Industry Canada is currently consulting the public on a variety of issues, including corporate governance, corporate social responsibility and shareholder rights and regulations, as part of its review of the Canada Business Corporations Act (CBCA). What does this mean for your clients? A lot, actually.
That’s because increasing the scope of the CBCA could change the way that Canadian companies report on material environmental, social and governance (ESG) factors — and this information that could potentially have an impact on the valuation of a company. Of course, more comprehensive reporting would enable financial professionals, such as portfolio managers and advisors, to better evaluate how Canadian companies are addressing risk, leading to better long-term investment decisions.
Industry Canada says that in order “to grow and thrive in the global knowledge-based economy, Canada needs a strong corporate governance framework that both reflects and facilitates the best practices of Canadian corporations.” The inclusion of corporate social responsibility and the mention of best practices implies that Canadian regulators are interested in playing catch-up with forward-thinking legislators around the globe — and that could have a huge impact on Canadian business.
Climate change, supply chain management and other pressing issues are redefining entire sectors; and our traditional investment management tools simply aren’t up to the task of assessing these risks. By reviewing the CBCA with these considerations, the government recognizes that ESG factors can have a material impact on the operations and financial performance of a company.
In the Europe Union, there is proposed legislation to improve ESG transparency in large companies. Many of the calls for transparency have been driven by institutional investors reacting to the growing body of evidence that managing ESG risk has a positive impact on the long-term financial performance of companies.
Some international governments have already responded with increasingly strong regulation surrounding reporting on non-traditional risk factors. For example, the U.K., Australia, France and Germany now require that investment decision-makers disclose the extent to which they take ESG factors into account. Furthermore, the adoption of mandatory sustainability reporting requirements in countries such as Denmark, Sweden, France and South Africa in recent years has already had a positive impact on corporate behaviour and financial performance.
As part of this trend, the world’s largest stock exchange, NYSE Euronext, recently joined the United Nation’s sustainable stock exchanges initiative to explore how exchanges can work with investors, regulators and companies to increase transparency on ESG issues. (Euronext NV is home to 8,000 listed companies and is itself a sustainable firm.)
We have many corporate leaders in Canada. There are companies that have been producing sustainability reports for more than a decade — and some of those companies manage ESG risk in every aspect of their business. But that’s not enough. We need consistent reporting standards for all companies. Investors and other stakeholders need access to information that will allow them to differentiate the companies that are managing the future from the companies that won’t be a part of that future.
For Canada’s responsible investment (RI) community, this is an opportunity to contribute to the development of public policy. For a summary of the questions and topics posed in Industry Canada’s CBCA public consultation Visit the Responsible Investment Association’s discussion forum at http://riacanada.ca/ria-canada-discussion-forum/.
Deb Abbey is the Chief Executive Officer of the Responsible Investment Association. She is the co-author of the 50 Best Ethical Stocks for Canadians [2001] and the author of Global Profit and Global Justice, Using Your Money to Change the World [2004]. For more information about responsible investment options visit www.riacanada.ca.