In recent years, Environmental, Social, and Governance (ESG) considerations have taken centre stage in the corporate world, reshaping how businesses operate and are held accountable. Investors, regulators, and consumers increasingly demand that companies prioritize sustainability, ethical practices, and robust governance frameworks. In Ontario, these growing ESG expectations have significant implications for directors, who are tasked with overseeing corporate compliance, strategy, and risk management.

This blog explores how ESG obligations affect director liability in Ontario, the legal framework governing these responsibilities, and strategies for mitigating risks while fostering sustainable business practices.

Understanding ESG and Its Importance

ESG refers to a company’s performance and practices in three interconnected areas:

1. Environmental: Addresses the company’s environmental impact, including carbon emissions, resource use, and waste management.
2. Social: Covers relationships with employees, suppliers, customers, and communities, emphasizing human rights, diversity, and labour practices.
3. Governance: This area focuses on corporate governance issues such as board structure, transparency, executive compensation, and compliance with regulations.

For directors, ESG is no longer a “nice-to-have” but a business imperative that influences risk management, reputational capital, and long-term profitability.

Directors’ Duties in Ontario: The Legal Framework

Under Ontario’s Business Corporations Act (OBCA) and the Canada Business Corporations Act (CBCA), directors are legally obligated to:

• Act honestly and in good faith with a view to the corporation’s best interests.
• Exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.

Traditionally, these duties focused on maximizing shareholder value. However, court decisions, regulatory developments, and market trends have broadened the scope of what constitutes the “best interests of the corporation.”

In the landmark case BCE Inc. v. 1976 Debentureholders (2008), the Supreme Court of Canada emphasized that directors must consider the interests of various stakeholders, including employees, creditors, consumers, and the environment, when acting in the corporation’s best interests. This stakeholder-oriented approach has paved the way for ESG considerations to become a critical part of directors’ fiduciary duties.

How ESG Impacts Director Liability

1. Environmental Obligations and Liability

Directors are increasingly expected to oversee their company’s environmental performance and ensure compliance with environmental regulations. In Ontario, this includes adherence to laws such as the Environmental Protection Act (EPA) and Climate Change Mitigation and Low-carbon Economy Act.

Potential Liabilities:

• Failure to Comply with Environmental Laws: Directors can face personal liability for environmental violations, particularly if they authorized or acquiesced to non-compliance.
• Greenwashing: Misleading claims about a company’s environmental initiatives can lead to lawsuits and reputational damage. Directors who fail to verify the accuracy of ESG disclosures risk liability for misleading statements under securities laws.
• Climate-Related Risks: Directors who neglect to consider climate-related risks in corporate strategy may face claims for breaching their duty of care, especially if these risks result in financial harm to the corporation.

2. Social Considerations and Liability

The “S” in ESG focuses on a company’s social responsibility, including labour practices, workplace safety, diversity, and community engagement. In Ontario, directors must ensure that their company complies with legislation such as the Employment Standards Act, Occupational Health and Safety Act, and Accessibility for Ontarians with Disabilities Act.

Potential Liabilities:

• Workplace Harassment or Discrimination Claims: Directors may face scrutiny for failing to implement effective policies that promote diversity and prevent harassment.
• Supply Chain Issues: Failing to address human rights violations or unethical practices in the supply chain can lead to reputational harm and potential liability for negligence.

3. Governance Obligations and Liability

Good governance is central to ESG and includes ensuring transparency, managing risks, and maintaining ethical decision-making processes. Directors are responsible for overseeing the company’s governance framework and ensuring compliance with securities laws and stock exchange requirements.

Potential Liabilities:

• Inadequate Disclosure: Directors must ensure accurate and timely ESG-related disclosures, as required by the Ontario Securities Commission (OSC). Failure to do so can result in regulatory penalties and shareholder lawsuits.
• Ethical Lapses: Directors who ignore ethical concerns, such as conflicts of interest or executive misconduct, may face claims for breaching their fiduciary duties.
• Failure to Monitor Risks: Directors who fail to oversee emerging risks, such as cybersecurity threats or data privacy breaches, may be held liable for negligence.

Evolving ESG Expectations: Regulatory and Market Trends

Enhanced Disclosure Requirements

The Ontario Securities Commission and other regulators increasingly require companies to disclose ESG-related risks and performance metrics. For example, public companies are expected to align with international frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD).

Investor Pressure

Institutional investors, such as pension funds and asset managers, are prioritizing ESG performance when making investment decisions. Directors who fail to address ESG issues may face shareholder activism or divestment.

Litigation Risks

Globally, ESG-related litigation is on the rise, particularly in areas such as climate change, human rights, and corporate governance. Ontario directors must remain vigilant to avoid becoming targets of similar claims.

Strategies for Directors to Mitigate ESG Liability

To fulfill their obligations and minimize liability, directors should adopt proactive strategies, including:

1. Integrate ESG into Corporate Strategy

• Ensure ESG considerations are embedded in the company’s long-term goals and operational plans.
• Regularly assess how ESG factors impact business risks and opportunities.

2. Strengthen Board Oversight

• Establish a dedicated ESG committee or integrate ESG into the mandate of an existing board committee.
• Ensure the board has access to ESG expertise, either internally or through external advisors.

3. Enhance Disclosure Practices

• Ensure transparency and accuracy in ESG-related disclosures to investors and regulators.
• Adopt recognized reporting standards, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB).

4. Monitor Regulatory Changes

• Stay informed about evolving ESG regulations and industry best practices in Ontario and beyond.
• Work with legal counsel to ensure compliance with all applicable laws.

5. Foster a Culture of Accountability

• Promote a corporate culture that prioritizes ethical behaviour and ESG performance.
• Establish clear policies and training programs to guide employees and management.

More Than Shareholder Primacy: Balancing ESG Obligations and Director Liability

In today’s business landscape, ESG obligations are no longer optional—they are fundamental to maintaining a competitive edge, managing risks, and meeting stakeholder expectations. For directors in Ontario, this shift brings both opportunities and challenges. While addressing ESG issues can enhance corporate reputation and resilience, failure to meet these obligations can expose directors to significant liability.

Directors can effectively navigate this evolving landscape by integrating ESG considerations into corporate governance, ensuring compliance with legal and regulatory requirements, and fostering a proactive approach to risk management. In doing so, they not only protect themselves from liability but also contribute to their organizations’ long-term success and sustainability.

Milosevic & Associates: Providing Toronto Directors & Officers Robust Advice on ESG

If you are a director or officer facing a legal claim, it is crucial to consult an experienced lawyer who specializes in advising corporate leaders. At Milosevic & Associates, our Toronto corporate commercial lawyers have extensive experience representing directors and officers in various claims, including allegations of negligence, breach of fiduciary duty (including ESG obligations), oppression remedy claims, and derivative actions. We are known for our professionalism, integrity, and dedication to achieving the best outcomes for our clients. To schedule a consultation, please call 416-916-1387 or contact us online.