ESG Trends to Watch in 2023: ESG Liability for Canadian Companies, Directors and Officers
ESG Trends to Watch in 2023: ESG Liability for Canadian Companies, Directors and Officers
Environmental, social and governance (ESG) concerns have been increasingly on the radar of Canadian companies in the past few years, garnering significant attention and discourse.
Environmental, social and governance (ESG) concerns have been increasingly on the radar of Canadian companies in the past few years, garnering significant attention and discourse. The factors that have created the greatest liability risks to date represent the “E” in ESG and, in particular, risks related to climate change disclosures and allegations of “greenwashing” – the concept of conveying a false impression or providing misleading information about how an organization is environmentally sound, or has a greater positive environmental impact than it actually does. With increased regulatory enforcement and a growing concern and activism relating to environmental issues, litigation risk is increasing for Canadian companies and their directors and officers.
Regulatory Focus on Greenwashing
ESG enforcement is on the rise. Over the past year, the Competition Bureau of Canada (the Bureau) opened several greenwashing inquiries prompted by environmental groups. In November 2022, for example, the Bureau opened an inquiry into the alleged deceptive marketing practices of a Canadian natural gas association. This was prompted by a formal complaint filed by a group of doctors, nurses and public health advocates, supported by an environmental group, under provisions of the Competition Act that require the Bureau to initiate an inquiry where six Canadian residents file an application alleging contraventions of that statute. As a result of the complaint, the Bureau will be seeking to determine whether the association’s representations in an advertising campaign in respect of natural gas being “clean” and affordable were false and misleading.
A few months earlier, in September 2022, the Bureau had opened an inquiry into a bank’s environmental representations based on a similar complaint from six individuals supported by environmental groups.Of all organizations, banks may be particularly exposed to ESG risk as their potential role in funding industries with a higher carbon footprint puts them in a unique position when making climate-related representations. Among other things, the complainants argued that the bank’s continued financing of certain energy projects made its representations with respect to being a climate leader materially false or misleading. The complainants contrasted public statements made by the bank detailing its support of the Paris Agreement’s net-zero by 2050 goals, and that it would provide billions toward sustainable financing by 2025, against its funding of such projects.
More recently, on March 16, 2023, Greenpeace Canada filed a further “six resident” complaint with the Bureau alleging that an advertising campaign by an alliance of Canada’s largest oil sands producers involved false and misleading representations with respect to the producers’ net zero commitments. Among other things, the complaint takes issue with the producers’ emissions accounting, expanding production levels and claims regarding carbon capture and storage technology. If the Bureau were to accept the complaint’s allegations and pursue further action following an inquiry, a potential penalty in the millions or even billions of dollars could be pursued following recent increases in maximum penalties under the Competition Act.
The outcome of Bureau inquiries in these cases could potentially change how Canadian organizations, financial institutions and industry organizations discuss their environmental and climate initiatives. In the meantime, the rise in greenwashing complaints underscores the growing scrutiny ESG commitments are facing in the current environment.
Ready, Set, Class-Action
There is precedent for public enforcement around ESG issues to be followed by class-actions premised on the same conduct or allegations pursued by the relevant regulator. This is likely to become an increasingly prominent trend into the future, given the increased regulatory enforcement and oversight that is emerging in this area globally and in Canada.
For instance, in January 2022, the Competition Bureau reached a settlement agreement in a “greenwashing” case in which a coffee pod company paid a CA$3 million penalty following a Bureau investigation into the company’s claims that its single-use coffee pods were recyclable. These claims were determined to be false and misleading on the basis that they created the impression the pods were easily recyclable despite consumers often needing to take additional steps to properly recycle the pods. The Bureau also found the company’s claims to be false or misleading due to the pods not being accepted in most Canadian cities’ recycling programs.
Although the Bureau matter came to a close in 2022, a year later, a Canada-wide class-action lawsuit was filed in Court against the company on behalf of individuals who had purchased its single-use pods. Canada is not the only jurisdiction where this company faced a class-action; this same company has been fighting class-actions with class members in the United States (one of which it resolved by paying US$31 million into a settlement fund).In the Canadian class-action, class members are claiming damages under the Competition Act based on allegations the company knowingly made false or misleading representations that the coffee pods were environmentally friendly and recyclable, while also claiming damages under the Consumer Protection Act on the basis that the representations constituted an “unfair practice.” The class members argue that the Bureau’s settlement did not compensate the purchasers of the single-use pods and related machines.
Funding of class-actions around environmental issues appears to be top of mind for various stakeholders, including municipalities. In July 2022, the City of Vancouver voted to allocate nearly CA$700,000 in funds toward a future potential class-action lawsuit against energy companies in Canada. This vote followed a “Sue Big Oil” campaign initiated by environmental groups to encourage municipalities to use class-actions to recover alleged costs borne by them in connection with climate-related repairs, adaptation and mitigation. However, as of March 2023, the litigation funding was apparently not included in the City’s operating budget, nor added in as an expenditure. The future of this funding remains unclear as various council members appear to believe that such funding should instead be considered at the provincial and federal government-levels or obtained through private fundraising.
Things Are Getting Personal – Directors and Officers Exposed
In addition to ESG claims at the corporate level, directors and officers of corporations must also be aware of the increased risk of ESG-related liability and public accountability. Directors and officers may be named as defendants in actions in tort, securities class-actions, as well as in regulatory investigations related to their duties in relation to harm caused to the environment by the organization. They may also be engaged by a regulator to implement company-wide changes. For instance, to resolve the Bureau’s inquiry into its marketing of coffee pods, the senior leadership of the coffee pod company signed personal commitment letters to the Bureau under which they agreed to implement, monitor and report on a corporate compliance program to promote compliance with the deceptive marketing and other provisions of the Competition Act.
However, the biggest ESG litigation risk for directors and officers may be claims brought against them under corporate law statutes. Such claims arise from concepts relating to duties of fairness and acting in the best interests of the corporation and can take the form of derivative actions against a company’s officers and directors in their personal capacities. These are litigation claims in which any company stakeholder – shareholders, debt holders, directors or creditors – claims against a corporation’s management, board of directors or controlling shareholders, typically alleging breach of a fiduciary duty, conflict of interest, fraud, breach of the duty of care or mismanagement. The procedure for derivative actions stems from the corporate statute under which the corporation is incorporated, such as the Canada Business Corporations Act or its provincial counterparts.
Any directors or officers make decisions that may intentionally or unintentionally lead to failure to meet environmental and climate-related responsibilities must pay attention. Under the Canada Business Corporations Act, directors and officers in Canada are subject to a fiduciary duty of loyalty, in that they must act honestly and in good faith with a view to the best interests of the corporation, as well as a duty of care, in that they must exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances. Similar duties exist in the provincial business corporations legislation across Canada. As these duties are comparable to those being cited in various derivative complaints in the United States and the UK, Canadian directors and officers could be subject to similar proceedings taken against them with respect to allegations of ESG-related actions or inactions of the companies they serve.
Derivative actions against directors and officers related to ESG issues have been common in the United States. For example, a board of directors of one of the largest international energy companies has faced several class-action derivative complaints alleging a failure to mitigate the anticipated impacts of climate change on the company’s long-term business prospects, and alleging that it has been misleading shareholders on these issues, providing investors with materially misleading descriptions of the company’s efforts to account for climate change-related risks associated with the company’s assets. These proceedings are still ongoing.
In a first-of-its-kind case filed in the UK on February 9, 2023, an environmental charity commenced a derivative action against 11 members of the board of directors of an oil and gas company for failing to adopt and implement a climate strategy that aligns with the Paris Agreement goals, and for breaching its duties under sections 172 and 174 of the UK Companies Act. The claim is supported by institutional investors of the company worldwide. The charity alleges that the net emissions reductions expected by the company do not comply with the 2021 order of the Dutch Court to implement a 45% reduction in group-wide emissions by the end of this decade. This alleged failure to comply with the Dutch Court’s judgment (which is currently under appeal) is argued to also be a breach of the company’s corporate law duties. The claim seeks an order for the board of directors to adopt a strategy to manage climate risk in line with its duties under the Companies Act, and in compliance with the Dutch Court judgment. Currently, it is up to the High Court of Justice in the United Kingdom to determine whether to grant the charity permission to bring the claim. This case may pave the way for future claims against directors and officers from a wider class of potential stakeholders.
Mandatory ESG Reporting Creates Risk
Similar to voluntary statements and claims made by Canadian organizations, enforcement and litigation premised on allegedly false ESG claims or misrepresentations can arise from publicly listed organizations’ mandatory disclosure requirements. Whenever companies are required to disclose material information, there is a concomitant risk of litigation with respect to any misrepresentation related to that information. This can be an untrue statement of material fact, or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made.
ESG will become even more important as organizations get ready to comply with formal reporting requirements around environmental issues. The Canadian Securities Administrators (CSA) announced in spring 2021 that new climate-related disclosure requirements were to be implemented in Canada due to an increase in investors’ focus on climate-related risks, and to align Canada with foreign markets to streamline disclosure obligations. National Instrument 51-107 develops mandatory ESG disclosure for federally regulated financial institutions aligned with the Task Force on Climate-Related Financial Disclosures framework. It requires issuers to disclose four types of climate-related information beginning in 2024, including information regarding management of climate-related risks and opportunities, strategies and risk management of climate risks, as well as disclosing metrics used to assess climate-related risks and targets to be implemented by the company. This instrument also requires issuers to disclose greenhouse gas emissions, or provide an explanation as to why an issuer has chosen not to disclose this information, as well as disclose the reporting standard used for these calculations. This is part of a global change; the International Sustainability Standards Board (ISSB) climate-related disclosure standard is likely to be finalized in 2023 and we have previously written about the importance of the ISSB’s work to the development of the CSA’s Climate Disclosure Proposals. It is expected that ESG litigation, particularly as related to securities disclosure, will start gaining momentum quickly in this area once mandatory standards are formally in place.
What about “S” and “G?”
As ESG-related priorities continue to expand beyond just the “E”, social and governance-related disputes may also become more common in the coming years. Legislative action targeting modern slavery, such as Canada’s proposed 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, as well as increased scrutiny on supply chain due diligence, is gaining attention and will, in turn, lead to further reporting and disclosure requirements with respect to company practices. Bill S-211, if passed, would require every reporting entity to report the steps it has taken to prevent and reduce the risk that forced labour or child labour is used at any step of the production of goods in Canada or elsewhere by the entity, or of goods imported into Canada by the entity. The board of directors of these entities must approve this report while upholding their fiduciary duties and the expected standard of care under corporate law. Increased disclosure in these areas will give stakeholders the opportunity to address discrepancies between what companies disclose, and the actions taken, both through recourse against the company as well as its directors and officers.
Other social factors can include industry health and safety standards, as well as human capital management and access. Governance could refer to corporate governance and behaviour, including ethics, corruption, transparency, anti-competitive practice, corporate sustainability and board diversity. Social and governance-related ESG litigation has also been increasing, examples of which include claims of a lack of diversity on the boards of directors of certain major US technology companies, as well as the proposed class-action filed by civil service employees in Canada accusing the federal government of systemic racism, discrimination and employee exclusion.
Where Does This Leave Us?
Canadian organizations, as well as their directors and officers, should now be well aware that stakeholders, regulators and consumers expect ESG considerations to be fully integrated across Canadian organizations’ operations, and that failing to meet such expectations with measurable, verifiable and complete actions is increasingly likely to lead to regulatory action, enforcement or litigation. As this pressure increases, organizations must adapt to the dynamic risks associated with ESG, as well as implement the strategies required to manage these risks. Practically speaking, organizations must be prepared for potential liability by working to provide proper training and meaningful response protocols to ESG-related complaints, and they must review insurance policies applicable to the company, and its directors and officers, in order to know whether ESG related claims will be covered.
This piece was originally published on dentons.com
To read other articles in the Dentons’ pick of Canadian Regulatory Trends to Watch in 2023 series, click here.
 Competition Act, RSC 1985, c C-34, ss 9, 10(1)(a).
 Competition Bureau, Letter dated November 4, 2022, online: https://cape.ca/wp-content/uploads/2022/11/DCPalumbo-Letter-2022-11-04-CB-to-CAPE.pdf.
 Competition Bureau Letter dated September 29, 2022, online: https://ecojustice.ca/wp-content/uploads/2022/10/2022-09-29-Notice-of-Inquiry-Commencement-RBC-complaint-to-Competition-Bureau.pdf.
 Greenpeace, ““Let’s clear the air”: Greenpeace Canada launches complaint against oil sands alliance for misleading advertising campaign” (March 16, 2023), online: https://www.greenpeace.org/canada/en/press-release/57725/lets-clear-the-air-greenpeace-canada-launches-complaint-against-oil-sands-alliance-for-misleading-advertising-campaign/.
 Previously, the Competition Act provided for penalties under the deceptive marketing provisions of up to $10 million for corporations on a first violation. In June 2022, amendments increased that penalty to the higher of $10 million, three times the benefit received from the deceptive conduct or, if that amount cannot be reasonably determined, 3% of worldwide gross revenues. See Competition Act, RSC 1985, c C-34, 74.1(1)(c)(ii).
 Government of Canada, Keurig Canada to pay $3 million penalty to settle Competition Bureau’s concerns over coffee pod recycling claims (Jan 6, 2022), online: https://www.canada.ca/en/competition-bureau/news/2022/01/keurig-canada-to-pay-3-million-penalty-to-settle-competition-bureaus-concerns-over-coffee-pod-recycling-claims.html.
 Keurig Indirect Purchasers Antitrust Settlement, https://www.keurigindirectpurchasersettlement.com/
 CBC News, “Vancouver city council passes motion to back climate lawsuit against big oil companies” (July 21, 2022), online: https://www.cbc.ca/news/canada/british-columbia/vancouver-council-motion-climate-change-oil-companies-1.6528285.
 City of Vancouver, Report to Council, Standing Committee of Council on Policy and Strategic Priorities (20 July 2022) at 9-10, online: https://council.vancouver.ca/20220720/documents/pspc20220720min.pdf.
 Daily Hive, “Vancouver City Council rejects funding for lawsuit against oil firms” (March 1, 2023), online: https://dailyhive.com/vancouver/sue-big-oil-lawsuit-vancouver-funding-rejection.
 See Registered Consent Agreement – Keurig Canada Inc., Competition Tribunal File No CT-2022-001 at paras 11–12 and Appendix D, online: https://decisions.ct-tc.gc.ca/ct-tc/cdo/en/item/518827/index.do.
 Sabin Center for Climate Change Law, “The Fiduciary Duty of Directors to Manage Climate Risk: An expansion of corporate liability through litigation?” (Feb 15, 2023), online: https://blogs.law.columbia.edu/climatechange/2023/02/15/the-fiduciary-duty-of-directors-to-manage-climate-risk-an-expansion-of-corporate-liability-through-litigation/.
 Hague District Court Judgment (May 26, 2021), online: http://climatecasechart.com/wp-content/uploads/sites/16/non-us-case-documents/2021/20210526_8918_judgment-1.pdf.
 CSA, “Consultation Climate-related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument 51-107 Disclosure of Climate-related Matters” (Oct 18, 2021), online: https://www.osc.ca/sites/default/files/2021-10/csa_20211018_51-107_disclosure-update.pdf.
 LegisInfo, 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, online: https://www.parl.ca/legisinfo/en/bill/44-1/s-211.
 Francesca Odell, Victor Hou and James Langston, “Shareholder complaints Seek to Hold Directors Liable for Lack of Diversity” (Auguats 11, 2020), online: https://corpgov.law.harvard.edu/2020/08/11/shareholder-complaints-seek-to-hold-directors-liable-for-lack-of-diversity/.
 CBC News, “Government moves to dismiss class-action suit filed by Black civil service employees” (October 4, 2022), online: https://www.cbc.ca/news/politics/government-motion-dismiss-class-action-black-public-employees-1.6606217.