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