Q&A: Will Canada follow in Europe's footsteps and regulate greenwashing?

How can you tell if a Canadian company is environmentally responsible or “greenwashing?”

Canadian regulations don’t make it easy to tell. Greenwashing, or misleading statements about the environmental benefits of your product or service, happens in all sorts of marketing materials for all types of products. 

Since May, Canada’s Competition Bureau has been investigating Lululemon’s environmental claims in its marketing campaigns. 

Non-profit company Stand.earth filed a complaint against the B.C. activewear company, accusing it of greenwashing.

The complaint stated that Lululemon’s Be Planet 2020 sustainability campaign—in which the company said it would work to reduce its greenhouse gas emissions—contradicts its own reporting. 

A 2022 impact report outlining Lululemon’s progress in reaching its climate goals shows the company’s Scope 3 greenhouse gas emissions — indirect emissions due to a company’s activities, including those produced by customers using its products — increased by 79 per cent in 2022.

In another and perhaps one of the most infamous examples of greenwashing, Volkswagen advertised its “clean” diesel vehicles, claiming the emissions from its vehicles had been drastically reduced in 2009.

Instead, they simply installed software to cheat emissions tests. Ultimately, the carmaker paid more than $45 billion in fines for their deception.

Vancouver is hosting the 2024 Responsible Investment Association (RIA) Conference on May 27-28. The yearly event brings together industry change-makers, visionaries, policymakers, sustainability leaders, and practitioners.

Sustainability disclosure and regulation are among the topics to be discussed.

“Public companies must respect accounting standards for financial disclosure,” said Milla Craig, President and CEO of Millani, a Quebec advisory service on ESG integration for companies and investors. 

Those accounting standards help investors assess the financial situation of the company they invest in. 

“Sustainability standards will complement this information so investors, asset managers, and fund managers can make an informed decision about the risk and opportunity a company represents,” she added.

Craig will participate in the May 28 RIA Roundtable, “Regulatory critical developments and what to anticipate.” 

We spoke with this pioneer of Canada’s sustainable investment community, who helped make Montreal an important North American hub for sustainable investment.

Questions and answers have been edited for clarity.

Q: Can financial regulatory authorities influence companies to “do the right thing,” to reduce their negative impact, or to have a positive impact?

A: Their influence is indirect. Financial regulatory authorities protect investors and ensure market stability. Their superpower is disclosure. These authorities ensure investors, asset managers, fund managers, and the whole investing ecosystem have access to up-to-date, authentic, and complete company information.

Q: What is their reach if these authorities can’t force companies to transition to a sustainable business model?

A: The disclosure rules set by the Canadian Securities Administration, the umbrella organization of Canada’s provincial and territorial securities regulators, influence the flow of capital. Investors compare information disclosed by companies to decide where to invest. Asset managers do the same to advise their clients, as do fund managers to select stocks. 

For example, money can flow away from a company if its climate information indicates slower emissions reduction than its peer group or if it relies on raw materials that will soon be banned or regulated. Based on the sustainability information, investors may choose not to invest in or sell their stocks. Investors may be driven by personal values, risk perception, or a little of both. 

In the end, the sustainability information disclosed may influence the capacity of a company to attract investment. That is why regulatory authorities’ decisions should be followed closely by stakeholders of the impact sector.

Q: Canadian companies, investors, and impact investors are expecting new sustainability disclosure rules. Who is in charge?

A: The process started at the international level. The International Sustainability Standards Board was formed in November 2021 to develop standards for companies disclosing high-quality, globally comparable information on sustainability-related risks and opportunities. The Canadian Sustainability Standards took note of the international standards and released its own version: The Canadian Sustainability Disclosure Standards. Until June 10, there is a consultation for public comments on the Canadian disclosure standards. When the consultation ends, the CSA will draw final guidelines and send them to the Canadian Securities Administrators(CSA). The CSA is the authority that will decide which sustainability disclosure standards Canadian public-listed companies need to respect.

Q: What are the U.S. and European positions on sustainability disclosure?

A: Last March, the Securities and Exchange Commission (SEC) adopted its Climate-Related Disclosures rule. It requests public-listed companies to disclose risks they face due to climate change and share partial information about their greenhouse gas emissions. I specify partial because the information is limited to direct emissions. It does not include the indirect emissions a company is responsible for. 

For example, a car manufacturer will disclose its manufacturing emissions but not those resulting from using the car. Therefore, it underestimates a company’s sustainability impact. A coalition of ten States is suing the SEC, alleging these new requirements will hurt the economy. On the other hand, environmental activist (organization) Sierra Club voiced the lack of ambition of these new disclosure rules. 

Meanwhile, Europe attacks greenwashing on two sides. It includes indirect emissions in mandatory disclosure and ensures green products are labelled appropriately. For example, a product labelled “green” should be shown on the mission statement and in the reporting indicators. Companies and funds will publish their first reports in 2025. Close to 1,300 Canadian businesses must comply with the new European rules because of the scope of their activities on that continent.

Q: In April’s budget and at May’s Montreal Sustainable Finance Summit, Minister Steven Guilbault promised a green taxonomy for 2024. What is it, and how will this regulation influence Canada’s transition to a more sustainable economy?

A: A green taxonomy defines what can be labelled as a green product – a fund, for example – or a green investment, a company. Europe has a green taxonomy. Considering how the Canadian economy relies on the fossil fuel industry, it will be challenging to produce a green taxonomy. There are indications that Canada’s government is considering a transition taxonomy. Australia did, with an economy that is somewhat similar to ours. We need a lot of capital to help Canadian businesses transition from brown to green assets. Those would be transition investments to get to a low-carbon economy. Otherwise, if we shut down “the old industries,” society will be significantly disrupted. 

Q: What more can we expect about disclosure in the medium to long term?

A: Anything related to double materiality. Companies must disclose how external factors, like the climate, affect their business. That is called single materiality. In Europe, companies must also disclose how their operations affect their stakeholders: employees, suppliers, the community, and the environment. It is double materiality. Double materiality is part of anti-greenwashing disclosure.

Q: Quebec senator Julie Miville-Dechêne presented the 21st Century Business Act to ensure businesses play a leading role in social and economic progress. What is it?

A: This act aims to expand the fiduciary duty of the board and management to include social and environmental impact, in addition to financial return objectives. It is about double materiality.

It is modelled after the U.K. Better Business Act. Adopting it could allow certain people to initiate court proceedings if they believe a company is not fulfilling its purpose. 

Senator Miville-Dechêne was instrumental in introducing Bill S-211 in May 2023. The bill concerns forced labour in Canadian supply chains. 

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