Bill C-59 Consultation Shines Spotlight on Directors’ Role in Climate Oversight

ESG Global Advisors, a leading boutique ESG and climate advisory firm, is a trusted partner to both corporates and investors in Canada and globally. ESG Global has been advising clients on C-59 business implications based on recent amendments to the Canadian Competition Act. This article provides a summary of the amendments, along with key findings and actionable insights for Corporate Directors following a public consultation launched by Competition Bureau Canada.

Bill C-59 Overview

Bill C-59, otherwise known as Canada’s Fall Economic Statement Implementation Act, 2023, makes significant amendments to the Canadian Competition Act (“the Act”) around “greenwashing” or misleading environmental claims about products and services. Virtually all businesses in Canada, including foreign businesses doing business in Canada, are in scope. Now, if a business makes a statement, warranty or guarantee of the environmental attributes or performance of a product or service, it must be based on an “adequate and proper test” or “in accordance with internationally recognized methodology.”

While the intention of the legislation is arguably positive and is intended at preventing greenwashing, there are complexities around these amendments, which include the following:

• A higher bar to justify covered representations and claims. Prior to the amendments, environmental claims were covered by the general “misleading advertising” provisions of the Act; they must be “false or misleading in a material respect” to contravene the Act;
• Now, claims may contravene the Act unless supported with an “adequate and proper test” (in the case of products) or “adequate and proper substantiation in accordance with internationally recognized methodology” (in the case of other business activities). Yet, what is considered an “adequate and proper test” and “internationally recognized methodology” to justify a claim is still uncertain;
• The onus is on the business making the representation to prove that the claim can be justified and applies to all current and historical disclosures made.

Most notably, these amendments introduce a new private right of action allowing an application to allege that a company has contravened the Act, pending court authorization. This is a significant change as the current regime only allows the Competition Bureau to enforce the Act’s deceptive marketing provisions.

Penalties for non-compliance are severe. If a business contravenes a section of the Act, it can face monetary penalties of up to $10 million ($15 million for subsequent order); or three times the benefit derived from the misrepresentation. If that cannot be reasonably determined, the corporation can face up to 3 percent of the corporation’s annual worldwide gross revenues.

The Competition Bureau launched a public consultation in July 2023, with the objective of informing the development of enforcement guidance by the Bureau. ESG Global Advisors participated in this consultation and considered the perspectives of both preparers and users, with investors being the primary users of ESG and climate reports. The focus of our roundtable was on understanding the potential outcomes, including any unintended consequences, resulting from Bill C-59.

Key Findings from ESG Global Advisor’s Submission on Competition Act’s New Greenwashing Provisions

For background, it’s important to note that voluntary ESG and climate reporting has increased in Canada in recent years. Investors know that organizations that manage climate and ESG-related risks and opportunities are more resilient and generate better returns, and are now incorporating climate and ESG considerations into their decision-making process. While organizations are publicly disclosing some climate and environmental-related information, investors are still seeking more consistent and comparable disclosure from companies. One of the unintended consequences from Bill C-59, is that many Canadian companies are removing all historical data and reports on climate and ESG issues due to lack of guidance and clarification on what these key terms mean in practice. This approach has the opposite effect for investors as they no longer have access to the voluntary reported climate and ESG data and disclosure for investment decision-making.

For example, one of the most common environmental claims made is a commitment to be “net zero” by 2050 or sooner by both companies and investors. In certain circumstances these claims are being made without detailed transition plans in place to substantiate these claims. In order for these claims to be reasonable, companies need to develop credible transition plans, aligned to recognized frameworks, such as the CEC Net Zero Company Benchmark.

One of the key questions the Bureau asked centered around what internationally recognized methodologies should the Bureau consider when evaluating whether claims about environmental benefits of the business or business activities have been “adequately and properly substantiated?” In our view, current limitations include i.) lack of general consensus on terminology, and ii.) incomplete methodologies.

Lack of General Consensus on Terminology

There is a need for common environmental terms and claims to be defined and standardized. As previously mentioned, many businesses have made “net zero” commitments. According to the Intergovernmental Panel on Climate Change, net-zero refers to an ideal state in which the greenhouse gasses released into the earth’s atmosphere is balanced by the amount of GHGs removed. This does not mean there are no emissions in the global economy, but rather that they have been reduced as much as feasible, then the remainder are either 'captured' or 'offset' through both technological or natural investments such that the 'net' impact is zero emissions in the atmosphere. This definition would require businesses to calculate and reduce all categories of emissions (Scope 1, Scope 2 AND Scope 3 emissions). However, many businesses are only reporting on Scope 1 and Scope 2 emissions. There needs to be national consensus on what businesses need to do to be compliant.

Incomplete Methodologies

Preparers face limitations when backing claims up with “testing”, or by substantiation in accordance with “internationally recognized methodology” as a result of many methodologies being incomplete. In our work at ESG Global Advisors, we work with many investors and companies, who are doing their best to reach various climate commitments. In our consultation a key recommendation was for the Bureau to consider implementing agreed upon parameters and a set list of criteria and guidelines in order to be accepted, such as the GHG Protocol, final CSSB standards, the upcoming CSA climate rule, and the CEC net zero company benchmark, to name a few.

In the case of products, third party verification or certification (i.e. ISO 14001, LEED, ENERGY STAR, B Corporation etc.) should be reasonable provided that the certification is current (and not outdated), requires the reporting company to complete a survey or report data that has been verified by internal or external audit, and that the Board has signed off on the representation or claim being made.

If we use the “net zero” example, it is recommended that the Bureau should implement criteria that requires the entity to have the following in place:

• Calculation of its carbon footprint aligned to the GHG protocol (or other international GHG calculation framework). If the entity only has calculated its Scope 1 and Scope 2 emissions, it needs to show “reasonable progress” year over year and begin to calculate material Scope 3 categories.
• Parameters should also require the entity to set science-based targets aligned to the SBTi. The entity should also set short and long-term targets. The Bureau should consider implementing guidelines for target setting (i.e. absolute or intensity based).
• The entity should have a transition plan in place that is aligned to a recognised framework (i.e. Transition Plan Taskforce).
• It would also be advised for the entity to align climate and environmental reporting to recognized reporting frameworks (i.e. TCFD, SASB, GRI, IFRS S1 & S1 etc.).

This is only one example of potential criteria that the Bureau should consider implementing.

Other Challenges we Heard from Businesses and Investors

A key challenge we heard from participants revolved around forward-looking statements and ambitions. There is a “chicken and egg” challenge inherent in net zero by 2050. Companies and investors struggle with needing to set a target first vs. developing a plan to get there first. Investors are challenged by the fact that their portfolios represent their Scope 3 emissions. Yet, in order to decarbonize at the portfolio level, they are reliant on all of their investee companies across sectors and asset classes, to reduce emissions across the real economy.

Other challenges revolve around industry-specific definitions. There is a need for continued investment in research and innovation, particularly for hard-to-abate emissions, such as airline transportation and large haul trucking.

The other challenge revolved around the new “private right of action.” One of the complexities is the potential for advocacy groups to bring claims if it’s in “the public interest.” While court authorization is required, the term “public interest” is quite broad and exposes businesses to significant monetary penalties if a claim contravenes the Act. It is advised that the Bureau should require the claimant to substantiate that the claim is material to the public interest. This has the potential to mitigate the risk of companies having to use resources to defend insignificant or ill-intended allegations.

The Path Forward: What Should Corporate Directors Do?

While we are still waiting for the Competition Bureau to release further guidance based on feedback from the consultation, Bill C-59 should send a clear signal to governance professionals that ESG and climate reporting is not going away, in fact, it is becoming more regulated. Organizations need to implement the appropriate oversight and governance to ensure all public environmental statements, commitments and objectives are reasonable and have the proper documentation in place to prevent potential penalties. In particular, there are four key steps Governance professionals should implement now:

1. Review all Environmental Claims & Representations: Directors need to assign accountability to management and ensure that all environmental statements that meet the requirements of the Act are reviewed. Existing statements or claims that are unable to be tested need to be modified or removed immediately.
2. Keep Auditable Records: Organizations should collect defensible, auditable and reliable data to support any environmental or climate-related claims. This responsibility should have audit and/or financial committee oversight.
3. Align Reporting Practices to a Recognized Framework: It is advised that companies align “Net Zero” or other environmental commitments, claims, target setting and reporting practices to a recognized framework or methodology.
4. Board Education: It is important that the Board is engaged and understands how quickly the ESG and climate reporting landscape is moving. Corporate Directors should review all ESG and climate reports before they are made publicly available and be involved in the organization’s ESG strategy. It is also important that management has the appropriate level of oversight and updates the Board regularly. It is becoming a best practice for the Board to have ongoing capacity building and Board education to ensure effective oversight.

While this article highlights the challenges that many businesses face when backing up environmental claims, frameworks and methodology do exist and provide a strong foundation for businesses when communicating environmental benefits and commitments. All public environmental commitments and reporting need to be defensible and should be backed up by sufficient evidence and data, regardless of whether C-59 is in effect or not. Corporate directors need to be involved in the organization’s climate strategy and reporting by asking management the right questions. For more information, contact us to learn how we can support your approach to reporting given the recent amendments to the Competition Act.