Q1 | Torys QuarterlyWinter 2023

Getting ahead of proxy season: key ESG considerations

We expect that environmental, social and governance (ESG) considerations will have a significant influence on the 2023 annual meeting season. Consistent with global trends, investors, proxy advisers and advocates increasingly expect Canadian companies to disclose how they integrate ESG factors into corporate strategy, director recruitment and training, report on progress against specific commitments and discuss the board’s role in overseeing ESG issues. Read our review of what Canadian public companies should have on their watchlist for 2023.

Beginning in 2023, governance committee chairs at S&P/TSX Index Composite companies risk a negative voting recommendation from Glass Lewis if the company does not provide adequate disclosure about the board’s role in overseeing environmental and social issues.
Climate and other environmental issues in focus

Proxy advisers: Glass Lewis and Institutional Shareholder Services (ISS) have updated their 2023 guidelines for Canadian companies to make climate board accountability a factor in their assessments. Although their guidelines differ somewhat in approach and scope, in general terms, Canadian companies with financially material climate risk exposure (such as those identified by Climate Action 100+) potentially face a negative voting recommendation for the chair of the committee/board with oversight over climate-related issues if the company:

  • does not provide comprehensive disclosure aligned with a global standard such as the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD);
  • has not adopted medium-term greenhouse gas (GHG) emissions reductions targets for its Scope 1 and Scope 2 emissions; and/or
  • has not defined and disclosed board oversight for climate-related matters.

Although the 2023 proxy advisory guidelines focus primarily on significant GHG emitters, as the TCFD disclosure regime matures, we anticipate that these policies will be incrementally expanded over time to capture more Canadian companies. Glass Lewis is already signalling that it views climate risk as a material risk for all companies and, therefore, it believes all boards should be considering their operational resilience under lower-carbon scenarios.

Institutional investors: The proxy advisory firms’ guidelines described above are broadly consistent with institutional investors’ expectations on climate matters.

Members of Climate Engagement Canada, a finance-led initiative focused on driving dialogue between the financial community and Canadian issuers, has stated that it expects the 40 TSX-listed companies on their focus list1 to, among other things:

  • Implement a strong governance framework that clearly defines board and senior leadership accountabilities and oversight of climate change risks and opportunities;
  • Develop and implement a comprehensive strategy to reduce GHG emissions and build climate resilience across the value chain, consistent with the goals of the Paris Agreement;
  • Set measurable, sector-relevant targets; and
  • Disclose in line with the TCFD’s recommendations.

Shareholder proposal trends: Climate-related shareholder proposals continue to be prominent, with more than 30 climate-related proposals being disclosed in Canadian companies’ circulars and at least 12 going to a vote in 2022. In 2023, we expect the pressure on Canadian companies to ramp up with shareholder proposals requesting companies to adopt more aggressive net-zero or GHG emissions reduction targets, cease developing (or financing) fossil fuel projects, enhance their disclosures about climate-related matters (including greater transparency regarding financing of fossil fuel projects) and/or hold an advisory “say on climate” vote.

Institutional investors, however, are becoming more selective about which shareholder proposals they support. For example, shareholder proposals that are unduly prescriptive, such as calling for specific changes to a company’s strategy or business model or constraining the board’s decision-making with respect to actions or targets that are not material to how the company delivers long-term value, are less likely to receive broad support.

Regulatory developments: If National Instrument 51-107 Disclosure of Climate-Related Matters (NI 51-107) is adopted as proposed2, Canadian reporting issuers will be required to disclose climate-related metrics and targets, certain GHG emissions data, and how management assesses and manages—and how the board oversees—climate-related risks and opportunities. Although climate change-related disclosure continues to be a priority for Canadian securities regulators, new rules are not expected to be effective until 2024 or 2025, once greater progress has been made on the equivalent international and SEC disclosure standards.

Beyond climate: With the increasing focus globally on nature-related risks (such as biodiversity loss and ecosystem degradation), investor-led initiatives in this area are gaining momentum. In December 2022, Nature Action 100—an institutional investor-led group—was launched to engage with companies in systemically important sectors to seek to stop or reverse nature and biodiversity loss. Similar to Climate Action 100+, Nature Action 100 initially will identify a list of 100 focus companies (whose operations involve material, nature-related impacts) for investor engagement, which we anticipate will lead to calls for enhanced disclosure and target-setting for nature-related risks. Companies should be prepared to address shareholder proposals and other forms of engagement on this issue in 2023.

Although Canadian securities regulators have not adopted, or proposed, disclosure requirements specifically focusing on nature-related risks, the Taskforce on Nature-related Financial Disclosures (TNFD) is making progress on a global standard that might inform securities regulation3 in the coming years.

Potential environmental-related shareholder proposal themes for 2023

Make or enhance net zero and similar commitments at the company level or in respect of a company’s investment or loan portfolio
Avoid specific activities considered harmful to environment (e.g., new fossil fuel exploration and development, pollution-intensive privatizations and/or projects facing significant opposition from Indigenous Peoples)
Conduct a shareholder advisory vote on the company’s climate and environmental policy
Establish a dedicated board committee for climate and other environmental matters
Report on the company’s contributions to support the circular economy
Propose an action plan to achieve zero plastic waste by a specified date
Include biodiversity commitments in company’s supplier code of conduct
Social issues

Modern slavery and human rights: 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 is nearing adoption. If enacted as proposed, Bill S-211 will require all companies listed on a Canadian stock exchange, as well as certain companies that meet specified size thresholds, that, directly or indirectly, produce, sell or distribute goods in Canada (or elsewhere) or import goods into Canada to publicly report on steps taken to prevent and reduce the risk that forced labour or child labour is being used in their supply chains. If Bill S-211 is passed in 2023, the first report will be due in May 20244. In the meantime, for the upcoming 2023 proxy season, we expect to see continued investor engagement strategies, including shareholder proposals, calling for enhanced disclosure and impact assessments relating to human rights, including on topics such as protections for migrant labourers, freedom to engage in collective bargaining and the implications of the use of artificial intelligence.

Indigenous reconciliation and inclusion: In the past few years, several Canadian companies have disclosed shareholder proposals calling on them to report on the extent to which their policies and practices regarding Indigenous community relations, internal education in Indigenous reconciliation, procurement from Indigenous-owned businesses, and recruitment and advancement of Indigenous employees meet Indigenous-led standards. In most instances, the companies agreed with the proponent either to take certain actions either in lieu of a vote on the shareholder proposal or to put forward a management-led proposal providing for similar commitments. Given the increasing visibility of matters associated with Indigenous Peoples, including reconciliation, we believe that Canadian companies should be prepared to engage with shareholders, through a shareholder proposal process or other forms of engagement.

Potential social-related shareholder proposal themes for 2023

Assess and mitigate risks associated with financialization of housing
Adopt well-recognized external standards, such the UN Guiding Principles on Business and Human Rights, for identifying and mitigating human rights risks
Report on results of independent human rights impact assessment concerning migrant workers
Disclose results of supplier audits concerning human rights risks (including risks relating to forced labour)
Disclose the company’s equity ratio (i.e., the ratio of CEO pay to the average, or median, compensation of employees)
Disclose whether the company requires suppliers to respect their employees’ freedom of association and collective bargaining rights
Review the mandate of the board’s corporate governance committee to include an ethical component concerning the use of artificial intelligence (For the first time in Canada, a company has disclosed a proposal of this type in its proxy circular for the 2023 meeting season.)
Incorporate ESG metrics into the determination of executive compensation
Disclose board nominees’ ESG skills and knowledge

We expect continued focus on the extent to which Canadian company boards and management ranks reflect the diverse make-up of the company’s stakeholders and society at large, as well as rising interest to identify and take steps to address racial disparities in their workforce.

The Canadian Securities Administrators’ most recent report on the representation of women on Canadian public company boards and in executive officer positions (Year 8 Report)5 revealed some significant gains in key areas, including the following:

  • 45% of board vacancies were filled by women in the past year, a meaningful increase over 2021 (where women filled 35% of vacant board seats);
  • 39% of issuers reported having a target for the representation of women on their board, up from 32% in 2021; and
  • 87% of issuers have at least one woman, and 30% had at least three women, on their boards, up from 82% and 24%, respectively, in 2021.

What to expect: regulatory developments

  • New requirements or guidance expected: The Ontario Securities Commission has stated that it expects proposed changes to the disclosure requirements on diversity, board renewal and the director nomination process to be published in the second quarter of 2023. This initiative is part of recent research and consultations by the Canadian Securities Administrators (CSA) in consideration of broader diversity on boards and in executive roles, including the representation of people who self-identify as Black, Indigenous, persons of colour (BIPOC), persons with disabilities, or LGBTQ2+. Although any proposed changes would not apply for the 2023 proxy season, we anticipate that the current disclosure rules, focused solely on the representation of women, will be expanded to cover other underrepresented groups.
  • Disclosure format: In the Year 8 Report, the CSA reiterated that the lack of uniformity in diversity reporting may make it difficult for investors to locate and interpret such information. Accordingly, they are encouraging issuers to use a common tabular format to disclose this information. Corporations Canada has also published non-binding guidance for CBCA corporations recommending the use of a common tabular format for disclosure of required information concerning the number and percentage of women, visible minorities, Indigenous Peoples, and people with disabilities (i) on the corporation’s board of directors and (ii) among senior management6.

What’s new from proxy advisers: For 2023, both Glass Lewis and ISS are taking an incrementally tougher stance on board diversity.

  • Glass Lewis transitioned from a fixed numerical approach to a percentage-based threshold in its gender diversity guidelines for TSX companies. It generally will recommend a vote against: (1) the chair of a TSX company’s nominating committee if the board does not have at least 30% gender-diverse7 directors; and (2) all nominating committee members if the board does not have any gender-diverse directors. For boards of issuers listed on other Canadian exchanges, the standard remains a minimum of one gender-diverse director.
  • Consistent with its 2022 guidelines, ISS generally will recommend a vote against the chair of the nominating committee (or chair of the board if there is no nominating committee) of:
    • an S&P/TSX Composite Index company if women do not comprise at least 30% of the directors; and
    • a non-Composite Index TSX company or a NEO company that does not have at least one female director.
    New for 2023, ISS has eliminated the exceptions to these guidelines that applied in 2022 if a company had publicly disclosed a written commitment to achieve the relevant target at or prior to its next annual general meeting. Now, exceptions to ISS’s gender diversity policy will apply only if a company is new to the relevant exchange, exchange tier or index or in “extraordinary circumstances”.
  • ISS recently announced that beginning in 2024, it will expect Canadian S&P/TSX Composite Index constituents to have at least one racially or ethnically diverse director.

The latest from investors and governance advocates

  • Many Canadian institutional investors have already incorporated a 30% standard for the representation of women on boards into their proxy voting guidelines. Increasingly, institutional investors also want to see companies show commitment and progress toward diversity beyond gender.
  • The Committee on the Future of Corporate Governance in Canada, a joint initiative of TMX Group Limited and the Institute of Corporate Directors, recently recommended in its report Charting the Future of Canadian Governance8 that boards set targets to have at least 40% of their members identify as female and at least 40% identify as male. The Committee also recommends that companies set targets for at least 30% representation on the board from underrepresented racial groups, Indigenous persons in Canada and disabled persons.

In March 2022, Canada’s 30% Club Investor Group published an updated Statement of Intent in which it called upon public companies to, among other things:

  • Achieve and exceed the 30% gender diversity target;
  • Commit to best practices and approaches to increase the representation of underrepresented groups on boards and in executive management, such as considering the adoption of targets appropriate for the business and communities in which a company operates; and
  • Disclose to investors diversity data that is able to be collected as well as the company’s policies and procedures to identify diverse board nominees and diverse candidates for executive management positions.

What to expect: shareholder proposals

Based on recent trends, Canadian companies should look out for shareholder proposals in 2023 raising the following:

Potential diversity-related shareholder proposal themes for 2023

Set higher targets for the representation of women on the board or in senior management (e.g., at 40% or gender parity)
Report on the representation of women at all levels of management
Develop and disclose timebound goals to increase the proportion of underrepresented racial groups, Indigenous persons, disabled persons and LGBTQ2+ persons on the board and in senior management
Report on extent to which company’s policies and practices regarding Indigenous community relations, recruitment and advancement of Indigenous employees, internal education on Indigenous reconciliation and procurement from Indigenous-owned businesses compare to or are certified by Indigenous-led standards of practice
Report on plans to identify, address and dismantle racial disparities in the workforce9
Commission and publish the results of an independent racial equity audit
Publish comprehensive, quantitative data on the outcomes of gender, race and ethnicity-related diversity, equity and inclusion efforts
Provide for employee representation in the company’s strategic decision-making
Disclose in the information circular the languages in which directors are fluent (For the first time in Canada, a company has disclosed a proposal of this type in its proxy circular for the 2023 meeting season.)

Glass Lewis has signaled in its 2023 global guidelines for ESG initiatives10 that, after taking into account a number of factors, Glass Lewis generally will recommend in favour of well-crafted shareholder proposals for a racial equity or civil rights-related audit if it believes that doing so will help the company identify and mitigate potentially significant risks.


Consistently cited by instititional investors as a high priority issue with potentially significant material financial implications for every company, cybersecurity continues to be a focus this proxy season.

Proxy advisers: Glass Lewis has amended its 2023 guidelines to state that it believes cyber risk is material for all companies and that it expects companies to provide clear disclosure regarding the board’s role in overseeing cybersecurity issues and how companies are ensuring that directors are “fully versed” on this issue. Although Glass Lewis generally will not make recommendations based on a company’s oversight or disclosure concerning cyber-related issues, it may make recommendations against appropriate directors if cyber-attacks have caused significant harm to shareholders and Glass Lewis concludes that the company’s disclosure or oversight is insufficient.

Regulatory developments: In 2022, the SEC proposed rule amendments that would require disclosure of material cybersecurity incidents and about companies’ oversight and policies regarding cybersecurity risk11. Although currently there are no equivalent Canadian securities law requirements in place or proposed, and most of the SEC’s proposed amendments would not apply to Canadian companies that report under the MJDS, we expect that the SEC rules and U.S. market practice will influence market practice in Canada.

  1. See the CEC’s statement of expectations here and the list of companies on CEC’s focus list here.
  2. NI 51-107, which was published for comment in October 2021, can be found here.
  3. More information on this initiative can be found here.
  4. For more information, read Torys’ bulletin here.
  5. Read the report here.
  6. Corporations Canada’s guidance on diversity disclosures can be found here.
  7. Glass Lewis defines “gender-diverse” to mean women and individuals who identify as a gender other than male or female.
  8. The Report can be found here.
  9. A proposal of this type received a greater than 62% favourable vote at one Canadian company (in the technology sector) in 2022, despite management’s opposition and at least one Canadian company in technology sector has received a similar proposal for its 2023 meeting.
  10. Glass Lewis’s global 2023 policy guidelines on ESG initiatives can be found here. Although some of the guidelines in this document apply only in a specific market, others (including the guidelines on shareholder proposals regarding racial equity audits) apply globally.
  11. See Torys’ bulletin SEC proposes cybersecurity disclosure and reporting requirements for public companies here.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

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