In June 2024, many were surprised by the announcement of changes to the federal Competition Act. The talk of the summer soon became Bill C-59, as it is commonly referred to, which among other things included new provisions for environmental claims. Canadian companies responded to the bill with concern, some even removing entire sections of their website that previously contained years of environmental, social and governance (ESG) data. This apprehension seemed to largely stem from the liability of making environmental claims that could not be substantiated using internationally recognized protocols and standards – a liability that now comes with potentially stiff financial penalties north of $10 million. While guidance on implementation remains forthcoming from the government, this situation has created some dilemmas for investors and issuers alike.

Greenwashing – What Has Changed?

Greenwashing itself is nothing new. However, with more attention on sustainability and ESG, companies are increasingly promoting their credentials in this area, especially around the concepts of net zero or carbon neutrality. To be clear, many investors have been asking companies for this ambition as part of our engagement on preparedness for the energy transition to ensure our portfolios are resilient in the long run. We want companies to be aspirational around the long-term commitment of net zero by 2050 yet practical in their short- and medium-term goals related to implementation of this aspiration.

Investors generally support innovation and do not want to see it stymied by regulation. Particularly in the context of decarbonization, society is going to require new technological solutions, and we need companies to invest in and champion these promising opportunities without fear of unintended consequences. An overly punitive approach to greenwashing may realize such unintended consequences and incentivize companies to stick with the status quo. This is a balance that the Competition Act needs to strike.

While existing rules have addressed greenwashing in several ways, what is unique about the recent changes to the Competition Act is the broader scope that goes beyond just products and services, the monetary fines that could be imposed, and the ‘adequate and proper test’ indicated to substantiate claims.

Investors Equally Concerned with Greenhushing

Unfortunately, we have seen some companies overreact to the changes to the Competition Act by removing all ESG and sustainability-related information from their websites. This is information that investors rely on for investment decisions, making its disappearance a significant concern.

There is an important distinction between greenwashing, which includes mostly narrative, qualitative commentary on the exaggerated benefits of business activity, and ESG data. It is my hope that companies that have published ESG data for many years now, in some cases decades, have an appropriate level of internal controls and oversight to reliably stand behind their ESG disclosure. This doesn’t mean numbers must be precise, but they should be defensible and based on appropriate assumptions where necessary. Offering no ESG data to the capital markets will not serve companies or investors well, as this is now a mainstream requirement for debt and equity investors.

Data does not lie, so it would seem that some companies have thrown the baby out with the bathwater by wiping entire ESG sections off their websites. This approach is often called ‘greenhushing’ and has been a noticeable practice in the United States in the midst of a heated political debate over ESG. I certainly hope that Canada can do better. A more measured approach seems to be the use of disclaimers or caveats, which we are also seeing more of given the uncertainty around changes to existing legislation.

Solutions to Greenwashing and Greenhushing

One of the central reasons we are even having this debate in Canada is that we have been unable to establish a robust mandatory reporting regime based on international standards. Companies are largely providing ESG disclosure through avenues other than mainstream securities filings. Sustainability reports are distinct and separate from regulatory filings, with some exceptions, and too often treated as public relations material.

If ESG disclosure becomes mandatory through the work of the Canadian Sustainability Standards Board (CSSB) and adopted by securities regulators, it would naturally be covered by existing securities law. This mandatory regime should be prioritized yet we remain in limbo, and now the Competition Act is causing further confusion.

The other piece of the puzzle is the lack of progress in Canada toward an acceptable taxonomy related to what can and should be considered ‘transition’. For several years now, financial institutions across Canada have supported a taxonomy to ensure credibility when companies claim to be part of the energy transition. In early October, the Government of Canada announced support for such a taxonomy, which was welcomed by the investor community at the PRI in Person conference. Progress on this cannot happen soon enough to attract capital to Canada.

Investors have been clear about what they need through the CSSB consultation process and other avenues – consistent, comparable, decision-useful information. It is now up to regulators to deliver this to us. A regulatory solution of this nature will go a long way to addressing the concerns raised by Bill C-59 and the Competition Act. Hopefully, the consultation process underway by the Competition Bureau will also draw out investor perspectives and the right balance will be struck.

Jennifer Coulson is Vice President, ESG, Public Markets, at BCI.