One of the key "S" considerations of ESG (environmental, social and governance) is diversity, namely a push for companies to address the representation of historically under-represented groups (such as women and visible minorities) on their boards of directors and within their management ranks. An important tool towards this end has been public disclosure regarding diversity metrics whereby regulators encourage or mandate that public companies disclose their diversity statistics and/or set diversity targets (or explain why they are not doing do).
Although recent years have seen a growing number of regulators and market actors adopting diversity disclosure requirements, including in the U.S., Canada, Europe and the United Kingdom, there is not yet any straight line in the approaches being taken. Stated differently, while there is a growing consensus towards gender diversity disclosure, the mapping in terms of disclosure with respect to visible minorities and other under-represented groups is really just beginning and the regulatory horizon remains unclear. Indeed, Canada is not the only jurisdiction to experience internal division in the field of ESG.
This being the case, we step back and survey these diverging regulatory practices and market responses in the aggregate to identify some of the different influences at play and to consider how things may develop moving forward. We ask when and how consensus regarding diversity disclosure might emerge, and who should reasonably be expected to lead the charge.
United States
In the U.S., different regulatory thinking regarding the appropriate approach to diversity disclosure is perhaps best evidenced by the dissimilar stances of the NASDAQ and the NYSE.
NASDAQ requires its listed companies to disclose board-level diversity statistics annually using a standardized board diversity matrix template, and in addition, to either have, or explain why they don't have, at least two members of their board of directors who are diverse, which for U.S. companies with boards of more than five members means (i) at least one female director, and (ii) at least one diverse director who self-identifies as LGBTQ+ or as one or more non-Caucasian races or ethnicities.
By contrast, the NYSE has to date embraced a market-driven approach to board diversity, as evidenced by its absence of any rules prescribing diversity-related disclosure. In lieu of a disclosure requirement, the NYSE instead opted to adopt a community-oriented approach. In 2019, it launched a Board Advisory Council, comprised of the CEOs of some of the world's largest companies, that aims to educate and provide opportunities for candidates from under-represented groups to network at events with individuals from listed companies, with the aim of increasing board diversity.
The U.S. has also recently experienced an increase in the politicization of ESG and the emergence of an anti-ESG movement. A practical consequence for U.S. companies and asset managers has been an increase in the promulgation of anti-ESG shareholder proposals as well as announcements or legislation by various states that their state pension funds cannot invest in ESG-focused funds. Proxy advisers also have been brought into the fray. For example, with respect to board diversity disclosure, in January 2023 twenty-one Republican State Attorney Generals sent a letter to ISS and Glass Lewis claiming that their diversity policies may violate state anti-discrimination laws as well as fiduciary and contractual duties. ISS and Glass Lewis, in their respective responses, denied any wrongdoing.
This State Attorney General pushback comes amid a climate of increasing shareholder proposals related to diversity. For example, the Conference Board reported that proposals on racial equity and civil rights audits gained traction in 2022 compared to 2021. First, 43 such proposals were filed in 2022 compared to only 9 in 2021. Second, 31 of such proposals were voted on in 2022 compared to only 9 in 2021. Finally, 2022's racial audit proposals "were likely to go to a vote (72 percent) and received significant shareholder support (33 percent)". By comparison, anti-ESG proposals "attracted average support of only 3.5 percent" in 2022, according to the Proxy Preview 2023 released by As You Sow, Sustainable Investments Institute, and Proxy Impact.
The U.S. anti-ESG movement is also being met by direct pro-ESG resistance, including at the academic level. Most recently, for example, 130 faculty and researchers from more than 60 institutions from 24 states signed a letter to U.S. federal and state policy makers expressing great concern over efforts to curtail the use of ESG considerations in investment management.
Canada, Europe and the U.K.
In Canada, a fragmented approach to diversity disclosure is currently in place. Since 2014, most but not all, provincial securities regulators adopted mandatory disclosure regarding women on boards of directors and in executive officer positions. Two provinces remained silent on the issue, resulting in uneven requirements within the country.
In a more recent (and somewhat unusual) development, the Canadian Securities Administrators (CSA) put forth two alternative proposals related to diversity disclosure for public comment in April 2023. Alternative A's focus is less prescriptive and defers to public companies to decide which categories of "identified groups" (in addition to women) will be disclosed under the issuer's diversity strategy. By contrast, Alternative B takes a significantly broader focus in mandating disclosure regarding historically under-represented "designated groups". In addition to women, disclosure would be required for LGBTQ2SI+ persons, racialized persons, persons with disabilities and Indigenous peoples.
This disjointed situation is reflective of Canada's (unfortunate) lack of a national securities regulator. However, it is also reflective of the complicated nature of the issue of diversity disclosure. Indeed, the CSA's proposals appear to have (at least initially) further divided the country's provincial and territorial securities regulators, with four provinces and territories (British Columbia, Alberta, Saskatchewan and the Northwest Territories) indicating support for Alternative A, the country's largest province (Ontario) indicating support for Alternative B, and the remainder as of yet not indicating a preference.
Canada also has variations in diversity disclosure requirements among the country's different corporate statutes. Since 2020, companies incorporated under the federal Canada Business Corporations Act have been required to disclose diversity data regarding board and management composition with respect to women, Aboriginal peoples, persons with disabilities and members of visible minorities. No provincial or territorial statutes have yet followed suit, however. For further discussion on the diversity disclosure landscape in Canada, see our more detailed comments here (A Look Into the CSA's New Diversity Disclosure & Related Corporate Governance Proposals) and here (ESG 2023 Update: While Diversity and Social Awareness Are on the Rise, Canadian Regulators Remain Divided on Diversity Disclosure Approach).
The European Union (EU) presents yet another perspective. EU directives have imposed mandatory (but forward-looking) quotas regarding the participation of women in the management of listed companies, distinguishing between executive and non-executive director roles (with different quotas applying to each). By contrast, EU jurisdictions have not generally imposed requirements regarding the disclosure of racial or ethnic diversity at public companies, this issue being particularly sensitive in many EU member states, including for historical reasons. United Kingdom legislation, on the other hand, imposes a "comply or explain" system similar to that in Canada, but with somewhat more teeth.
Regarding shareholder proposals related to diversity in Canada, social issues continued to gain traction in 2023. Fasken counted more than 40 social related proposals made by shareholders as of April 19, 2023, and the proxy season remains ongoing. Third-party racial equity audits, operationalization of Indigenous informed consent, women in management, bilingualism, artificial intelligence, human rights and supply chain issues are among the topics. This appears to be a continuation of 2022, as social matters already represented an important portion of shareholder proposals.
In Europe, activists remained committed to holding listed companies to account on their ESG commitments in 2022, with 90 ESG-related demands, including 42 in the U.K. and 32 in Germany, according to The Shareholder Activism Annual Review 2023 of Insightia. However, the review indicates that "overall in 2022, 60% of global activist campaigns featuring both board representation and ESG-related demands had any success, down from a 67 % average for the entire 2018-2021 period."
When Might Consensus on Diversity Disclosure Emerge, and Who Should Lead?
Overall, the above examples illustrate that different views on the appropriate approach to diversity disclosure occur not only across jurisdictions internationally (i.e., U.K. versus Europe) but also within jurisdictions nationally (i.e., Canada). This being the case, when might consensus on diversity disclosure reasonably be expected to emerge, and who can reasonably be expected to lead?
In Canada, for example, some variances between provinces might make good sense. In Quebec, the country's predominantly French-speaking province, we have witnessed the increasing practice of voluntarily disclosing the language proficiency of directors by Quebec-based issuers. Part of this is also market-driven, with shareholder activists in the province having regularly demanded such disclosure over recent years. However, Canada has a significant Indigenous population, was historically built on immigration from different parts of Europe, and is now increasingly home to people of various ethnic backgrounds from around the world. This being the case, one can reasonably wonder why it remains a challenge for provincial authorities to agree on a single approach to diversity disclosure and to instead ask various actors in the business community to take a stance (or choose a side) on such a delicate matter as the CSA has recently done (see above). Would regulators or legislatures not usually be expected to lead the way to reforms?
Other related factors can also differ from one jurisdiction to another. An example here is the scope and substance of directors' fiduciary duties under applicable law. In the U.S., the politicization of ESG has raised a heated debate regarding whether ESG considerations and fiduciary duties pull in the same direction, with ESG advocates arguing that they do and the anti-ESG movement arguing the opposite. In Canada, by contrast, the relationship between the two is less controversial. Canadian law has long held that directors' fiduciary duties are owed to the corporation, and not directly to shareholders. Moreover, in 2008 Canada's highest court clarified that, in deciding the best interests of the company, in addition to the interests of shareholders, its directors may also consider the interests of other stakeholders such as "employees, creditors, consumers, governments and the environment..." and a provision to that effect has been codified in the Canada Business Corporations Act. Therefore, in Canada at least, the interaction of fiduciary duties and ESG should not be a significant complication on the road to diversity disclosure consensus.
Market actors may also play an important part in shaping diversity disclosure. However, as recent developments in the U.S. illustrate (discussed above), investors (including institutional investors) can no longer necessarily be expected to be homogeneous in their beliefs or preferences. In particular, while anti-ESG proposals have to date not gained any meaningful traction in Canada, it is arguable the same can no longer be said of the United States.
On April 20, 2023, Axios reported that 68 anti-ESG proposals have been filed in the U.S. so far in 2023, compared to 45 in all of 2022. Of direct relevance to this discussion, approximately one-third of these 68 anti-ESG proposals are focused on diversity and have asked companies such as Apple and Coca-Cola to "report on the 'risks' that their anti-discrimination or racial justice efforts pose to their business." Lastly, even if most of such proposals continue to be ultimately unsuccessful (as they generally have been to date), this does not mean the anti-ESG movement is not affecting ESG disclosure practice. On the one hand, the Financial Times has recently reported that a dozen financial companies, including BlackRock, Blackstone and KKR, now list anti-ESG efforts as a risk in their annual reports. On the other hand, Axios summarizes that, while "[p]romoting ESG policies was once an easy layup to score good press", it is increasingly viewed now as "a way to court controversy, the ire of politicians, and attention from well-funded anti-ESG groups". Consequently, Axios anticipates "fewer press releases and puff pieces about the issue" in the near-term. In other words, we now see the emerging practise of 'greenhushing' (i.e., companies not publicizing their ESG activities to avoid scrutiny or backlash). Overall, the lesson might be that the market is incapable of delivering reasonable consensus regarding diversity disclosure best practices, at least in the U.S.
And so this returns us to the CSA's request for comments on its two alternative proposals regarding diversity disclosure. It is possible the comments received from investors and other stakeholders begin to lead to some form of consensus regarding an advisable path forward. However, given the delicate and complicated nature of diversity disclosure, it is equally possible, if not more probable, that they will not. Should this prove the case, the burden will return to regulators to lead the way, a result that is seemingly unavoidable as well as appropriate. Widespread consensus across different jurisdictions may be difficult to achieve or somewhat unreasonable to expect. However, we believe an equitable, well-reasoned, coherent and defensible approach within individual jurisdictions is reasonably attainable as well as generally desirable. This may be the less prescriptive and more deferential approach of "Alternative A". This may be the broader and mandatory approach of "Alternative B". It may be a hybrid of the two. What we would hope to avoid in Canada is any prolonged uncertainty, further division or unfortunate politicization.
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