ESG and shareholder activism: key tips for issuers

TERESA: Hello, I’m Teresa Tomchak, and I am a partner in Osler’s Litigation practice in the Vancouver office and a key contact for the Corporate and Securities Litigation group.

Shareholder activism is on the rise in Canada and particularly so in the realm of claims made by companies when it comes to the evolving area of ESG or environmental, social and governance (ESG) claims.

While no sector is immune to such activity, we have seen a rise particularly in the mining sector. On average over the last 10 years, mining companies were the targets of 45% of all activist campaigns, according to Laurel Hill’s Trends in Shareholder Activism Report as of September 2023.

Investors are tracking ESG related disclosure closely and that could mean trouble for those companies who are making claims and setting goals that they cannot live up to or those who are failing to address ESG in a meaningful way at all.

There are three ways companies can encounter problems if they are making ESG claims that they cannot live up to. These include:

• shareholder activism
• enforcement by securities regulators
• securities class actions alleging misrepresentation in ESG disclosure

Activism by shareholders can include demanding a change by replacing one or more directors, putting forward shareholder proposals or refusing to invest in or make loans to companies that do not meet their ESG investment standards. Notably, many institutional investors and lenders and other stakeholders have ESG requirements that are more stringent than those of proxy advisors ISS and Glass Lewis, or those suggested by existing disclosure standards. However, separate and apart from engaging with those stakeholders, issuers should prepare to meet the minimum guidelines set by the proxy advisors.

The second area of concern could be through enforcement action by securities regulators. The regulations relating to ESG are growing significantly and are constantly evolving. It is critical for companies to stay abreast of these changes and incorporate ESG into its governance processes so that they can meet their disclosure obligations and avoid enforcement actions by the securities regulators.

The disclosure required will be very different for mining companies depending on their stage of growth. For a small exploration mining company, disclosure requirements may be fairly easy to satisfy and for a large mining company in production, the disclosure may be quite complicated and require input from many parts of the company. In every case, meeting the requirements will require meaningful board and senior management engagement. While securities regulators may show some leniency, particularly to junior mining companies, as this area evolves, we expect that there will be increasing enforcement action from the securities regulators.

The third area for concern for mining companies is though securities class actions alleging misrepresentations in ESG disclosure. While companies will want to meet their disclosure obligations, they should be very careful about making claims when they have no realistic concrete plan to achieve those objectives. Forward looking information and risk factors should be reviewed and enhanced to ensure that such typically boiler-plate disclosure is as effective as possible in defending against these types of actions.

Given the potential areas for liability in this fast-changing area, companies should consider obtaining or reviewing their insurance to ensure they have adequate coverage should such issues arise. If you want to know more about the risks posed by ESG issues, particularly those in the mining sector, please reach out to me or one of our team members in the ESG Group at Osler.