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The ABCs of ESG

Environmental, Social and Governance, or “ESG” refers to three central factors in measuring the sustainability and ethical impact of investments. A growing number of investors rely on these factors to determine whether they ultimately want to invest, or continue to invest, in a given business. The practice places value on companies’ choices to be environmentally conscious, ethically aware, and forward-looking. While ESG investment may be characterised as ethical in its approach to capture environmental and social impacts, at its core, ESG investment involves gauging a company’s long-term, rather than short-term sustainability.

Here are some factors that ESG investors consider when making investments:

  • Energy Efficiency
  • Greenhouse Gas (“GHG”) Emissions
  • Staff Turnover
  • Training and Qualification
  • Maturity of Workforce
  • Corruption and Bribery
  • Revenues from New Products‎

History of ESG

ESG investment practices spawned from the growing realisation in the 1990s that accurately predicting a business’ success required the review and assessment of traditionally “non-financial” factors. ‎The most notable statement of this acknowledgement came in 1998 when John Elkington published his ‎work entitled, Cannibals with Forks: the Triple Bottom Line of 21st Century Business. Elkington identified ‎several non-financial factors that he argued should be included in assessing the long-term prospects of a business. Through identifying these factors, Elkington ‎coined the term “triple bottom line” which refers to the financial, environmental and social factors ‎included in his proposed calculation. ESG can be viewed as a continuation and modernisation ‎of Elkington’s proposition, with the inclusion of the “governance” factor, which acknowledges that the manner in which ‎a company is run will impact its bottom-line. For instance, the way a company treats its employees may impact employee morale, loyalty, and thus affect its ability to retain talent.

Fast-forwarding to present day, ‎there is general acceptance that financial assessments cannot be ‎accurately made without access to ESG-related information. As such, ESG has become less a question of philanthropy or ethics, ‎and more a practical acceptance of the underlying relationship between corporate finance and society more generally. In recent decades, as investors increasingly seek ESG-related information for investment purposes, many governments around the world have implemented regulations and disclosure requirements relating to ESG factors. While the legal shift supporting ESG investment has been relatively slow-paced, international organisations such as the United Nations’ Principles for Responsible Investment have been actively promoting and supporting these legal developments.

Where does ESG stand in Canada?

Although exact statistics are difficult to ascertain, a recent Canadian Responsible Investment Trends Report reveals that ESG investment is on the rise in Canada. The report relied on survey data collected from more than 100 asset managers, asset owners, and publicly-available sources. According to the report, assets in Canada being managed using responsible investment strategies increased from,

“$1.5 trillion at the end of 2015 to $2.1 trillion at the end of 2017. This robust growth represents a 41.6% increase in RI assets under management over a two- year period.”

The report goes on to acknowledge that,

“The rapid uptake of responsible investing in Canada is being driven largely by the growing business case for incorporating environmental, social and governance factors into investment decisions. Survey respondents reported their top four reasons for considering ESG factors are: (1) managing risk, (2) improving returns over time, (3) meeting client or beneficiary demand, and (4) fulfilling fiduciary duty.”

A further example evidencing the trend towards ESG investment in Canada comes from the largest single investor in Canada: the Canadian Pension Plan. The Canada Pension Plan (“CPP”) offers Canadian contributors and their families with partial replacement ‎of earnings upon retirement, disability, or death. Almost all individuals who work in Canada outside of ‎the Province of Quebec (where the Quebec Pension Plan provides similar benefits) contribute to the ‎CPP. ‎In 2013, CPP’s net managed assets totaled CAD $175.0 billion.

The Canada Pension Plan Investment Board (“CPPIB”) is the body responsible for investing CPP ‎contributions made by Canadian citizens and was established in 1997. While the Canada Pension Plan Investment Board Act does not specifically mention or require sustainable, responsible, or ‎ESG investment practices, the CPPIB has publicly stated the following interpretative position on their website: ‎

‎“Given our legislated investment-only mandate, we consider and integrate both ESG risks and ‎opportunities into our investment analysis, rather than eliminating investments based on ESG factors ‎alone. As an owner, we monitor ESG factors and actively engage with companies to promote improved ‎management of ESG, ultimately leading to enhanced long-term outcomes in the companies and assets in ‎which 20 million CPP contributors and beneficiaries have a stake.”‎

Similarly, while explicit requirements for ESG investments are not present within the Ontario Pension Benefits Act, O. Reg 235/14 under the Act now requires Ontario registered pension plans to include the following within their statement of investment policies and procedures (“SIPP”):

“The statement of investment policies and procedures shall include information as to whether environmental, social and governance factors are incorporated into the plan's investment policies and procedures and, if so, how those factors are incorporated.”

As pension plans are required to invest in accordance with their SIPPs, ESG factors are becoming an essential aspect of Ontario registered pension plans’ investment decisions.

The recent Responsible Investment Association Report, the interpretive statement from the CPPIB, as well as Ontario regulatory requirements for its registered pension plans, stand as strong indicators that ESG investment is alive in Canada.

ESG disclosure requirements and regulations in Canada

Generally, legal support for ESG is reflected through the implementation of disclosure requirements obligating businesses to disclose information such as environmental impact assessment reports, corporate governance documentation, and other social impact reports stemming from business operations. After all, investors cannot make informed ESG investment decisions without access to relevant data.

In Canada, environmental disclosure requirements under the Canadian Environmental Protection Act and similar provincial legislation only apply to specific energy-producing sectors and only with regard to a limited subset of businesses based on the volume of Greenhouse Gas (“GHG”) Emissions per annum. As a result, much of the environmental disclosure that occurs in Canada is done on a voluntary basis. While one may argue that some disclosure is better than none, the lack of regulatory oversight has resulted in ad hoc, inconsistent, and sometimes misleading disclosures. Furthermore, even when disclosures are made in good faith, the lack of consistent methods for presenting ESG data has made it difficult for investors to quickly and accurately compare investment options.

Recognising the growth of ESG and responsible investments in Canada, securities regulators and lawmakers have begun to publish guidelines for businesses on their websites. These guidelines indicate that securities regulators in Canada are both aware of and support ESG investment practices. For instance, under Canadian securities laws, publicly-traded businesses are generally required to disclose all material information affecting their business. While this requirement was not historically been interpreted as including ESG factors, the Canadian Securities Association (“CSA”), has published guidelines indicating that such a requirement does extend to environmental disclosure in some circumstances. In Staff Notice 51-333, CSA staff concluded that,

“information relating to environmental matters is likely material if a reasonable investor’s decision whether ‎or not to buy, sell or hold securities of the issuer would likely be influenced or changed if the information ‎was omitted or misstated.”‎

Furthermore, in Staff Notice 51-358, CSA staff note that “Investors, particularly institutional investors, are increasingly seeking entity-specific information regarding ‎these [environmental] risks.”‎ These statements from the CSA clearly illustrate that securities regulators in Canada are aware of investors’ desires to have access to ESG data, and have begun interpreting the requirement for public businesses to disclose all material information as extending to the environment.


All signs in Canada appear to indicate that ESG investments continue to be on the rise in Canada. Both institutional and private-sector investors alike appear to be part of the trend. We have already begun to see support from securities regulators when it comes to ensuring that investors in Canada have access to the ESG data they require to make informed investment decisions. It is only a matter of time before regulatory amendments and disclosure requirements are implemented to reflect investors’ growing interest in ESG investment. As both the negative and positive externalities associated with investments become more aware to investors, both the scope and popularity of ESG investment is likely to increase.

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This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

Eric is a Finance partner in DLA Piper Canada’s Toronto office, practising in the areas of debt finance, structured finance, derivatives and payment systems.  Eric acts for both borrowers and lenders, including Canadian and foreign banks and other financial institutions. He also provides advice to regulated financial institutions regarding Canadian Federal and Provincial regulatory requirements relating to compliance and controls pertaining to financial crimes. Eric has been recognized by Chambers Global and Chambers Canada as a leading banking and finance practitioner in Canada and is listed in Best Lawyers (Canada), the Legal 500 Canada and as an Acritas Star. 

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