What purpose would a safe harbour for ESG disclosure serve in the Canadian securities regulatory framework?
The question loomed large in my mind while attending the annual Responsible Investment Association conference last week. A number of speakers, including Grant Vingoe, CEO of the Ontario Securities Commission, emphasized the importance of this protection if further mandatory ESG disclosure becomes part of our disclosure landscape.
But why is this important and what additional protection is needed that is not provided by the existing safe harbour defence? Considering the purpose of the safe harbour, and its already broad scope, the answer may be not much.
Let’s start with the purpose of the safe harbour. Disclosure about future events is inherently uncertain; no executive officer or disclosure committee has a crystal ball. However, projections and forecasts about future events are often material and of great interest to market participants.
Some categories of forward-looking information can be predicted with a meaningful degree of certainty (not 100% exact, of course). To protect issuers and encourage the disclosure of high-quality forward-looking information developed via reasonable analysis, a statutory safe harbour was enacted.
The safe harbour protects statements that contain forward looking information from civil liability where:
- they are accompanied by reasonable cautionary language that identifies factors that may cause ultimate results to differ, along with the material factors or assumptions applied in generating the forward-looking information; and
- the issuer had a reasonable basis for drawing the forward-looking conclusion or making the forecast or projection.
Any forward-looking information
The protection of the safe harbour is not limited to financial forecasts or projections. It can extend to any forward-looking information which the Securities Act defines as “disclosure regarding possible events, conditions or financial performance that is based on assumptions about future economic conditions and courses of action.”
This definition includes, but is not limited to, financial information.
The Canadian Securities Administrators published Companion Policy 51-102 to assist issuers in understanding their reporting obligations. Underscoring the point that forward-looking information need not be financial, the guidance states, “An example … would be an estimate of future store openings by an issuer in the retail industry. This type of information may or may not be material, depending on whether a reasonable investor’s decision whether or not to buy, sell or hold securities of that issuer would be influenced or changed if the information were omitted or misstated.”
What additional protection is needed? If the information sought to be disclosed is forward-looking, then the same rationale ought to apply to its disclosure. Most, if not all, forward-looking ESG information would already be safely moored in the existing statutory harbour.
If the desired protection extends to disclosure that is not forward-looking, that begs the question of why we should tolerate, let alone encourage, disclosure of potentially less accurate information.
Non-forward-looking information can be accurately discerned. Why does it need similar protections to forward-looking information? A significant amount of ESG information (particularly environmental and governance) is already routinely included in disclosure despite the fact that there is no specific statutory protection.
The suggestion that such a safe harbour is needed to avoid “automatic liability” is unfounded.
According to the latest NERA survey of Canadian securities class actions, approximately 40% of cases in the 2020–2024 time period were dismissed or discontinued. Liability or a settlement is far from certain, even once a claim is filed.
A reflexive desire to encourage ESG disclosure through special protections should not compromise the quality of the information our capital markets rely upon. Absent a compelling economic argument for the benefit of a second harbour, we should stick to the slips we’ve already got.