Canadian ESG for Investors and Lenders

Elizabeth: I think that the numbers are levelling out so we're going to go ahead and get started today on our ESG, our Environmental Social and Governance. I think we've all seen a lot of those words bandied around for the last 2 years, and increasingly so, but we are going to get started on ESG for Investors and Lenders. My name is Elizabeth Burton. I am a partner in the Calgary office of Gowling WLG. I'm also the co-Lead of our national ESG group and the Calgary Financial Services Leader. So ESG has been all over my practice and my area of work in the last few years. I have worked primarily in energy and Indigenous specialization in ... and restructuring so it's very front of mind for me.

I'm joined today by my colleague, Stephen Pike, who is the co-Lead of our national ESG group. Hi, Stephen. Stephen is a partner in our Toronto office and has been practicing in ESG before it was ESG. So for very many years. He provides advice in corporate law and governance, on ESG specifically, on transactional, operational and risk management issues, including ESG, CSR supply chain regulatory compliance, product distribution and many, many other related matters. He's a member of the Board of Directors of the International Commission of Jurists Canada, a co-Chair of the ESG sub-committee, a business law section of the American Bar Association. He's also co-editor of an exciting new book on 'ESG in the Board Room: A Guide Book for Directors', which we'll speak to later, and he writes and speaks frequently on how businesses can address the risk of modern slavery, forced labour and child labour in their operations and supply chains. Today he's going to speak to us about supply chain risks and assessment from an investor's perspective.

I'm also joined by my colleague, Lorraine Mastersmith, who is a partner in our Calgary, sorry, I wish she was in Calgary, in our Ottawa Corporate Commercial and Capital Markets group. She's also the Head of the business law department in Ottawa. She's the Ottawa lead for the firm's Technology Industry group and a team lead for the Corporate Practice and Private M&A group. She represents emerging and established companies, specializing in various technology sectors and as such is often dealing with companies at the front of development and operations.

Scott Smith is also joining us from Gowling. He's a lead in national practice at the confluence, and I think that's the only way you can say it, of Indigenous, environmental, energy and natural resource law. He has a strong track record of successfully advising clients and high profile, complex regulatory hearings and related litigation for major energy and natural resource projects across Canada. He also has extensive experience in negotiating and structuring Indigenous equity ownership of major projects so we've worked together frequently in that area. Scott will be speaking more on that a little bit later on.

And then I'm absolutely delighted to tell you that we are joined by Justine Hendricks of EDC. Welcome, Justine, who has kindly agreed to join us. Dan Mancuso was unable to attend and Justine has willingly substituted in, however, I do not think we have a bad substitute. In May of 2019, Ms. Hendricks was named Senior Vice-President, Sustainable Business and Enablement. As of May, 2021, time certainly goes oddly now, is EDCs first Chief Corporate Sustainability Officer. So she's their CCSO. As CCSO her mandate is to align EDCs focus with the central pillar of its 10 year strategy, ensuring EDC takes a leading stance for Canada and it's customers on ESG principles. Embedding sustainable business practices and principles for the environment, human rights, social welfare into every EDC line of business, as well as enabling evolving for thinking innovations, which goes into our technology theme as well today, within EDCs business lines to be more agile, efficient and effective. She's been with EDC since 2006. In her previous role she was a Vice-President Working Capital Solutions and she led across Canada team devoted to meeting working capital needs of small/medium sized business. Prior to this she had led the transformation of EDCs financing and investment groups and she has a lot to add to that conversation as a result, today, for our financing and investors joining us. Which that particular area had also accounted for 80%25 of the net revenue of EDCs annual income. Ms. Hendricks also led team serving small business and investors and she has an MBA from the University of Ottawa, Bachelor of Arts in Urban Studies from Carleton University and she holds a Certified Financial Planner designation. She's a member of Digital Opportunity Trust since January of 2019 and she was appointed to Chair role in June, 2021. In 2020 she became a board member of University of Ottawa and holds a seat on their audit committee. So we're very lucky to have Justine join us today and I'm very pleased to open up the panel to begin our discussion on this very important topic.

In Canada I think we have all become a little bit more familiar, certainly at the last 2 years with the 'E' in ESG. Environmental has been front of mind for many of us in the investing and lending space. In particular we've seen the big six banks just recently sign on to the UN Net Zero Alliance and I believe there's 43 and growing, it might be more than 43 members across the world in that Alliance. So a very significant alliance. We also, though, want to make sure that we keep in mind the other components of ESG. In the Canadian context the 'I' which should override and be part of those considerations. The 'S' is social and we'll speak quite a bit to the supply chain considerations and some other aspects today on that end. Governance is something that we used to see a little bit more perhaps in other terminology, in terms of corporate responsibility and succession, other mandates but we'll speak a little bit to that and Justine is a very important part of the governance combination with ESG and EDC. So we'll have some chance to speak to that. But we'll also speak to the Indigenous considerations. In Canada, in particular, it's very hard to take 'E', 'S' or 'G' and not include the 'I' so we'll be speaking to that. Scott will give us a bit of that discussion. So we'll kick it off with maybe a bit of an overview and a discussion, and then we'll lead into some more specifics, and Stephen will come in, in particular, on the due diligence and supply chain considerations. Bear with me while I find my spot and I will lead us off. And I'll stop moving my camera for those who are wondering what I was doing there.

In terms of the big six announcement, it's obviously going to be something that we don't know yet what it looks like, but in Calgary and in energy transition, it's become more and more clear that we are looking every day at, even in a traditional energy space, what do ESG elements mean and how do we move forward on the environmental side? So we're certainly seeing a lot of discussion and conversation around both Cleantech and sustainable linking and a number of questions that seem to come out those, what do we do and how do we proceed when we're an investor or a lender with this ESG mandate that we now have and within the ESG goal for many investors and lenders as well. So it's not just how do we do this when we don't know what we're doing yet, a little bit in Canada, but also what does this mean for ourselves and our own organizations? So, Lorraine, you're often tasked with transactions where an investor is looking to come in and look at a company, especially with Cleantech or with technology, it's a new and growing company and it's very difficult in those scenarios sometimes just to meet the everyday expected due diligence. Can you give us a little discussion on that?

 

Lorraine: Sure, Beth. As you're saying, the way a company handles its ESG issues, those matters really are being accepted to affect long term performance and valuations and so it really behooves all of our startup companies to be, in the back of their mind, realizing that justice is a really important factor and it's coming down from the top with the Canadian Securities regulators, our administrators there, requiring disclosure of ESG compliance and what companies are doing from an ESG perspective. So that pressure is coming down from the top and that's going to affect companies who are coming up and looking to raise capital. Because of all of this happening we're really expecting to see, like to date, you haven't seen a specific call of ESG factors in diligence. The typical diligence list addresses a lot of the ESG factors from a compliance perspective in a number of different ways but it's not looked at from one specific angle or one bucket. That's actually what we're expecting to see that these things are becoming more common and being used in the diligence process in order to better manage risk and enhance companies performance. Many of those, as I said, many of those considerations are already embedded in standard diligence lists but that's usually from a compliance perspective. Environmental factors of course, you'd look at that if there's a real estate element to the acquisition or to the company that's being invested in. But that emphasis on responsible investing, and the disclosure being contemplated, those things are really broadening the focus into bigger things like issues like pollution and carbon footprint and use of scarce resources. A lot of the factors like worker safety and human rights compliance and data protection, of course, are already part of the typical diligence process but, again, from a compliance perspective rather than broader social terms. I think Stephen's going to touch upon a lot of the supply chain matters from a broader social lens rather than specific compliance matters. So that's sort of what I'm seeing is that they're not specifically called out but right now they're still parsed out among the different areas of diligence that are conducted but we are starting to see a broader focus, or we're expecting to see a continuing broader focus aside from just the legal compliance perspective, but also what is the company doing to enhance its portfolio and its response from the ESG perspective to garner a better reputation in the community.

Elizabeth: Thanks very much, Lorraine. You mentioned the Canadian Securities Administrator, the CSA, and last week they had published a comment for proposed climate related disclosure requirements just because of precisely this. The disclosures don't match. The disclosures are something that we're all struggling with, whether it's on the investor side or the end company's side, in terms of what's consistent and what's comparable information, in particular for investors that comparability really matters. They are expected to probably recommend something that is largely consistent with the task force on climate related financial disclosures recommendations, which is just TCFD, and I believe, Justine, that TCFD is something that EDC has been working with and themselves are using. Can you speak a little bit to your experience with those disclosures and working with ESG type investment assessments and lending assessments?

Justine: Yes, happy to, Elizabeth. You're correct. We were one of the first ones in the ESG community to sign up to the TCFD back in 2019. So we're on our third disclosure and I guess what I would say is we recognize that there's different standards out there. The TCFD seems to be the one emerging to be the most common one and the most recognized. I can share with you though that as other standards have still been around, or some were earlier than the TCFD, when we do look at our due diligence we do, for the most, recognize ones, align them so that we can do the best comparison possible so that hopefully no one feels that it's seen from a different perspective. But definitely the signing up to it and the transparency that it brings about in terms of reporting, we certainly feel is an important step and I know there's been some conversations in the market as to do we wait for the one standard to come out, that everybody will recognize and then we'll finally know that this is the one? To that we'd probably say start early, because you need some practice on it, and it is more about getting started to get used to what that environment is and then you can evolve. But if you wait too long you could find yourself having quite a bit of a hurdle to overcome. If that one unified standard ever comes across.

Elizabeth: That's a very good recommendation and I think it's fair to say that they are not all certain yet but they certainly are becoming more consistent. I think even now with different standards there is some ability to look across. Obviously we're speaking on the environmental. There are other standards that speak to broader ESG principles and it would be great to see those expand but while we're waiting for that to happen I certainly agree with going there. You mentioned starting off and getting in there, one thing that EDC I think is doing that is a bit unique and certainly front of the Canadian market, is working quite a bit in promoting and working with credit enhancing and providing support to Cleantech transactions. Cleantech's one of the things I mentioned we're seeing in my market in Calgary but certainly it's hard to say Cleantech is not ESG conscious. Can you take us through what EDC is doing on the Cleantech side and how you support those very capital heavy and new and innovative but also risky transactions?

Justine: Yes, thanks for that Elizabeth. So maybe a couple of thoughts and then I'll share a few statistics with the audience. So when we look at this global challenge that we have, and as we're all trying to figure out how best to tackle it, one thing I think is important to say is that there is probably no silver bullet. It's a combination of initiatives brought together with some regulatory requirements, certainly the financial markets have to be there to be able to, in a combined way, address what we're all trying to address and within that envelope certainly the ESG and I components of it. So for EDC I guess Cleantech was identified as a priority back in 2012. I'd be remiss if I didn't say that we knew it as a good bet but certainly today we're very pleased that we have a few years of practice because certainly we know now it's going to be so important where we go next on the transition. As it being identified as a priority for us we've been able to facilitate over the last years about 13 and a half billion dollars of Cleantech exports and investments and that represents over 300 companies that we've been able to support just in 2020 alone. Which has been an increase of 27%25 over 2019. If you compare to when we started it's almost 80%25 increase overall. So we've really seen kind of the benefit of getting in there early to understand what are some of the issues. We do it through some of our equity investing. We've also been the first in Canada to issue a green bond and we have three outstanding bonds as of 2020 that have also been able to capture some of these transactions. As a result of that we believe that as we've been able to remove about 6.1 million tonnes of CO2 emissions as a result of the benefits that we've had from the bonds. In terms of being there for the market we've been there for a long time. We see the support that we have in Cleantech to be integral, to solving for some of the climate issues we have, and maybe the other component I'd add, Elizabeth, is even in some of the engagements, and my colleague Dan talks a lot to some of the large corporates in Canada, there is a growing interest to even connect with some of the Cleantech industry in Canada. I'm sure folks on this webinar and in the audience know that's always been a huge issue of Cleantech in Canada. It's exiting Canadian soil and going elsewhere. So that too is a positive that we see. This interest and really understand what does Canada have to offer in Cleantech and can that kind of help solve some of the energy challenges we have towards that transition.

Elizabeth: That's an excellent point, Justine. In Calgary we're very conscious of energy transition and I will tell you it actually is taking genuine root. One of the ways to do that is to combine Cleantech with traditional operations and to enhance and improve their footprints. That's an excellent way to progress forward and to look at, for your bottom line let's be honest, for investors and lenders, those Cleantech operations have a lot better customer base and some reliable business models. So that's something to keep in mind for sure. We also see popping up on Cleantech for agriculture and other industries so I think it will only continue to grow. It's certainly not limited to our more traditional energy considerations when we say Cleantech. I think, Lorraine, it's fair to say that you definitely see a lot of different and unique technology companies coming forward. Cleantech is only beginning to expand. Now, with that I would caution that on Cleantech, and in any other industry, we definitely have supply chain considerations and that's where I think it's a struggle for many to, on one hand have this excellent new operation, but those materials need to come from somewhere and that supply needs to be provided from somewhere. One of the reasons that we're discussing ESG for investors and lenders, in particular, is to do your due diligence and your risk assessment. When we look at the company's bottom line we obviously are first looking at revenue and do they have a business, but we're also looking at the risk and their own supply of ... and safety. When we go to that end of things we've seen a lot of areas, especially during COVID, where supply chain has been obstructed and supply chain has been an issue, but there's also other supply chain considerations around human rights and modern slavery. So, I'm going to turn it over to my colleague, Stephen. Stephen, you are going to have a great idea. What should investor or lender be aware of in this regard?

Stephen: Thanks a lot, Beth. I think from a supply chain procurement perspective, in looking at ESG, the focus obviously, as you mentioned, is on the 'S' and what we're seeing is increasing concerns and increasing consensus that the 'S' in ESG and supply chains is really forced labour and child labour in supply chains. This is really giving rise to material risk for businesses, investors and lenders. What kinds of risks? Reputational risk. Brand erosion risk. Supply chain instability risks. Governance risk. Regulatory risk. Litigation risks and on and on. In most instances multiple risks are presented concurrently, increasing the impact on businesses. Unlike the 'E' in ESG, there's no net zero for forced labour or child labour. There's no forced labour or child labour offsets or credits. There's no filter so what we're seeing now, increasingly, is enhanced sensitivity and impact on businesses, lenders and investors as they're trying to mitigate risk through supply chain due diligence. Let me explain sort of big picture what we're talking about. When the board adopts, or the business adopts, a zero tolerance policy for forced labour or child labour the question is how does a business flow down this commitment through the supply chain, tier after tier, and how does a business acquire confirmation and information evidencing compliance with the commitment and have it flow up the supply chain, tier after tier, all the way back to the board and senior management. That's what we're talking about in terms of due diligence. With respect to the risks I mentioned, let me give you a few examples of what we're seeing. According to ISS the number of modern slavery related shareholder proposals quadrupled over the past 5 years and that's in the US. We've seen them in Canada with companies such as Dollarama and Saputo confronting shareholder proposals seeking human rights impact assessments from management. In the US we see them as recently as this year. One example is Nike where there's a shareholder proposal citing lack of transparency on cotton sourcing and the complaint that it was introducing challenges for investors who are seeking to fulfill their commitments to conduct human rights due diligence. That's a reputational risk. We also see in Canada, for example, reputational risk from reports published by NGOs alleging 34 plus billion dollars of forced labour and child labour made goods being imported into Canada on an annual basis as well as a report in June of this year that goods are being imported into Canada made by companies already under investigation or regulatory action for use of forced labour by the US government. So that's one aspect of reputational risk.

From a supply chain instability risk, it happened to Apple a few years ago where it was alleged that there was child labour being used in the mining of cobalt that found it's way into their lithium-ion batteries in smartphones. Had to revamp their supply chain and cobalt sourcing and put in place very detailed supply responsibility standards which run to 111 pages. Let me give you another example to illustrate the sensitivity of reputational risk for companies. On October 8, earlier this month, Reuters published a report about a Nasdaq listed company, which no need to name, essentially saying that that company had struck a deal with authorities in Xingchen region to transport workers to another location in China. The company was quoted, or a spokesman was quoted, in the Reuters report saying that the company didn't do due diligence on who and where workers were trained. Last Wednesday a letter was sent on the US Senate Committee on Foreign Relations from three senators to the CEO of this company inquiring about the matter and referring to the Reuters report. Asking questions such as what evidence do you have to support your belief that there is enforced labour in your operations and can you provide evidence of disclosure about these workers that you've been given to your shareholders? The letter was cc'd to Larry Fink of BlackRock and the CEO of another company, 2 funds, which were the major shareholders in this company. As of yesterday the share price had fallen almost 13%25 since the Reuters report. No regulatory action. No law suit. This is just an illustration of the sensitivity of reputational risk and how it can impact on investors and lenders. As you may know, Canada has been the importation of goods, mined, manufactured, produced in whole or in part, by forced labour and so it is illegal for those goods to be coming into Canada. As well in the US, forced labour goods are also prohibited and the US has a very aggressive enforcement regime which Canadian companies need to take note of. The US Customs and Border Protection can issue a withhold release order to detain goods at the border if it reasonably, but not conclusively, believes that the goods were made with forced labour.

Let me give you an example of how that regulatory enforcement impacts on supply chain stability, brand erosion and reputational risk. Last week a withhold release order was issued against a farm in Mexico that was alleged to be producing tomatoes with forced labour. So the goods from that company, the tomatoes cannot enter the US anymore, and the question is how long is this going to last for? According to published reports the company said it's going to take at least 3 months to get the information it needs to Customs Border Protection and then CBP will take 6 to 9 months to review it. So in terms of due diligence, when due diligence is started and when it's completed, is very important because in the event there is some regulatory inquiry companies need to be able to respond right away.

Let me just finish my comments with one sort of approach to recommended due diligence. It's not one size fits all. It's generally bespoke for each company, taking into account industry, geographic footprint, a supply chain footprint, other relevant factors. We're looking for internal indicators such as a board level commitment to prohibit forced labour and child labour and then the operationalization of that commitment throughout the business internally. You're looking at whistleblower policies, etcetera, employee codes of conduct and as well, externally, you're looking at supplier codes of conduct. You're looking at contractual provisions relating to the supply of goods and on and on. So it's both internal and external but it all is driven by a commitment, at the board level or senior management, to prohibit these human rights abuses in the business and its supply chains.

Elizabeth: Thanks very much, Stephen. I think that it's fair to say in Canada we have a maturing ESG view and due diligence in that we focus very heavily on environmental but this is clearly going to be, and rightly should be, a very important part of an investor and lender's risk assessment and due diligence and something that we take into quite a bit of consideration. I will admit, at the moment, I don't see it as drilled out, or as conscious, in the documentation and the drafting in the disclosures or in the third credit agreement covenants. But, Justine, you have a different experience when you're sitting where you are with EDC in such a global role, and I know Dan had mentioned to us that very much so you're seeing what we also are seeing the hints of, but more so in a more robust way. The attention to the 'S' and to the 'G' on a more regular basis and more robust than we see typically here. Can you speak to that a bit?

Justine: I think Stephen's comments were really compelling. I'll kick off, I'll go off script like you sometimes do, Elizabeth, and I'll speak for a second to the reputation part of it. Those that know EDC, our reputation has been tarnished by some events, that would have taken under the due diligence, some of our transactions. One, and I think now over 10 years ago, it was under the collapse of a dam in South America and we still paid a price to this day. We still get calls upon what had taken place at that time although we had conducted human rights due diligence. But I must underscore what Stephen says, in terms of the impact that it can have on a company's reputation, and then the work you need to do to fix it isn't something that is a quick fix either. It can remain with you for a long time. You asked me about some of the due diligence. Yes, given the fact that we operate in international markets, for us conducting business in a responsible manner has always been part of the due diligence we undertake at EDC. So it kind of starts off, Elizabeth, like we have a, I'll say an overarching framework, under which we govern environmental, social and governance matters. Items such as our climate policy, we have a stand alone human rights policy that we also made public, are part of this due diligence framework. We also look, when we're looking at international standards, standards such as the UN Guiding Principles on Business for Human Rights. We also include the OECD Common Approaches to name a couple. So those end up being some of the standards we look up to as we perform our own due diligence and our due diligence has two main components. The credit side and the non-credit side. Maybe what I'd offer, Elizabeth, is both have always been present. I think in recent years it would be safe to say that the non-credit side, certainly at the risk committees at EDC, I'd say it's taking up a lot more space. I'd almost say it's a 50/50, compared to maybe just a couple of years ago, it was probably more an 80/20 conversation. So it kind of shows you how things are evolving.

Once we conduct this due diligence, we do it throughout the transaction, and once the transaction is approved we still continue to monitor it and should something occur, which unfortunately is sometimes the inevitable, the big component is how we respond. How do we go in there? To look and understand what's gone on. What were the mitigants? I would like to say to you, as delicate as it may be, is that due diligence on the 'S' side, if you look on the human rights side, that's the one thing I must admit keeps me up at night. You have to recognize that it evolves over time. So if I go back to that tragedy that happened in South America, I can tell you hand over heart, the due diligence we have today is not the same as it was 10 years ago and the due diligence process we'll do in 5 years will not be the one that we do today. So the way that we achieve that is as different issues arise, so the supply chain one I think is an excellent one especially if you consider what's required in order to have a more green economy, and you think of the renewable industries and how some of them are connected to the 'S' side and you take that situation in China. You take the solar industry as an example and 85%25 of the raw materials that goes in solar panel come from that specific region. So right away you can see here that there is an issue here that crosses some of the great opportunities we have in new industries that we need to work towards. But what's important is to be able to understand the risks, be able to articulate them. I think Stephen had some great examples of starting from the board, being clear on what those policies are and making sure that you can have a mechanism to review them and evolve them and be able to monitor progress against them. I think certainly from an EDC point of view that's what we look for. Maybe the last comment I make, Elizabeth, is as an export credit agency when we're faced with some of these transactions, either from a sector point of view or a geography point of view that can demonstrate an elevated human rights risk, we're also looking at using our leverage sometimes in order to see how we can improve the risk of a transaction. So we can find ourselves in the market working with another export credit agency to help sometimes the Canadian company ensure that where they're sourcing their material is from a good source and the risks are properly mitigated. So that's also a role that we will play. Our position, I guess in this regard or role, is to really help companies evolve and to improve. Certainly those that aren't willing, or ignoring those risks, are not those that we would support but when the interest is there and the willingness, we certainly do everything we can to help educate, increase the awareness and put the right mitigants in place.

Elizabeth: That's very helpful, Justine, and I think where you're coming from with EDC is definitely where most of us will need to go. So I think you bring a lot of experience to that area and we certainly see the beginnings of that evolution and it's important evolution. Stephen, if we were to look at that as an investor or lender and you're trying to figure out, since we're in an evolving level of progression into this due diligence, aside from working with Justine at EDC, who I think can provide some help and some guidance, what else can an investor or lender do in that regard?

Stephen: Well, I echo Justine comments. They're fantastic. I would ask three questions. Taking a step back from the due diligence that you're seeing but take a step back and say, "Okay. Is the business's strategy to combat forced labour and child labour in business and supply chain? Is the business's strategy and the programs that they've implemented to drive this commitment forward, are they well designed to prevent and detect forced labour and child labour in the business and it's supply chain?" So the design of the due diligence programs and the strategy. I would also ask, "Are these programs adequately resourced and empowered to function effectively within the business? Do they have the people, the budget and the bandwidth to do their job?" The last question I would ask is, "Do these programs, and this strategy, do they work in practice? How have they evolved over time to address existing and developing risks to the business?" In other words, it's a question of are they well designed, are they adequately resourced and empowered and do they work? Have they discovered issues and anomalies in their business and supply chain or do they just sort of work at superficial level? So those are the three questions I would ask.

Elizabeth: That's excellent, Stephen, and I think, Justine, you'd agree with some of those questions as well. What question we haven't asked, and perhaps we should turn from a global lens to a more local lens, so there's certainly others doing local business who need to be aware of it as well, is what additional considerations but also what other opportunities are there in the Indigenous supply chains and service providers? We see a very large growing Indigenous business community and not just in the large projects that, Scott, I know you spent time on and I have as well, but also the privilege to work on smaller supply chain levels especially in the energy transition world where a lot of those businesses are independent but they're also coming with a background and a context of community and other considerations. I think that is unique to Canada or a very small number of countries in terms of where we're at. So, Scott, can you speak to some of the opportunities and also understanding how that component, the 'I' component would fit into this discussion?

Scott: Yeah, absolutely. Thanks, Beth. So I'd like to begin by recognizing and acknowledging the traditional territories of the Musqueam, Squamish and Tsleil-Waututh People where I live, work and play everyday. Also very honoured to be speaking on this panel with such distinguished panelists. So thank you, Beth, for the invitation. I'll come back to the global issue in a moment because we're seeing Indigenous issues rise to the forefront of many different circumstances globally but I'll focus initially locally and on the supply chain before we move onto those other topics. I'd like to make two points on supply chains. One, we're seeing increasing trends where many organizations now have Indigenous procurement policies. The Government of Canada took a leading role in that regard this summer. In August it announced mandatory requirements for Federal departments and agencies to ensure that at least 5%25 of the total value contracts are held by Indigenous businesses. This very significant development was a result of lobbying over a number of years by a National, Provincial, Territorial and regional Indigenous groups and will significantly increase Indigenous participation in the economy, particularly relating to Federal procurement opportunities. As well many businesses now are adopting reconciliation action plans. Key components of those reconciliation action plans involve enhancing significantly developing ties with the Indigenous communities and businesses together with Indigenous procurement policies. Of course we have a reconciliation action plan in place here at Gowling WLG that we're all very proud of. So just generally speaking in the marketplace, we're going to see increasing trends of procurement opportunities for Indigenous businesses, and then of course emanating from the area of major project development, we're seeing also increasing involvement in Indigenous businesses and helping build out, own and operate major projects. So these requirements typically come from impact benefit agreements. Those are agreements that Indigenous communities sign with project proponents. One of the key benefits provided to Indigenous communities in those agreements are procurement or business opportunities and these, from a due diligence perspective, are one of the things that investors and lenders are going to want to look into and how companies are complying with the requirements and the IBAs. Too often we see IBAs signed and they get put on shelves and collect dust and that can represent significant risk for investors and lenders because it tends to erode social support and consent for the project. Likewise, when businesses are doing a good job, it helps build on and maintain ongoing support and we're seeing increasingly sophisticated Indigenous businesses in many natural resource and energy projects across Canada and world wide. So back over to you, Beth.

Elizabeth: Thanks very much, Scott. I would say that sometimes when we're applying ESG and the reason we focus on making sure that the 'I' is kept in the mind is in part because when you're importing these types of standards from other jurisdictions, if they don't have this in mind you can drive right by what is a very, very important part of the Canadian community. So that's why we wanted to mention on that but also as, Scott, you mentioned and I know Justine you're very aware of it at EDC, this is, as you referenced, a very strong and growing business opportunity. So for investors and lenders in the Canadian market, which is always of course looking for growth, if you're an investor or a lender there is some considerations to be had that way as well. So, Scott, maybe I'll put it right back to you and say what have we have got for exciting new opportunities and considerations on that front?

Scott: Yes, and I'm going to give everyone a global example here in a second but those of you know me won't be surprised to hear me identify that there's a missing letter in ESG and that's the 'I' that Beth's been referring to. The 'I' of course refers to Indigenous issues. There's been a lot of work recently to look at the standards, ESG standards, and many people have concluded that they have unfortunately, largely been developed without input from Indigenous Peoples and without considering their Aboriginal rights, title, treaty rights and interest. As a result ESG standards could undermine the interests of Indigenous Peoples and investors alike. In particular of interest to this audience will be issues about unaddressed capital risks. Stephen talked about reputational risk. Justine talked about reputational risk. So I'm going to turn to an example of a very significant reputational risk that we've seen unfolding over the last couple of years, globally, to underline and highlight the consequences of failing to consider the 'I' in ESG. So in May 2020 Rio Tinto unfortunately destroyed a cave in Juukan Gorge that had evidence of continuous human occupation for over 46,000 years. The case was a sacred site for the traditional owners of the land, the PKK People, who had strenuously objected to the destruction of their sacred cave. Rio Tinto nevertheless proceeded to blow up the cave based on permits that it had already obtained. I think this is a key part of the story here. We're talking about an activity that was authorized by the Australian Government and so this goes to show that peer reputational risk that's at stake in these types of situations. Right? So Stephen talked about sort of law suits, failing to comply with legislation, etcetera. In this case there was a parliamentary inquiry that got into this issue later but the activity was actually authorized. It had catastrophic implications for Rio Tinto. There was widespread media coverage and public outcry. Rio Tinto eventually apologized to the PKK People for destroying their cave and the harm that it caused. There was an internal review that was conducted at the company. Eventually three senior executives had to step down, including the CEO, Jean-Sebastien Jacques. The Chairman of Rio Tinto was also eventually forced to step down and eventually the issue garnered so much attention that the Joint Standing Committee on Northern Australia was forced to carry out a parliamentary inquiry. That committee issued its report in 2020 and the report was entitled 'Never Again'. I'm going to read two passages of the report because I think they're very telling.

"Rio Tinto's role in this tragedy is inexcusable. Rio Tinto knew the value of what they were destroying but blew it up anyway. It pursued the option of destroying the shelters despite having options which would have preserved them."

"The evidence presented to the Committee raises significant issues about the culture and practices inside Rio Tinto and highlights a need for internal reform of the company."

So what came out of the inquiry was some fairly devastating facts that speak to the very sort of procedures and processes and policies that Stephen was talking about putting in place. So the company had actually commissioned archaeological work on the caves that it blew up. Understood the significance of those caves to the PKK People and proceeded to blow them up in any event. so the second thing that I wanted to draw the seminar's attention to is the following quote. This goes to the underlying reputational risk at stake in ESG matters. Quote, Rio Tinto has paid a high price in reputation for its failure at Juukan Gorge. Other resource companies need to take note: governments, investors and the community will no longer tolerate such tragedies, end of quote. So we've all watched that play out in the media. That's probably the most high profile example that I could think of where the failure to take into consideration the 'I' in ESG could have catastrophic effects in reputations, impacts on reputations, but I promised Beth that I would actually talk about positive things and I see you looking over at me, Beth.

 

Elizabeth: That's okay. I was going to say you're allowed to talk about the risks too that are relevant for investors and lenders but, Scott, what I was going to say is one of the ways, perhaps, to mitigate or avoid these situations is partnerships and working together. I know that we can talk about that so why don't we raise that and, Justine, I know you've been doing a lot at EDC to work on providing opportunities and working with Indigenous partnership support. So, as Scott's highlighted there's certainly a lot of reasons to be conscious of those risks and that is a particularly clear issue and reputational but also a community disaster which we don't want to see happen, especially in Canada as we move forward in Truth and Reconciliation. There's some opportunities to benefit from working with people who can avoid you getting in those circumstances, we hope, and as an investor and lender hopefully grow your bottom line and give you some good opportunities as well on that front. Scott, do you want to talk about the partnering and if they had have had a partner heavily involved in this I don't think they would have this circumstance.

Scott: Yeah. Just the word, partnership, really reflects a very different approach of engaging with Indigenous Peoples. One that the inquiry found was entirely absent in Rio Tinto. I guess what I'll start with, Beth, is by highlighting the Truth and Reconciliation Commissions call to action and call to action 92 that relates to businesses. It calls for businesses to adopt and implement the United Nations Declaration on the Rights of Indigenous Peoples. Of course, most people will be familiar with now article 32 of UNDRIP which deals with Free Prior and Informed consent. Frankly, the best way to get Free Prior and Informed consent is through partnerships and Indigenous equity participation in major projects and natural resource development. I can tell you, Beth, both your practice and my practice, what I'm seeing across Canada is an increasing trend of Indigenous equity participation in major projects. Another theme that we've heard on our panel today, it's not a one size fits all approach. It comes in various shapes and forms. It can happen early at the onset of project development. It can happen at the end of construction. It can happen when the project is operational. But one of the reasons behind this trend is it helps align interest between Indigenous communities and project developers and when somebody is your partner in something, like other partnerships in life, you really have to sit down and talk about issues and work through them and resolve disputes. So we've seen tremendous upside in the Indigenous equity partnerships that we've had the opportunity to work with. So we're seeing it across sectors. Of course we're seeing it in transmission lines. So there's a number of examples. ... Power was the first to go in Ontario. Beth, I know you've been involved in some transmission lines in Alberta. We're working on Ontario on some. As a result of the feed-in tariff program in Ontario in early 2010 we saw a lot of Indigenous equity participation in renewable energy generation projects. Lots of really positive announcements out of the oil sands and Nakota Sioux Cree and other impacted First Nations there that are partnering on owning oil sands assets. I think the trend is going to continue moving forward, Beth, and it's one that we've had the real honour and privilege in participating in. I'll leave it there.

Elizabeth: I would echo your thoughts. It's certainly an honour and a privilege to work on it. Scott and I both, I think, have worked on this particular area of practice for a very long time and EDC has worked on a lot of things for a long time. It's nice to see progress into the more mainstream but I think it is progressing into the more mainstream and I think there's only going to be more continued growth and good results from that growth. I think those partnerships are things that we see working more effectively in the communities that they are in, and operating in, and also between the business community and the underlying community that's living there. It's very important to have that working/talking relationship. Justine, we've had the privilege of working with EDC on some of those and I'd like to turn it over to you to speak to some of the successes and where EDC is going on that front because I know you are actively progressing.

Justine: Thank you, Beth. If you can give me 30 seconds to jump on the Scott bandwagon and I promise I'll be positive at the end as well. We're taking over the webinar. Sorry, Beth. I just want to maybe connect a couple of dots because first of all, Scott, the next time something like that happens similar to the Rio Tinto story, I'll give you a call because that news about the firing of the CEO was the day before I had to go in front of a board and actually talk about our human rights policy. But just for the audience, it's not just about what happens to the company itself and it's reputation, but you think of a Rio Tinto, if it's another entity that then comes knocking on our door and says, "Hey! There's another project we'd like to do." How they behave vis-à-vis that event has an impact on whether or not we will consider to support them in future investments and that's where we kind of come in and say, "Okay. What are your practices?" and would undergo a pretty significant review and it would be up to the company to demonstrate to us that not only do they understand but they're practicing what they're preaching and put it into practice what's required so something like this does not happen again. I was called upon, Beth, to just maybe connect that dot in terms of what that impact has and how long lasting it can be. Maybe the other thing, before I just talk about some of the opportunities in the Indigenous sector is, we've been talking about the Canadian lending and investment community and one thing that we can do, and it's really nice to see the trend in terms of more partnerships and so forth, but there are in some instances, like if I think project finance, where depending on the size of a project there is a standard, for example, that would recognize or ensure that there is the right mechanisms around Free Informed Prior consent, as an example. Bult you need to hit a certain threshold and I would put out there that that threshold is probably too high. So sometimes what happens is that there's a bit of a negotiation as to whether or not a project fits the threshold or not. But we fundamentally should change our mindset. It shouldn't be about a threshold, whether or not you have these partnerships and see the opportunities. It should be part of how we do business. So I just thought it would be important for the investment and lender community that's with us today to say if you really want this to change you have to embed it in what you do everyday. Don't wait for the framework or the standard to force you to do it. As Scott so eloquently said, there's tons of opportunities.

So a couple of stats and then I'll show you where EDC is at and where we're striving towards. If you take in Canada there's probably more than 50,000 Indigenous owned companies. Mainly in three groups. So we see in First Nations, Metis and Inuit and interestingly enough, I think as Scott alluded to, it's very diverse in terms of the sectors in which they operate and they contribute an excess of 30 billion dollars annually to Canada's economy. So not insignificant at all. We know some of the challenges. Accessing working capital. Some of the challenges on the remoteness of the communities. Shipping of goods and so forth but suffice to say that the partnership approach can really make a difference. So certainly in the last couple of years EDC has turned its attention to this. I can share with you in 2020 we served about 77 customers in Indigenous communities which represented about 119 million dollars of business facilitated. We're setting a goal for ourselves that by 2023 we'd increase that to 400 companies and aiming to have more than 650 million dollars of business facilitated. So it's a lofty goal but certainly the opportunity is there and, again, I must echo the need to partner but also all of our responsibility and accountability to apply regardless of the size of the transaction or the opportunity that's in front of us.

Elizabeth: That's an excellent point and I think that it's fair to say all of us on this call, and I hope everybody joining us, all are looking forward to those opportunities becoming something that we have as part of our day to day expectation and our path forward in the business community. Scott and I have been working in Indigenous business ventures for a very long time and we both no longer qualify for under 40. I told Scott I would get him back at one point if I needed to. But we've been doing it, and we've seen a lot of changes, and I'd say with EDC you've seen a lot of changes and an embrace in going forward and I think that's fair to say for a lot of investors and lenders. But that is a very clear area of growth in the Canadian market and ESG, with an 'I', very much overtop of all of it is a very good way to get there. I know we're wrapping up. We're getting to the end of time and I think we could all probably talk quite a bit longer, at length, I know we do have a question as well but we've also got some upcoming seminars that we wanted to make sure that we noted that people could join us for, or join EDC for. So perhaps I'll first take the question because we have one question and it's one that, Stephen, I think you're the very best one to speak to. Where companies voluntarily adopt ESG policies, or commitments, via the board, what does duties does the board take on with respect to those policies and commitments? What if these policies or commitments have a negative net financial impact on shareholder value? Could the shareholders sue? I know, Lorraine, you work with B corps, you might want to finish overtop of Stephen on that because there is different consideration with B corps. Stephen, why don't you go ahead on that point. Unless I'm mistaken, you know that topic very, very well.

Scott: Stephen, you're on mute.

Stephen: Yup. Directors in Canada have a duty to act in the best interest of the corporation. It's a fiduciary duty. They also have the ability to take into account the interests of stakeholders and that's both as a result of the Supreme Court of Canada's decision in the BCE debenture holders case as well for CBCA, Canada Business Corporations Act, incorporated companies that's now been codified and part of the CBCA. The question, could shareholders sue? It's very fact specific so I think what I'd like to say is that the directors have the duty to do what's in the best interest of the corporation and, depending on how that plays out, shareholders may or may not have an opportunity to sue.

Elizabeth: Then, Lorraine, talking to the bottom line we do see in BC and a growing presence in the States, of B corps, or benefit corps. Can you speak to that experience a little bit?

Lorraine: Yes. B corps certifications I'm seeing more and more often and it's an international certification that verifies that companies meet the highest standards of overall social and environmental performance about transparency and legal accountability. So the scope of a B corps certification covers everything from, it's basically 5 major areas, so including governments, workers, community, environment and customers, and the adherence to the requirements of the certification are assessed and verified by a non-profit corporation called B Lab, which actually does the certification process. A B corps certification might alleviate some of that concern because actually the Articles of the company are drafted such that these environmental and social and transparency matters are part of the Articles of the company. The board would be obliged to comply with the social impact matters that the company has stated are important to it.

Elizabeth: Then I think in fairness I have to, Scott will tell me on my own views on this and he probably would agree with me, but this is my main point on ESG which is that the bottom line may short term be impacted but it is very unlikely the bottom line is going to be impacted in a negative way long term by taking ESG considerations into account. So, a lot of what needs to be done is stopping the immediate quarterly thought, or short term yearly thought, and looking at the long term strategy. As an investor you want something that's going succeed on a longer term and grow and looking at ESG principles it is probably the best way to do that but it's certainly not going to be good for the bottom line, in my view, to not do so. Energy transitions are a very clear example where if you were not embracing and moving forward I think you'll find that the results are negative in the long term. Justine, you probably have some thoughts on that same point. So feel free.

Justine: Definitely. We see that embracing ESG practices and embedding them as part of your day to day is actually going to be an accelerator to your growth from a trade point of you. If you go beyond the Canadian borders, and kind of take a look at what's going on around, you cannot avoid it anymore. So that's becoming more and more a criteria to be selected or to get that opportunity or that contract. I would agree with you, Beth. There are more and more studies that are demonstrating that it's very good to the bottom line. The time factor, I think, depends on the sector and the geography but avoiding it at this point, I think, would be an unwise choice.

Elizabeth: Exactly. Scott, you and I will both very strongly agree that, and I know everybody on the call would as well, but in terms of considering the 'I', there is definitely some good considerations to make on the bottom line front as well as many other considerations.

Scott: Yeah, absolutely. Just to conclude here, Beth, I think it's absolutely essential for future development of major projects in Canada. We're not just going to be able to move large projects forward without the ESG and I components having been addressed.

Elizabeth: On that note I want to thank everybody who's joined us, Justine especially for stepping in and EDC for joining us as a partner in this matter. I also want to thank everybody for hanging on. We do have some upcoming events I just wanted to quickly highlight. EDC has it's own 'Net Zero By 2050: What will it mean for your business?' event that's coming up and that is, I'm just looking for the date on it, I know it's early November. But we'll send a link if you're interested in it to anybody on this. In terms of upcoming seminars on our end, Stephen, you may have the dates but in November we have upcoming webinar on Mandatory Vaccines. Stephen has a very exciting book launch on the Board of Directors and Their Roles in the ESG Sector and that's coming out shortly. So for the attendee who was particularly interested in that topic I think some of those specifics are likely in that book. Stephen, you had another webinar coming up as well I believe.

Stephen: Yeah, early in the new year we'll be doing a webinar on American and Canadian supply chain and human rights issues in supply chains.

Elizabeth: I do have the date for the EDC webinar now, sorry. It's November 16. So coming up very soon, at 1:00, and we can provide the link to anybody who's looking for that. I'm sure it will be a very timely topic, Justine, so thank you for letting us know. With that, I will let everybody go and thank you once again to everybody who joined us a panelist today. Thanks all.