Q2 | Torys QuarterlySpring 2023

The “S” in ESG: Canadian law increasingly looks abroad

As focus on companies’ ESG practices continues to grow at home and abroad, Canadian courts and legislators are addressing the legal obligations of Canadian companies’ operations outside of Canada in new ways. This is particularly true in respect of the “social” aspect of ESG issues.

For example, Canadian courts have allowed class actions to proceed that address the foreign operations of Canadian companies, and or their foreign subsidiaries. This year, the Government of Canada is anticipated to pass Bill S-211, enacting broad reporting requirements related to forced labour and child labour across global supply chains, applicable to a broad range of companies with potentially limited connections to Canada. Meanwhile, reflecting the often-political nature of ESG-related issues, Canadian plaintiffs are becoming increasingly creative in their use of international forums to advance domestic ESG-related disputes. These developments are discussed in detail below.

In order to manage evolving social risks, and meet forthcoming requirements of Canadian law, a strong approach to risk management is needed, including:

  • implementing robust training, supervision and auditing of foreign operations and global supply chains;
  • reviewing internal controls and certifications in order to deliver comprehensive and accurate reporting on global supply chains; and
  • coordinating legal, public relations and government relations teams to manage political and reputational dimensions of social issues.

We explore these three areas of strategy below.

Training, supervision and auditing of foreign operations and supply chains

Canadian courts have demonstrated a willingness to certify class actions that address the foreign operations of Canadian corporations and those of their foreign subsidiaries and suppliers. Those class actions may be founded upon alleged breaches of customary international law, negligence or other common law causes of action that may be informed by foreign law, such as breach of the foreign country’s labour standards laws.

For example, in Nevsun Resources Ltd. v. Araya1, the Supreme Court of Canada allowed to go forward a class action filed by Eritrean workers against the Eritrean subsidiary of a Canadian mining company alleging violations of customary international law. The plaintiffs alleged violations of customary international law prohibitions against slavery, forced labour, cruel and inhuman treatment and crimes against humanity—an area of law that had previously been limited to sovereign states.

The Supreme Court’s decision in Nevsun reinforces the potential basis for class proceedings addressing foreign operations, following the 2018 Das v. George Weston Limited decision2. In Das, though the Court of Appeal for Ontario (the Court) refused to certify this proposed class action brought by families of factory workers at a collapsed Bangladesh factory that made clothes for Joe Fresh, the Court demonstrated its willingness to consider and apply foreign law in Canadian class actions, leaving open the window for class actions addressing foreign supply chains where foreign law is favourable. The dismissal was based on a finding that Bangladeshi law did not support the cause of action pleaded because the local limitation period had expired. However, Canadian courts may be less willing to apply foreign law in class actions addressing foreign operations where it is evident that the claim could be addressed through local courts, particularly where the legal issues raised in the claim are unsettled and novel, as in Berg et al. v. Canadian Hockey League et al3.

Review global supply chains, internal certifications and controls

The federal government is planning to implement transparency and reporting requirements for many companies with connections to Canada in respect of forced labour and child labour in their supply chains. In March 2023, the House of Commons began its third reading of Bill S-211, An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff (the Act), discussed in greater detail in our bulletin.

Once passed, the Act will apply to all companies that produce, sell or distribute goods anywhere, or import goods to Canada, which a) are publicly listed in Canada, or b) have a place of business, do business, or have assets in Canada, and meet certain size thresholds. The Act will require those companies and any company meeting a) or b) and controlling such a company to publish and file an annual report discussing the steps taken to prevent and reduce the risk that forced labour or child labour is being used in their supply chains. The report must also address applicable policies, any incidences uncovered, remediation measures taken, training and auditing practices4.

The Act will apply to a broad set of companies, potentially with little direct connection to Canada. It will require accurate reporting on a broad set of activities related to the manufacturing, growing, extracting, processing and import of any goods, even of a minor scale. Companies will want to consider how to best discharge this reporting obligation, and evaluate their internal controls and certifications required to deliver a comprehensive and accurate public report. Doing so in the short-term will best position those subject to the Act for future compliance.

Consider political dimensions of social issues

While ESG issues associated with Canadian companies’ foreign operations may be advanced in Canada, Canadian plaintiffs are also advancing ESG-related claims in international forums, which often have a political nature. For example, in Thompson et al. v. His Majesty The King5, a class of Black federal civil servants alleges that Black Canadians’ employment opportunities have been denied or restricted in the federal public service as the result of systemic racism and discrimination. In late 2022, the plaintiffs brought a parallel complaint to the UN Special Rapporteur on racism, racial discrimination, xenophobia and related intolerance6.

Similarly, various Indigenous communities have brought complaints to the UN Special Rapporteur on the rights of Indigenous Peoples while also pursuing domestic legal remedies. These and other mechanisms, such as the OECD National Contact Point for Responsible Business Conduct and the Canadian Ombudsperson for Responsible Enterprise, may engage a political forum for ESG-related disputes.

Companies’ ESG practices may be raised in these forums. An effective response requires coordination with the federal government, which may have rights of response in these forums that companies do not. It is therefore important for legal, public relations and government relations teams to work together in order to manage political and reputational dimensions of ESG-related disputes.

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