SECURITIES REGULATION & IR

How an issuer addresses social issues is becoming an increasingly important consideration for investors in their investment decision-making process, as well as playing a critical role in external factors such as brand reputation and customer loyalty. Keeping current on significant social issues and publicly taking a stance on such issues can positively impact an issuer’s image and increase investor and consumer engagement. Conversely, if an issuer takes a neutral stance or adverse stance on certain social issues, there may be a negative effect on such engagement. Internally, addressing social issues can create a positive work environment and meaningful employee engagement. For example, in the wake of Roe v. Wade being overturned, some U.S. issuers have publicly taken a stance on abortion and supported their employees by adding abortion travel costs to their employee benefits. While this stance may enhance employee engagement, there may also be increased risks, as explained below.

While social issues are generally categorized with environmental and governance issues under ESG, our focus here is on an issuer’s disclosure obligations with respect to how it addresses and handles various social issues. These social issues cover a wide range of matters, including labour practices, human rights, Indigenous rights and supply chain management.

A Step-by-Step Analysis

A Canadian reporting issuer is required to publicly disclose “material” information. According to the Canadian Securities Administrators (CSA), “information is likely material if a reasonable investor’s decision whether to buy, sell or hold securities of the issuer would likely be influenced or changed if the information was omitted or misstated.” The manner in which an issuer engages with social issues may constitute “material” information that needs to be publicly disclosed.

An issuer should assess various social issues and determine which ones impact its business. The issuer should then assess, on an ongoing or case-by-case basis, whether any of these social issues rise to the level of being “material”:

1)    As a first step, an issuer should compare its current disclosures with peers and competitors (this process is called ‘benchmarking’). Beyond comparisons with peers and competitors, an issuer should consider objective social disclosure standards and frameworks. The Sustainability Accounting Standards Board (SASB) Standards can be used to help identify and disclose financially material social factors to investors. SASB has developed a series of industry-specific reporting Standards to assist an issuer in its disclosure practices.

2)    After gathering this information, an issuer can use it to identify potentially “material” social factors. Specifically, an issuer should consider social factors that would likely impact its business as well as investment decisions of the general investing public. For example, how an issuer chooses to engage with supply chain management in the context of modern slavery may have an impact on its business as well as an investor’s decision to invest in the issuer. The relevancy of certain social issues will depend on the business and financial condition of the issuer and the industry in which it operates.

3)    Finally, the issuer needs to disclose how it addresses such “material” social factors. CSA guidance indicates that it is better to err on the side of materiality and disclosure. Issuers also have a continuous obligation to review and update these material factors.

A full and comprehensive analysis of various social factors and whether any of them cross the threshold of being “material” to the business, operations, or financial condition of the issuer is required in order to ensure compliance with securities legislation. An issuer should be sensitive to each stage of the analysis above. Prior to a formal assessment of whether a factor should be considered “material”, an issuer should keep updated on various social issues relevant to its business and operations. As mentioned, the SASB Standards provides a list of industry-specific topics that could be utilized to keep issuers updated.

Management Discussion and Analysis

In its Management’s Discussion and Analysis (MD&A), an issuer is required to give a balanced discussion of its financial performance and financial condition. This includes discussion of important trends and risks that have affected the issuer’s financial results and trends and risks that are reasonably likely to affect them in the future. Using the SASB Standards as an example, an issuer can identify and discuss potentially material social factors that are most likely to impact the financial condition or operating performance of an issuer operating in its industry. For example, in the metals and mining industry, the social factor of human rights and rights of Indigenous peoples is considered a material ESG topic by SASB Standards.

An issuer’s Annual Information Form (AIF) must disclose all risk factors relating to the issuer and its business. The risk factors should address issues that would most likely influence an investor’s decision to purchase securities of an issuer, which include social factors. Specific risk factor disclosure may be required if an issuer is proposing changes to its business or if there are events that impact its future prospects. For example, the issue of company-sponsored abortion travel may be seen as a potential risk for litigation from states with abortion bans. This is because currently in some U.S. states, those who “aid and abet” abortion can be penalized. Another example in the metals and mining industry pertains to risks relating to supply chain transparency and forced labour. With increased political pressure, social issues such as modern slavery can drive legislative changes and represent a greater risk for certain industries. An issuer may be required to disclose these risks as they become material.

Voluntary Disclosure

Beyond mandatory disclosure, an issuer may voluntarily choose to disclose information related to various social issues. Voluntary disclosure can enhance an issuer’s public image and help investors and various stakeholders make better-informed decisions. An issuer should be alert to the following factors when choosing what to voluntarily disclose:

1)    The issuer should include applicable and appropriate disclaimers as misrepresentations can potentially increase the risk of litigation; and

2)    An issuer should review whether any information voluntarily disclosed constitutes “material” information that actually belongs under mandatory disclosure. Further, an issuer should ensure that the voluntary disclosure is accurate and consistent with mandatory disclosure.

Conclusion

In light of the increasing emphasis on ESG considerations by investors, Boards and management of Canadian issuers should assess their current approaches and internal and external processes for considering and preparing the issuer’s public disclosure around social issues.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-authors Thomas Fung (Associate) and Joannie Fu (Articling Student) at McCarthy Tétrault LLP.