Environmental, social and governance (ESG) issues are now at the forefront of corporate thinking, as a source of both risk and opportunity.  Several factors are driving this change – including stakeholder activism, consumer choice, ESG-related litigation, and new legislation on ESG related issues, much of which has extra-territorial reach.  Stakeholders, including shareholders, employees, contractors, consumers, communities and supply chains are effectively influencing corporate behaviour. 

ESG criteria establish a framework used to assess the impact of the sustainability and ethical practices of a company on its financial performance and general operations.  Increasingly, ESG data is used to analyze corporate risks and behaviour that can influence and even determine the long-term performance of companies.  This type of risk analysis has become very important to investors in all sectors of the economy, but it is particularly germane in sectors where environmental and social issues have assumed greater significance and notoriety – such as in the extractive industries of petroleum and mining.

It is very important to appreciate that, while the acronym ESG is of relatively recent vintage, many of the concepts included in the criteria have been applied to the mining sector for decades.  Environmental impact assessments have been required in most countries for a long time. Such regulatory reviews often include detailed requirements to describe the expected environmental risks and mitigation strategies, as well as the socio-economic costs and benefits, expected from a particular project.  Those issues were considered as part of the legal landscape within which a company and its projects were expected to operate.  They were assessed by regulators and governments. Companies had to meet the requirements in order to have their projects approved and had to continue to meet applicable requirements in order to be compliant and operate without enforcement issues.

What has changed in recent years is the increased focus placed on environmental and social issues by the investment community, and in particular, by large institutional investors with access to trillions of dollars of capital.  So in addition to having to address environmental and social issues to the satisfaction of government regulators, companies are now being asked to demonstrate acceptable performance in these and other areas in order to access the capital needed to fund their projects.  It is not just borrowers and issuers who are being asked for their ESG report cards.  Banks, pension funds and other investment vehicles are being pressured by their shareholders, members and investors, and by NGOs, to direct investments to companies viewed as having positive environmental and societal impacts and to “disinvest” from industries and jurisdictions perceived to have negative impacts.

The last few years have seen a significant increase in sustainability reporting regulations around the world.  The various types of instruments that are included in ESG reporting frameworks range from “soft laws” to actual legislative requirements (aka “hard laws”).  It is important for companies to track the development of the former as it often leads to the latter.  Soft laws are things like statements of principles agreed to by nations, information collected on corporate performance by NGOs and presented to governments, and codes and practices developed by industry sectors.  These can lead to voluntary reporting and disclosure practices.  Self-governing bodies such as industry associations may eventually require members to agree to be bound by these reporting practices.  Financial market regulators may become more active and make reporting and disclosure a requirement for companies seeking to raise capital in the markets they regulate.  Ultimately, governments may enact legislation making reporting and disclosure mandatory and enforcing criminal sanctions for non-compliance against companies and their officers and directors.

The treatment of greenhouse gas emissions as a contributor to global warming and climate change provides a good example of how this issue has moved through the spectrum of provisions described above.   The 1992 UN Earth Summit in Rio de Janeiro produced a broad agenda focused on sustainable development that led to the signing of the Kyoto Protocol in 1997.  The Protocol was a non-binding statement of intent signed by almost 200 countries but was not ratified until 2005.  In the meantime, some companies (e.g. Suncor Energy) started to track their GHG emissions and look at ways to offset those emissions.  Governments in some jurisdictions decided to encourage emitters to voluntarily report their emissions to government agencies set up to aggregate and track this data on an industry, region and national basis.  Lenders took up the issue and frameworks like the Carbon Disclosure Project developed.  Financial regulators jumped in, resulting in the Canadian Securities Administrators CSA Staff Notice 51-333 in 2010 to provide guidance to reporting issuers on disclosure requirements relating to environmental matters (including emissions). The Financial Stability Board’s Task Force on Climate-Related Disclosure (TCFD) and the issuance of its recommendations regarding the disclosure of metrics and targets used to assess and manage relevant climate-related risks and opportunities is another example.   Eventually, GHG emissions reporting became mandated by law and requirements to reduce these emissions are required in certain jurisdictions.

This progression is now being seen in other areas that fall under the ESG rubric, so it is important for companies to recognize the development of the soft laws and prepare for the possibility that they could ultimately lead to hard laws.  Companies should become familiar with the UN Sustainable Development Goals (SDGs) as they form the basis for many of the topics covered in existing and developing ESG reporting frameworks.
The UN Environment Programme on sustainability reporting in the mining industry published a report in September 2020 in which it found a growing demand for more detailed disclosures at the mine-site level and the need for increased government involvement and guidance (such as on national SDG priorities) that can inform the context of sustainability disclosures and make them more meaningful to stakeholders. Among the key findings of this report was that “the management of environmental and social aspects, and sustainability reporting of mining companies is not currently meeting the expectation of interested stakeholders, notably communities affected by mining operations and investors”.

Sector-specific reporting provisions are an important part of the overall picture.  The two reporting standards that have become the most prominent and most commonly used are the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI).  Both organizations have developed documents specific to the mining sector.  SASB has its Metals & Mining Sustainability Accounting Standard covering 11 topics ranging from GHG emissions to business ethics and transparency, some of which allow for quantitative measurement while others that are not capable of measurement are dealt with by discussion and analysis.   GRI’s standards are broken down by topic, such as procurement practices, energy use and anti-corruption, but the organization also uses what it calls “Sector Disclosures” to focus on particular industries.  The Mining and Metals Sector Disclosures document is intended to cover key aspects of sustainability performance that are meaningful and relevant to this sector and that are not sufficiently covered by the guidelines and standards of more general application.

While SASB and GRI appear to be emerging as the more commonly applied ESG reporting frameworks, there is a plethora of other standards, principles, guidelines, questionnaires and performance indicators.  This makes it difficult for companies, investors and other stakeholders to make meaningful assessments and comparisons.  Another important issue is the fact that reporting frameworks focus on aggregate corporate performance and may not provide sufficient detail to provide a reliable basis for assessing individual projects or business units.

There is clearly a need for harmonization and a need to ensure that the data being provided is relevant, useful and assessed in the proper context.  For example, data on a company’s water usage may be much more relevant if it is operating in an arid region than if it is operating in the tropics. 

There is also a need for sectors such as mining to do a better job of communicating their accomplishments in ESG to stakeholders and the media.  Despite what many of those critical of the performance of the mining industry assert, the mining sector was one of the first global industries to commit to sustainability reporting through the International Council on Mining and Metals.  The Mining Association of Canada’s “Towards Sustainable Mining” initiative is certainly a step in the right direction as it makes participation mandatory for all its members.  It is also the only program in the world that conducts assessments at the facility level.

Dentons Canada team is monitoring the fast-evolving ESG landscape. For further information or if you have questions, please contact Alex MacWilliam or another member of Dentons’ Environment and Natural Resources group.

To read other articles in the Dentons’ pick of Canadian Regulatory Trends to Watch in 2021 series, click here.

For the latest information and developments in regulatory law across Canada, see our Canada Regulatory Review blog.