CSR and the CFO
Last November’s release of the Government of Canada’s Enhanced Corporate Social Responsibility Strategy for the Extractive Sector (the “CSR Strategy”) may seem an un-noteworthy event for the Chief Financial Officers (CFO) of Canadian mining companies, but upon a closer look, it becomes readily apparent that CSR is more relevant than ever to the work of the CFO.
The private sector lending arm of the World Bank, the International Finance Corporation (“IFC”), has applied CSR environmental and social standards in assessing its investment decision making since the 1990s. The size and scope of the IFC and its investment and financing activity (over $97 billion invested since 1956) made compliance with the IFC’s CSR standards an important consideration for any businesses seeking financing for projects in the developing world.
The IFC’s CSR requirements were codified into a very detailed set of regulation-like standards called the IFC Performance Standards on Environmental and Social Sustainability (“IFC Performance Standards”) in 2006, updated and restated in 2012. The relevance of the IFC Performance Standards grew exponentially when, in 2002, a coalition of private sector financial institutions launched the Equator Principles (the “EP”).
The EP requires signatories to apply the IFC Performance Standards in the assessment and management of certain asset based financings, including project financing over certain monetary thresholds. At present, the EP has been adopted by 80 global financial institutions (including all of Canada’s Chartered Banks and Export Development Canada), covering over 70% of all global project financing that occurs in emerging markets. Of great importance to CFOs, this phenomenon makes compliance with the IFC Performance Standards a threshold qualifier for financing – thereby aligning CSR compliance with access to debt capital.
The IFC Performance Standards and the Guiding Principles were expressly endorsed by the Government of Canada as part of the CSR Strategy. In so doing, the Government of Canada has, of its own accord, pointed to the IFC Performance Standards as the appropriate benchmark for assessing CSR practices of Canadian miners. This adds another, but by no means the most significant, driver encouraging adoption of the IFC Performance Standards.
In 2012, the IFC Performance Standards were revised to incorporate the human rights due diligence requirements of the United Nations Guiding Principles on Business and Human Rights (the “Guiding Principles”). By consequence, the Guiding Principles were also incorporated into all EP financings. Again, the CSR Strategy follows this development with endorsement of the Guiding Principles as a benchmark for human rights performance – but the real significance of this human rights standards arises in its implication for access to capital.
CSR is also a growing focus of equity investors. Institutional investors, such as the Canadian Pension Plan Investment Board (CPPIB), regularly incorporate environmental and social risks and opportunities in investment analysis. The CPPIB is one of more than 1300 signatories to the Principles of Responsible Investing (PRI), which requires the incorporation of CSR issues into investment decision making. The International Integrated Reporting Council, Global Reporting Initiative (GRI), and the Sustainability Accounting Standards Board, are spearheading the broad adoption of integrated reporting of financial and non-financial disclosure as standard accounting practice. Apparently following this trend, the CSR Strategy endorses the Global Reporting Initiative integrated reporting framework as a best practice for Canadian miners.
There are numerous government-led initiatives requiring greater disclosure of CSR related information from publicly listed companies beyond disclosure of material environmental and social information already required by existing securities rules. For example, in 2014 the Canadian government tabled its newly developed Extractive Sector Transparency Measures Act which requires that companies involved in the commercial development of oil, gas and minerals publicly disclose payments that they make to foreign and domestic government entities. Similar legislation has already been passed in the European Union and the United States. Also in 2014, the European Parliament adopted a directive on non-financial disclosure, that will require European companies with 500 or more employees to disclose information on policies, risks and outcomes as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity in their board of directors.
With so many CSR developments tied to financial matters, is increasingly in the domain of the CFO.
*Michael Torrance is a lawyer in Norton Rose Fulbright’s Toronto office.