Stay Clean, Don’t Wash: CSA Comments on Artificial Intelligence and Climate Disclosures

On November 7, 2024, the Canadian Securities Administrators (CSA) released CSA Staff Notice 51-365 Continuous Disclosure Review Program Activities for the Fiscal Years Ended March 31, 2024, and March 31, 2023 (Notice). The Notice summarizes the findings from the CSA’s Continuous Disclosure Review Program, highlights common disclosure deficiencies, and, in some cases, provides illustrative examples to guide issuers in addressing these issues effectively.

As always, the CSA is particularly focused on requiring issuers to provide disclosure that is true, balanced and not misleading to investors. Recently, artificial intelligence (AI) “washing” and “greenwashing” have each represented critical areas where issuers must exercise caution, as overly-promotional or unsubstantiated material claims risk both regulatory action and findings of liability to issuers.

AI Washing 

The Notice provides that an AI system is a machine-based system that, for explicit or implicit objectives, infers from the input it receives how to generate outputs such as predictions, content, recommendations, or decisions that can influence physical or virtual environments.

While AI has been around for quite some time, its most recent, cutting-edge forms have the potential to transform many aspects of public companies’ businesses. However, the enthusiasm associated with AI can result in claims that are intentionally or imprudently exaggerated, misrepresenting actual capabilities and prospects, artificially promoting interest in an issuer’s securities.

Key Points of Concern: 

1. Classification: The Notice emphasizes the importance of issuers disclosing how they define AI in their products and services. Since the term is broad and encompasses different levels of technological sophistication, providing this context is crucial.
2. Completeness: Information that the CSA expects investors to generally consider as being material includes the source and providers of the data that each AI system uses in order to perform its functions, whether the AI system used by the issuer is being developed by the issuer or supplied by a third party, the impact that the use, development or dependency on AI systems is likely to have on the issuer’s business, results of operations and financial condition, whether there have been any incidents where AI system use has raised any regulatory, ethical or legal issues, and any other concerns that arose with the adoption of AI systems.
3. Substantiation: Statements must be supported by facts and grounded in an issuer’s actual corporate activities and performance.
4. Balance: Disclosure needs to include a discussion of the business-related benefits and risks related to AI.
5. Governance: Issuers should establish clear governance structures, including those related to accountability, risk management and oversight in respect of AI use in their business.

The Notice is clear to point out that the preceding guidance is based on existing securities regulatory requirements and does not create any new legal requirements or modify existing ones.

Greenwashing 

The Notice states that the CSA has observed an increase in ESG and sustainability-related disclosure in recent years and a corresponding amount of disclosure that is potentially misleading, unsubstantiated or otherwise incomplete. The CSA highlights the importance of balanced disclosures including adequate detail to avoid misleading investors.

Key Points of Concern: 

1. Unsubstantiated / Forward-looking ESG Claims: Claims made by issuers must be supported by data, timelines and explanations of how the goals will be met. Issuers can meet these criteria by providing ESG targets with detailed plans or credible pathways of achieving those targets. Issuers are reminded that ESG-related disclosures may constitute forward-looking information. As such, in the context of ESG disclosure, issuers are expected to have a reasonable basis for statements respecting future targets or plans and must disclose the material factors or assumptions underpinning those targets or plans and the material risks to achieving those targets or plans.
2. Misleading Language: Disclosure claiming a material product or service is ESG “friendly” or “compliant” can be misleading without accompanying disclosure identifying the relevant industry standards, the particular factors considered and how they are measured and evaluated.
3. Lack of Methodological Transparency: ESG ratings should be accompanied by an explanation of the methodologies used (i.e., actual rating, specific criteria on which rating is based, quantitative and qualitative data, third party certifying the rating and date of rating). The Notice advises issuers to clearly state the data and parameters used so investors can be made aware of all assumptions and limitations considered. In the view of the CSA, it is not sufficient, for example, to say that an issuer obtained “a high score” on “a national corporate governance survey.”
4. Misleading Terminology: Undefined or broad terms can create a false impression of an issuer’s ESG impact. The CSA reminds issuers that terms should be well-defined and supported by measurable outcomes and objective evidence.

Other Noted Deficiencies 

The Notice outlines the CSA’s review of disclosures from 425 issuers, classifying aggregated review outcomes into four categories: (1) referred to enforcement/cease-trade/default list, (2) refiling, (3) prospective changes, or (4) no action required.

For fiscal year 2024, 58% of review outcomes resulted in substantive comments that required either amended disclosure, document refiling or the submission of previously missing documents. Additionally, 8% of cases led to issuers being referred to enforcement, cease-traded or added to a default list. In several instances, reviews triggered multiple outcomes, necessitating both document refiling and commitments to improve future disclosures. Finally, in 34% of cases, no action was required, a notable drop from 44% in fiscal year 2023.

Beyond AI washing and greenwashing, the Notice identifies several other areas where the CSA identified deficiencies in continuous disclosure filings, including:

• Financial Statements: The Notice includes a more extensive discussion of financial statement and accounting issues than is typical, regarding matters including impairment of assets, business combinations and asset acquisitions, expected credit losses and revenue.
• Management’s Discussion and Analysis (MD&A): In addition to the corresponding MD&A disclosures related to the foregoing financial statement matters, where applicable, the Notice also provides commentary on CSA expectations regarding forward-looking information and financial guidance, discussions of operations and liquidity and capital reserve disclosure within an MD&A. In particular, in respect of financial guidance, the Notice reiterates the CSA position that the time period for which future-oriented financial information can be reasonably estimated does not, in many cases, go beyond the end of the issuer’s next fiscal year.
• Regulatory Requirements: The Notice identifies frequent deficiencies related to the filing and redaction of material contracts. See our November 2024 Blakes Bulletin: A Canadian Securities Law Primer on the Filing of Material Contracts.
• Mineral Project Disclosure: Deficiencies were identified in compliance with National Instrument 43-101 Standards of Disclosure for Mineral Projects, including in respect of qualified persons and technical reports.

For more information, please contact the authors of this bulletin or any other member of our Capital Markets group.