All Posts

Going Green? Companies Need to be Able to Back Up Environmental Claims or They Could Face Significant Penalties under Bill C-59

Published on July 26, 2024 - In Blog Posts, News & Events

Amendments to the Canadian Competition Act places additional onus on corporates to ensure all environmental claims are backed by internationally recognized methodology.

Contents

Bill C-59 Background

Bill C-59, Canada’s Fall Economic Statement Implementation Act, 2023, received Royal Assent and became law on June 20, 2024. This legislation makes significant amendments to the Canadian Competition Act (“the Act”), particularly around “greenwashing” or misleading environmental claims about products and services.

The Act applies to virtually all businesses in Canada, including foreign businesses doing business in Canada, and is aimed at preventing deceptive marketing practices. As a result of these amendments, greenwashing has received enhanced regulatory oversight and has come under the purview of Competition Bureau Canada. 

Key Amendments to the Competition Act: Greenwashing now Considered “Deceptive Marketing”

C-59 targets greenwashing related to two types of environmental representations:

  1. Statements, warranties or guarantees of a products’ benefits for protecting or restoring the environment or mitigating the environmental, social and ecological causes or effects of climate change that are not based on an adequate and proper test.
  2. Representations regarding the benefits of a business or business activity for protecting or restoring the environment or mitigating the environment and ecological causes or effects of climate change that are not based on adequate and proper substantiation in accordance with internationally recognized methodology.

Therefore, if a business makes a statement, warranty or guarantee of the environmental attributes or performance of a product or service, it must be based on an “adequate and proper test”. Key features of the new C-59 amendments include:

  • A higher bar to justify covered representations and claims. Prior to the amendments, environmental claims were covered by the general “misleading advertising” provisions of the Act; they must be “false or misleading in a material respect” to contravene the Act;
  • Claims may contravene the Act unless supported with an “adequate and proper test” (in the case of products) or “adequate and proper substantiation in accordance with internationally recognized methodology” (in the case of other business activities);
  • The onus is on the business making the representation to prove that the claim can be justified and applies to all current and historical disclosures made.

Potentially Significant Penalties for Non-compliance

Penalties for non-compliance are severe. If a business contravenes a section of the Act, it can face monetary penalties of up to $10 million ($15 million for subsequent order); or three times the benefit derived from the misrepresentation. If that cannot be reasonably determined, the corporation can face up to 3 percent of the corporation’s annual worldwide gross revenues.

Complexities Around the Amendments

Some of the complexities around these amendments are centered around the interpretation of key undefined terms. For example, what is considered an “internationally recognized methodology”, what does an “adequate and proper test” entail, and what evidence is required by a company to justify a claim? Much uncertainty exists around how various terms will be interpreted and what methodologies will be acceptable under the Act.

Private Right of Action

C-59 additionally introduces a new private right of action allowing an application to allege that a company has contravened the Act. To start a proceeding, court authorization is required, however, if the application is deemed by the court to be in the public interest, leave can be granted. This is a significant amendment as the current regime only allows the Competition Bureau to enforce the Act’s deceptive marketing provisions.

This potentially opens the doors for more advocacy groups to bring claims against corporations for net zero commitments and other potentially misleading environmental representations.   

Our Take: What Will be the Implications for Businesses?

Any business that has made environmental commitments, claims or statements either on its website, in their ESG report or in another public document is at risk if these statements cannot be backed up by international methodology.

For example, over 130 Canadian companies  have made net zero by 2050 commitments.  They should ensure they have:

  • calculated their carbon footprint, including Scope 3 emissions, in alignment with a recognized methodology, such as the GHG protocol.
  • set targets, likely science-based targets,
  • a transition plan in place to demonstrate how the organization is reducing its carbon footprint year over year, in alignment with the Task-Force on Climate-related Financial Disclosures (TCFD), or other internationally recognized reporting framework.

While the Competition Bureau will be launching a public consultation to determine guidance around what is meant by an “adequate and proper test”, there are frameworks and methodologies that companies can use to prevent non-compliance, in our view.

The Climate Engagement Canada Benchmarking Report is a good source that outlines leading requirements investors look for when evaluating a companies’ net zero commitments, which include: interim reduction targets aligned with the SBTi, implementation of a decarbonization strategy, having a credible transition plan aligned with the TPT Disclosure framework. Along with remuneration arrangements where company’s executive remuneration scheme incorporates climate change performance elements, amongst others.

What Does C-59 mean for a Business’ ESG Strategy & Reporting Practices?

Amendments to the Competition Act requires all corporations to review their marketing collateral, investor communications, ESG reports and other public documents to ensure that all environmental and climate change-related representations can be backed up by testing, or by internationally recognized methodology.

Companies should review existing disclosures for the following product claims, including, but not limited to: “net zero”, “green”, “sustainable”, “recyclable”, “compostable”, “eco-friendly”, “carbon-neutral”or “good for the environment,” amongst others.

If a company is “net-zero” or has stated that its “targets are aligned to the SBTi,” or that its business uses “clean electricity,” these representations need to be backed by the GHG protocol and other recognized methodologies to avoid non-compliance and potential penalties. It is important to note that the GHG Protocol is collaborating with the International Sustainability Standards Board and their standards (i.e. IFRS S2). The interoperability and collaboration amongst various frameworks will support companies as they start to ensure that all environmental representations made are backed by the necessary tests.  

What Should Businesses Do Now to Avoid Non-Compliance?  

While much uncertainty remains about how these amendments will be enforced by the Competition Bureau, there are 5 key steps businesses should now take to prevent misrepresentations:

  1. Review current and historical reporting and disclosures: All environmental statements that meet the requirements of the Act need to be reviewed. All statements or claims that are unable to be tested and justified need to be modified or removed immediately. In our view, if your company has committed to Net Zero by 2050 publicly, your organization should have calculated its carbon footprint, including its Scope 3 emissions, in alignment with the GHG protocol (or other internationally recognized framework), and have a transition plan that the company has reviewed and received Board approval.
  2. Keep auditable records: Organizations should collect defensible, auditable and reliable data to support any environmental or climate-related claim. This will also prepare companies for assurance requirement under the ISSB and the Corporate Sustainability Reporting Directive (CSRD), along with upcoming reporting requirements for public companies.
  3. Align future reporting practices to a recognized framework: While many organizations are beginning their ESG journey, it is advised that companies align ESG-related commitments, claims, target setting and reporting practices to a recognized framework or methodology (i.e. Sustainability Accounting Standards Board, Global Reporting Initiative, Science-based Target Initiative etc.).
  4. Board Education: It is important that the Board is engaged and understands how quickly the ESG reporting landscape is moving. To avoid reputational damage and fines, ensure that the board is involved in the organization’s ESG strategy and reporting practices. This includes reviewing and approving all public statements about the company’s climate change and environmental goals and claims.
  5. Continue with Voluntary ESG Reporting: It is unnecessary to stop existing ESG reporting practices and it could even pose reputational risks to engage in “greenhushing” as customers and investors are paying attention to companies’ responses to these new requirements. The amendments are aimed at preventing deceptive marketing practices, rather than encouraging companies to stop their voluntary ESG reporting all together. These amendments can be compared to how a pharmaceutical company needs to ensure that any health benefits claimed are true and have been tested. Investors and other capital market participants require climate-related information when making capital allocation decisions, and organizations are encouraged to proceed with ESG reporting, provided proper testing and documentation is implemented.  

The amendments to the Act underscore the importance of authenticity by companies in the face of climate change and environmental challenges. Investors and other capital market participants expect companies to follow through on their commitments, including those that have made net zero by 2050 targets. As the ESG and climate change reporting landscape continues to evolve, it is critical that corporates begin to prepare now.

Contact us to learn more about ESG Global Advisors, our team, and how we can help you with your approach to reporting given the recent amendments to the Competition Act. ESG Global offers a comprehensive range of ESG services for companies and investors including customizable board education sessions. Visit Our Services to learn more. 

Disclaimer: Please note that the content and material provided in this article is for general information purposes only. It is not to be taken or relied upon as legal advice and should not be used for professional or commercial purposes. This article is intended to communicate general information about relevant sustainability matters and reporting requirements as of the indicated date. The content is subject to change based on evolving regulatory reporting requirements.