to the oil and gas sector. And the shortsightedness of financial sector players in Canada has been compounded by the uncertainties associated with climate-related risks and opportunities, expert panel member Andy Chisholm noted in a forward to the ISF report. 

“Our near-term risk aversion may underestimate the price for sluggish action, both environmentally and commercially, that might later be paid,” wrote Chisholm, who is also a Royal Bank of Canada board member. “Likewise, new opportunities for growth appear to be too heavily discounted in the face of uncertainty, notwithstanding what has been dubbed by many leading commentators ‘one of the greatest commercial opportunities of our time.’”

The work of the SFAC and the OSCG could help alleviate some of that uncertainty. 

Bardswick says the SFAC will tackle three key areas of concern. 

It will make recommendations regarding mandatory disclosure by publicly traded companies of their climate-related risks. The EU and U.K. have said they will require mandatory disclosure, and the U.S. government has also indicated support for the idea. “The world is moving to mandatory disclosure, and we need to go there too,” Bardswick says. However, provincial securities commissions regulate corporate disclosure, and the issue will also be front and centre with the official-sector group.

Perhaps even more fundamental than the disclosure issue will be the council’s advice on how Canada can provide consistent and transparent data that companies can use to assess the risks and opportunities they face as a result of the climate crisis. Such information is critical for the analysis needed in support of operating decisions and long-term strategies, as well as disclosure to investors.

And finally, the council will grapple with how Canadian companies can fund emission-reduction investments in high-carbon industries, and what role the government should play in setting the ground rules for this. 

The world is moving to mandatory disclosure, and we need to go there too.
–Kathy Bardswick, chair of the Sustainable Finance Action Council

There is currently a private-sector effort to define a “transition taxonomy” – the rules that would determine how carbon-intensive companies could issue investment products to finance emissions reductions.

The issue is a thorny one. The voluntary group is working with the CSA Group – formerly the Canadian Standards Association – and its report has been delayed several times, in part over disagreements about what types of investments in industries, such as oil and gas, should be considered transitional.

Transforming the financial ecosystem is just one part of the enormous task facing the government, and indeed all Canadians, as we look to meet the Liberal government’s commitment to reduce GHGs by at least 40% from 2005 levels by 2030. That pledge, which the government made before the election, is part of a COP26 effort to extract more ambitious targets from national governments to meet the goal of limiting the increase in average global temperatures to well below 2°C.

A report last week from the Trottier Energy Institute in Montreal said Canada requires a whole host of new measures to meet the 40% target. With the policies implemented so far, the country would achieve only a 16% reduction in GHGs by 2030, it said. 

The Liberals are gearing up for further action. On the weekend, Environment Minister Jonathan Wilkinson announced Canada’s commitment to develop a plan to reduce methane emissions across the broader economy. And he pledged regulations aimed at reducing oil and gas methane emissions by at least 75% below 2012 levels by 2030. 

A rising carbon price and targeted regulations are critical tools for achieving Canada’s zero-carbon transition. Driving changes in the financial sector to prioritize sustainable investment is just as important. 

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In the last year, the world’s major accounting and auditing standard setters, such as the International Accounting Standards Board (IASB), have clarified that existing standards require that all material risks – including climate-related ones – must be addressed in the accounts. Consider this: if the world is going to cease using fossil fuels, are prices for those fuels likely to be higher in the future, or lower? Most companies and observers would think lower, but in that case, shouldn’t accounting assumptions then reflect this new reality? 

Also in the past year, investors representing more than US$100 trillion in assets under management have asked companies responsible for high levels of greenhouse gas emissions to explain how they have accounted for climate-related risks in their financial statements. 

These developments recently led Carbon Tracker, in conjunction with the Climate Accounting Project, to publish a report, Flying Blind, on the financial statements of more 107 companies that investors have identified as focal points for engagement. 

We found a glaring absence of any discussion of how those risks were being addressed. In many cases, and despite companies having identified such risks as material, there was little evidence that it had changed the forward-looking numbers used in the accounts. 

Why does this matter? These numbers drive the results in the financial statements – the data upon which investment decisions depend. Without transparency, we have no idea whether these investments are consistent with a greener future. If not, and they are imagining an unsustainable world, what does that mean for the investments that are based upon them?

A world headed for net-zero emissions will not value emissions-producing assets as it always has, if it values them at all.

The report found that more than 70% of companies and 80% of auditors did not indicate they had considered material climate matters in such reporting. Just a quarter of companies provided disclosure of at least some relevant quantitative assumptions used in preparing the financial statements. Moreover, 72% of companies appeared to treat climate matters inconsistently with other reporting, and, even with observable inconsistencies across company reporting, auditors rarely commented on any differences. None of the companies used assumptions and estimates, or provided sensitivities, consistent with achieving the goals of the Paris Agreement, despite many publicly committing to that accord. 

Our review found numerous areas of concern. For example, though Europe- and Canada-based companies disclose the future commodity price assumptions used for valuing their oil- and gas-producing assets, their peers in the United States do not, leaving those investors in the dark. But wouldn’t it be important to know whether the U.S. companies were basing their accounting on high oil prices going forward? 

In essence, these reports fall short of what standard setters have said is required, and don’t go anywhere near what investors are seeking. 

As the standard setters have made clear, climate-related risks have to be addressed like any other risks. Where the world’s ongoing energy transition is likely to impact companies, that impact can no longer be ignored (as if it ever could have been ignored). A world headed for net-zero emissions will not value emissions-producing assets as it always has, if it values them at all. 

Auditing standards require auditors to use “professional skepticism” to apply a critical eye and question management assessments rather than simply assume that management is honest. This is required since the audit is performed not for the benefit of a company’s management, but instead for the benefit of the company’s investors. What is now clear is that when it comes to climate-related risks, management and auditors can no longer leave investors in the dark. 

Rob Schuwerk is the executive director of Carbon Tracker North America.

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An increased public awareness of broken treaties, unmarked graves, racism and ongoing cultural genocide is contributing to a powerful social movement for #LandBack across the country. This means that claims of Indigenous rights and jurisdiction – rather than being dismissed as mere distractions – are rightfully considered material facts that can delay a mine, stop a pipeline and force a government to buy out mining exploration projects.

When students in Osgoode Hall Law School’s Environmental Justice and Sustainability Clinic recently decided to take a close look at junior miner Noront Resources Ltd.’s corporate disclosures filed with the Ontario Securities Commission (OSC), they found some gaping holes. The company had disclosed almost nothing about the fierce Indigenous opposition to its projects in Ontario’s Ring of Fire region, a mining district once touted as “Ontario’s oil sands,” located in the roadless boreal peatlands some 500 kilometres northeast of Thunder Bay.

The students, working with Greenpeace, MiningWatch and the Council of Canadians and led by the Neskantaga First Nation, conducted research and analysis into Noront’s annual information forms (AIFs) and management’s discussion and analysis (MD&A) over the last five years. Noront plans to develop a nickel mine and other deposits in the area.

These projects, however, are located in the homelands of Anishinaabe and Anishini peoples who are parties to the James Bay Treaty No. 9, an agreement in which First Nations promised to keep peaceful relations, and Canada and Ontario pledged to protect their culture, livelihood and jurisdiction on the land as times changed. These First Nations thus hold Aboriginal and treaty rights across their territories and also have obligations under their own Indigenous laws to steward the lands and waters of the region. These include the Neskantaga First Nation, at the headwaters of the Attawapiskat River, and several downstream Mushkegowuk communities.

And yet, in recent AIFs issued by Noront, the nine Matawa First Nation communities in the region of the deposits are barely mentioned, outside of references to partnerships with Marten Falls First Nation, Webequie First Nation and Aroland First Nation. The language used in Noront’s disclosure – language that hasn’t changed over the last five years – fails to acknowledge that there are specific First Nations whose rights will be affected by its projects, and who are currently actively voicing their dissent. Noront’s repeated boilerplate disclosures of the general risks of First Nation lands and rights claims leave investors with the impression that the situation is stable, rather than volatile, and that no First Nations have made any recent and specific claims or assertions relevant to Noront’s projects.

This is simply not the whole truth. 

Neskantaga First Nation has been contesting the planned mining and infrastructure developments in the Ring of Fire over this entire five-year period. The tiny First Nation, known for holding the shameful distinction of Canada’s longest-running boil-water advisory, has made its opposition to Noront’s projects known on a number of occasions and in a variety of ways, including by threatening legal action and issuing public statements. In recent years, other First Nations have also expressed opposition to Noront’s projects and the regulatory processes being employed to approve them. Last winter, Neskantaga First Nation, Attawapiskat First Nation and Fort Albany First Nation went so far as to declare a moratorium on all development in the region. 

An increased public awareness of broken treaties, unmarked graves, racism and ongoing cultural genocide is contributing to a powerful social movement for #LandBack across the country.

Noront’s lack of transparency goes against current trends in information disclosure. Earlier this year, Ontario’s Capital Markets Modernization Taskforce made a number of recommendations for improving the province’s investment environment that acknowledged “increased global momentum towards enhanced disclosure of the Environmental, Social and Governance (ESG) factors that impact a company’s financial performance.” Indigenous impacts and opposition are increasingly becoming recognized as crucial social and governance factors to be considered in responsible resource development decision-making. Based on this, the Environmental Justice and Sustainability Clinic sent a letter last month to the Ontario Securities Commission asking for an investigation into Noront’s disclosures. The group’s submission argued that an accurate disclosure of material facts and changes would include details about the extent of Indigenous opposition to a company’s projects.

Figuring out how Indigenous rights impact logging, a pipeline, a dam, a transmission line or a mining project is not always easy. But the most important thing is for companies to actually disclose the fact that First Nations are claiming jurisdiction over lands that the companies have assumed to be “their” moose pasture. Increasingly, even companies whose projects have passed through Crown environmental assessment processes and received government permits are finding that they still must contend with Indigenous governing authority on the land – or risk delay and disruption. And investors are taking notice.

Societal expectations of how risks from Indigenous rights will be disclosed by companies are changing. Statues are falling, universities are being renamed, and there is widespread hope that the thousands of Indigenous children who died at Indian residential schools will now finally be properly memorialized and the perpetrators brought to justice. It’s time for companies and securities regulators to make sure the whole truth of Indigenous rights claims are brought to light through corporate risk disclosures.

Dayna Nadine Scott is an associate professor and co-director of Osgoode Hall Law School’s Environmental Justice and Sustainability Clinic. David Peerla is an advisor to the Neskantaga First Nation.

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In 2020, 10,000 companies, cities, states and regions disclosed data on environmental performance through our global environmental non-profit CDP (formerly the Carbon Disclosure Project), making us the largest repository of information on climate change, deforestation and water security issues. Companies and investors commonly look to CDP for data on basic information such as greenhouse gas emissions. 

Standardized disclosure allows the analysis of distinct yet related metrics that, when read in tandem, reveal whether a company is as committed to the environment as it claims. These four questions from our annual questionnaire can reveal whether a corporation is merely setting lofty goals or is backing up those goals with deep and impactful action. 

         1. Is the company linking emissions-reduction targets to executive compensation – and are there incentives in place that encourage progress toward meeting these targets?

Many companies are setting net-zero targets, but if they don’t have the governance structures in place to drive them forward, it’s difficult to believe they are seriously committed to meeting them. Linking targets to executive compensation is one of the most effective ways a company can entwine ESG into its corporate strategy and is a critical measure to build top-down momentum toward rapid decarbonization.

CDP data shows that just 10% of global companies disclosing through CDP indicate that a board member, C-suite member or other high-ranking executive receives compensation based on meeting emissions-reduction targets. In North America, HP Inc. and Canadian National Railway are among vanguard companies that have set science-based emissions-reduction targets and have tied these targets to executive compensation. Less than 10% of companies globally have taken this ambitious step.

         2. Is the company identifying risks in its supply chain related to climate change – and is it engaging its suppliers to manage those risks? 

One difficult lesson of COVID-19 for many companies has been that vulnerabilities within their supply chains can put them at risk. Supply chain emissions are on average 11.4 times higher than operational emissions. Of the companies disclosing through CDP, only 12% identify upstream risks in the value chain related to environmental impacts and are trying to manage those risks by engaging with their suppliers around sustainability. 

Manufacturer Stanley Black & Decker sources steel and copper from countries experiencing severe weather due to climate change, specifically Western Australia (which suffers through droughts) and Chile (which struggles with droughts and floods). To meet its target of having two-thirds of its supply chain develop science-based Scope 1 and Scope 2 targets by 2025, Stanley Black & Decker collects primary emissions data annually from suppliers, representing 67% of its total procurement spend, via CDP Supply Chain. And to preempt potential supply chain disruptions, the company uses software to track inclement weather and other events affecting their sites in real time.

         3. Is the company identifying risk related to regulation – and is it engaging with policy-makers on behalf of particular legislation that supports environmental resilience?

Many companies identify regulatory uncertainty around environmental issues as a risk to their business. For some, the shifting regulatory landscape – or worse, the absence of national climate policy – was a greater concern than the impact of any particular climate policy itself.

Companies that engage with the government to support pro-environment policy are demonstrating their commitment to a sustainable future. For example, the software company Salesforce discloses its public support for federal carbon-pricing legislation and clean energy policy, and last year signed a joint letter urging the U.S. to remain in the Paris Agreement. Strong climate policy is vital to confront the climate crisis. Even if companies are taking action within their own operations, they should not be considered true environmental leaders unless they support public policy that drives forward the low-carbon transition.

         4. Is the company identifying business opportunities related to the low-carbon transition – and is it investing in these low-carbon products and services? 

Companies that are truly in the vanguard when it comes to sustainability are not only identifying risks and addressing them – but are also seeking opportunities related to the low-carbon transition. In 2019, CDP found that global companies identified US$2.1 trillion in potential opportunities on the table if they take sustainable action. Technology company Cisco sells smart building products that improve building operational energy efficiency and reduce emissions – a market it pegs as a US$2-billion opportunity. Cisco has invested for years in such products and services; the company calculates that 64% of its 2019 revenue can be considered “green.”

In the years to come, we’ll no doubt see more companies integrate their environmental goals into their marketing strategies. While all of the above are indicators of a company’s seriousness about sustainability, the first vital step in any company’s commitment is disclosure. That disclosure must be backed up with real structures within the company, including ambitious (ideally science-based) decarbonization targets and tangible action. With the clock ticking on the climate crisis, we simply don’t have time for half-baked promises. Companies need to follow the through-line across their entire operations, translating sustainability goals into serious, immediate action.

Simon Fischweicher is the head of corporations and supply chains at CDP North America.

The post Sustainable or sellout? Four revealing questions in a company’s environmental disclosure appeared first on Corporate Knights.

The proposed Canadian legislation applies to oil, gas and mining companies with at least $20 million in assets and $40 million in revenue or employ an average of least 250 employees. It targets companies that are listed on Canadian stock exchanges or had assets in Canada during one of their two most recent financial years.

The mining industry is supportive of the law, even going so far as to submit their own set of recommendations last January. They hope that if people can see how much money they give to governments, they can increase their social capital and redirect public grievances at political leaders rather than mining companies.

Oxfam Canada is also praising the federal government for championing a global transparency standard that, it says, could help millions of people living in poverty demand their fair share of wealth from resource extraction.

But, amid all of this applause, let’s keep in mind that the United States was the first country to pass a payment disclosure law in 2010 and it still hasn’t implemented a rule. This should serve as a warning that there is lots of room for the oil and gas industry to undermine a law in the time it takes to write a rule.

The American example

President Obama signed Section 1504 of the Dodd Frank Wall Street Reform and Consumer Protection Act into public law in 2010 and sent it to the U.S. Securities and Exchange Commission (SEC) to implement a rule. The SEC wrote a strong rule in August 2012 that required companies to disclose payments to all levels of government for each of their projects. But the American Petroleum Institute challenged the rule in court only two months later, saying it placed an undue burden on the industry and would negatively affect competition.

In July 2013, the U.S. District Court for the District of Columbia sent the rule back to the SEC to either a write a new rule or provide a better justification for the first one. The SEC will discuss the rule again in March 2015, and until then, one can only speculate whether lobbying by the oil and gas industry has been successful, or not.

Canadians should take note of this because, as Oxfam Canada rightly pointed out, the tabling of legislation “is only the first step in developing Canada’s disclosure requirements.” Even if it passes a law supporting payment transparency, it will still need to settle important details, such as what the definition of a “project” will be and what the reporting standards will look like.

These are important details that can determine how useful the information is to the people living near oil, gas and mining projects. The more information people have, the easier it will be for them to hold their governments accountable for resource revenue. And likewise, any attempts to anonymize or exempt companies from disclosing will “rob citizens of the economic benefits of natural resource wealth,” said Claire Woodside Director of Publish What You Pay Canada, the global network of organizations pushing for payment disclosure last July.

And the Canadian oil and gas industry is not as supportive of a strong rule as the Canadian mining industry is. The Globe and Mail reported last week that “the Canadian Association of Petroleum Producers supports the principle of transparency, but has concerns about how it may be implemented.”

Talisman Energy Inc., a Canadian oil and gas company, is openly calling for a weaker rule. The company said in a letter to Natural Resources Canada in May that it does “not believe that trying to draft Canadian rules so that they are ‘equivalent with the most severe set of rules currently proposed is of any service to Canadian companies.’”

The letter goes further, pointing out that “the EU Accounting Directive was drafted to align with the then-existing Dodd Frank 1504 rules in order to establish a global reporting standard. Those Dodd Frank rules were subsequently vacated. If Canada drafts its revenue transparency rules to align with the EU Accounting Directive…it is ignoring the lessons learned in the U.S.”

Talisman and I are making the same point: even when you think you have a law in the bag, things can change very quickly.  So let’s not ignore the lesson learned in the U.S. and make sure that we don’t let a perfectly good transparency law get undermined by weak rules and red tape.

The post Don’t celebrate transparency standards yet appeared first on Corporate Knights.