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Legal Notes: The tangible risks of ESG non-performance

John Bleasby
Legal Notes: The tangible risks of ESG non-performance

It’s been a roller-coaster ride for ESGs lately.

Given a global backdrop of high inflation, interest rate increases and Russian invasions, it’s not really surprising that climate change has been pushed from front pages lately.

However, construction project designers, owners and builders must continue their vigilance to not only develop strong Environmental Social Governance policies but to ensure verification, compliance and reporting are entrenched in their corporate culture.

Addressing the “E” in ESGs is a priority for all construction participants.

However, as Conor Chell of MLT Aikins in Calgary told the Daily Commercial News, the “Social” and “Governance” portions must also be addressed. In the case of construction, commitments to safety should join the social aspects of diversity, equity and inclusion. Governance should include long-term commitments to pensions, plus ethics, business practices and cyber security matters.

ESGs are gaining steam around the world. According to a 2020 survey by KPMG, 80 per cent of companies globally and 90 per cent in North America report on sustainability. A majority of those are posting CO2 reduction targets.

One might think at first that large multinational companies would be most affected by ESG regulations. However, this perspective is shifting. Furthermore, it’s not only governments and regulators that are moving towards mandatory ESG disclosure. Banks and other lending institutions are beginning to collect climate risks and emissions reports from their clients in order to satisfy their investors. This can, in turn, impact project financing.

As MLT Aikins explains, “ESG metrics are now being used by the investment and financing communities to screen and rank potential investments and determine how capital will be allocated.”

From a regulatory standpoint, Canada is much slower off the mark than most countries in terms of requiring publicly-traded companies to provide complete, consistent and comparable ESG reporting.

A phased-in approach proposed by the Canadian Securities Administrators awaits final approval and, in any case, would not require ESG disclosure until March 2024 at the earliest. It’s leaving many companies in Canada unaware of the significant financial and potential liability risks down the road.

If other countries are any indication, there could be real and substantial penalties for those who fail to meet basic ESG disclosure requirements.

According to the Centre for Climate Change Economics and Policy, the cumulative number of climate change-related cases globally has more than doubled since 2015, with over 1,000 cases brought forward over the past six years.

In the United States, for example, the US Securities and Exchange Commission are pursuing numerous individual companies, fund managers and investment advisers for misleading ESG disclosure. In one case, BNY Mellon Investment Adviser agreed to pay a fine of $1.5 million. In the U.K., an activist shareholder group has announced plans to bring a claim against the directors of Royal Dutch Shell PLC for breaches in their directorial duties.

ESGs are not without their critics, with counter actions and statements against the imposition of ESG disclosure requirements.

Legendary U.S. investor Carl Icahn has called ESGs the “biggest hypocrisy of our time,” while outspoken Tesla CEO Elon Musk tweeted “ESG is a scam.”

Others have suggested ESGs are a distraction, impractical and not measurable.

Some governmental jurisdictions have taken strong action against ESGs as well. Texas has “prohibited” its pension funds and other state institutions from investing with several ESG-focussed funds, including those offered by Blockrock, the world’s largest asset manager.

This includes the divestiture of any current holdings that might include “a prohibition or restriction on oil and gas investments.”

Similar political posturing seems unlikely in Canada. In any case, Chell is not aware of any litigation under current consideration in Canada since mandatory ESG compliance regulations are still pending.

The ESG movement is here to stay, Chell says, despite contrary sentiments expressed by governments like Texas and certain reluctant investors. On the near horizon are also potential financial and liability risks for those who are slow to commit to meaningful compliance. Constructors must take heed.

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to

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