Lawyers need to be aware of evolving regulatory framework and thinking around fiduciary duty: author
A new guide from the Canada Climate Law Initiative details for directors and officers of Canadian retail companies the legal risks and opportunities associated with climate change.
Released Jan. 11, Retail’s Route to Net-zero Emissions: The Canadian Retail Sector and Effective Climate Governance, was authored by Dr. Janis Sarra, professor of law at the University of British Columbia and a principal co-investigator of the CCLI.
The Canadian retail sector brings in $636 billion annually and is responsible for 10.5 per cent of Canada’s greenhouse gas emissions, according to the guide. Lawyers, whether in-house or advising corporate clients, need to be aware of the changing regulatory framework and evolving mindset around fiduciary duty and climate change, says Sarra.
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Stikeman Elliott partner, Ramandeep Grewal, practises corporate finance and corporate governance, advising public companies and asset managers. For her clients, including in the retail sector, climate-change-related risks arise around energy efficiency, emissions reduction, sustainability and supply chain issues, she says.
Legal obligations vis-à-vis climate change come from Canadian corporate law, competition law and soon there will be new securities law obligations.
In corporate law, board directors have an obligation to act in the best interest of the company, says Sarra. This includes acting in good faith and with due diligence, and directors have a duty of care in exercising these obligations, she says.
“Given how widely accepted the systemic risk of climate change is, given that it's been recognized by the Supreme Court of Canada, by the federal government and by provincial governments, no director can say they're unaware of climate change risks now.”
To act in the best interests of their business, directors must turn their minds to what risks are associated with their business, sector and region and how they are going to manage them, and they must anticipate the kinds of requirements that will help the company transition to net-zero emissions, says Sarra.
The board has duties to manage the oversight and strategy of the corporation, says Grewal. This means they must oversee the risks and disclosure obligations and determine how climate change is being incorporated into the company’s “day-to-day operations.” They must determine who in the organization is accountable for these tasks and facilitate the system by which they will be reported and assessed, she says.
“The more material climate-change-related risks become, I think the more incumbent it becomes on the board to have a direct line of sight into them.”
“Many companies have been addressing climate change or climate risk for a long time,” says Grewal. “But, generally, at the employee level. There were employee-level committees, or management-level committees. More and more, we are now seeing these matters elevated to the board and having a board committee or at least board members involved, and having a direct reporting mechanism back to the board so that the board is kept apprised of developments and of initiatives as well.”
The risks coming from competition law stem from the growing consumer demand for environmentally sustainable products, and companies seeking to capture that market by promoting themselves as environmentally conscious. The Competition Act prohibits deceptive marketing, and the Competition Bureau has warned businesses that if they exaggerate their environmental benefits, they will be sanctioned for illegal greenwashing, said the CCLI guide.
The U.S. has already seen a wave of greenwashing litigation against retailers, says Sarra. One example from the guide is the oat milk company Oatly, which is currently facing three class actions brought on behalf of its shareholders. After its US$1.4-billion initial public offering last May, a short-seller’s report accused the company of greenwashing and improper accounting practices, which caused the stock price to drop. The plaintiffs allege the company misled potential investors on sustainability and financial metrics ahead of the IPO. The case is ongoing and is before the U.S. District Court.
The U.S. being more litigious, the greenwashing litigation risk is higher there, but this is a burgeoning area which is spreading globally, says Sarra.
Retail companies will soon also have more requirements on the securities front, as the Canadian Securities Regulators issued in October the Proposed National Instrument 51-107 Disclosure of Climate-related Matters. The 90-day consultation period ends Jan. 17.
The new disclosure requirements will have four elements, says Grewal. One will be governance – how the board oversees and assesses the risks and opportunities of climate change. The second is strategy, identifying the material risks and opportunities, and how the company is impacted, in the short, medium and long term. The third is risk management and issuers will be expected to assess risks and identify processes for managing them.
The fourth, which will likely be subject to the most debate and comment, she says, is metrics and targets. In its proposals, the CSA has asked the market whether it is appropriate to adopt a strict framework on metrics and targets in the form of a “comply-or-explain model” – where you either comply with the framework or must explain why you do not – or to adopt “more rigorous prescriptive requirements,” says Grewal.
“And so that remains to be seen where they land. But what they have done with this proposal is at least provided some standardization. Once this comes into force, we will have some standardization that applies to Canadian public companies, so that people actually have a roadmap as to what disclosure is required. Shareholders will have a better ability to compare and comparability across issuers, because they'll be on the same playing field.”
Still in the air is the extent to which the requirements will be prescriptive around factors such as emissions control, she says.