Operating in a manner that benefits the environment and wider society

A Senate bill that would expand the fiduciary duties of corporate directors and officers to include their company’s social and environmental impacts is “very scary,” some lawyers say.

Introduced last May, Bill S-285 proposes amendments to the Canada Business Corporations Act (CBCA) to provide that a corporation’s purpose is to pursue its best interests while also operating in a manner that “benefits the wider society and the environment” and “minimizes any harm that the corporation causes to the wider society and the environment.” It states the objective should be eliminating environmental harm.

Patric Besner, who heads a boutique law firm in Montreal specializing in governance, commercial and corporate law, is very concerned about the proposed legislation.

He says if passed, it would replace shareholder primacy with stakeholder primacy, shifting the responsibility of corporate directors from acting in the best interests of the corporations.

"Corporations are not there to solve social issues,” Besner says, predicting that some companies could switch their incorporation to another province or a country if the legislation passes.

“It’s not going to work.”

The legislation, known as the 21st-Century Business Act, would also require businesses to report on their social and environmental impacts, and allow certain people to initiate court proceedings if they believe a company is not living up to its purpose.“

At every annual meeting of its shareholders, the corporation shall report in the prescribed manner on its impacts on the wider society and the environment, including on the measures it has taken to minimize any harm it causes to the wider society and the environment,” the bill states.

If passed, the changes would apply to all companies, big and small, incorporated under the CBCA.

What’s proposed marks a significant shift towards integrating the "double materiality" principle into federal corporate law. This principle recognizes a company’s impact on society and the environment as being material to its financial performance.

Toronto lawyer Carol Hansell specializes in corporate governance. In a 2020 legal analysis, she said corporate board members are legally obligated to include climate change risks and opportunities in their companies' oversight and strategic direction.

She questions the need for double materiality, explaining that corporate directors have a “duty of care” encompassing many issues and adapting to changing situations, such as those imposed by climate change.

“The corporate law works because it is flexible,” Hansell says, contrasting the climate challenges her own law firm faces with those of a company in the oil and gas sector.

“That’s the beauty of it.”

The existing law does not spell out every reporting requirement, but clearly companies do have an obligation to consider climate risk.

Hansell foresees difficulties should S-285 pass, including the possibility of companies choosing to incorporate elsewhere. She’s unsure what benefits would result from the added disclosure requirements and what the actual cost would be.

Whatever it is, shareholders will have to pay that, and the proposed changes, “will drive people off these boards.”

Ivan Tchotourian, a Université Laval law professor specializing in company law and social responsibility, enthusiastically supports S-285.

While he agrees with Hansell that companies already have wider responsibilities, he says that by “changing the rules a little,” the legislation “is sending a strong message.”

A native of France, Tchotourian noted that there is a growing focus on sustainable governance and finance in his home country and Britain. S-285 is modelled after the UK’s Better Business Act.

“We want to do things differently,” Tchotourian says.

He acknowledges that what’s proposed is “ambitious” in seeking a shift to a business mindset “respectful of the environment.”

“This is something that will set off Canada from the United States,” Tchotourian says.

“I think that (it) will be well regarded.”

While it’s uncertain whether the bill will pass, nuisance litigation could be a side effect if it does. However, he believes the benefits of legislating uniform obligations on Canadian companies outweigh the negatives. Going forward, it will be beneficial.

While S-285 is part of widespread discussions on sustainability, Radha Curpen, the head of McMillan LLP’s ESG and sustainability practice, doesn’t consider the proposed mandatory requirements necessary.

She points to 2019 amendments to the CBCA, which made stakeholder interests something directors can consider “in the best interests of the corporation” within their fiduciary duties and duty of care.

Curpen says every corporation is evaluating the risks and opportunities of ESG without S-285, noting that the bill would complicate directors’ responsibilities and potentially expose them to litigation.

“There is no need for mandatory requirements under the Canada Business Corporations Act,” she says.

“I just don’t see corporations in today’s world not dealing with ESG considerations.”