The Canadian Securities Administrators (CSA) recently published a biennial report on its Continuous Disclosure Review Program, providing an overview of results and highlighting key findings and outcomes over the past two fiscal years.

Most of the contents are familiar (some of them, like “issuers not providing issuer-specific details or sufficient contextual information to enable investors to understand an issuer’s liquidity and capital resources,” have been around for decades) but here’s something new:

• Issuers adopting new technology will need to consider whether disclosures regarding the use of and variety of evolving risks associated with new technology is necessary. For example, if an issuer began using artificial intelligence (AI) systems in its product or service offerings, the issuer should only disclose the use of AI systems with a reasonable basis for doing so, otherwise such disclosure would be overly promotional…An issuer should disclose how it defines AI in its product or service offerings to allow an investor to understand what the issuer means when referring to AI. 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. Different AI systems vary in their levels of autonomy and adaptiveness after deployment. Issuers should consider their disclosure obligations regarding an issuer’s reliance on AI and the potential exposure to material risks on an entity-specific basis. We expect investors would generally consider the following information material: 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. Balanced disclosure that includes a discussion of the benefits and risks to using AI systems should be provided. Issuers are also reminded that they should establish clear governance structures, including those related to accountability, risk management, and oversight in respect of AI use in their business. The preceding guidance is based on existing securities regulatory requirements and does not create any new legal requirements or modify existing ones.

The breathless tumble of that paragraph (by far the longest in the document) might suggest it was added at a late stage to address someone’s review comment (it reads rather as if itself AI-generated): still, it’s an intriguing alert. The comment that an issuer “should only disclose the use of AI systems with a reasonable basis for doing so, otherwise such disclosure would be overly promotional” suggests that the CSA foresees something of an “AI bandwagon” – for example, an issuer might think it can spruce up its image with some vague references to using AI to enhance its product lines, marketing strategies and so forth. The document provides examples (seemingly all from the same real-world entity) including

• The company utilizes the most advanced AI technology.
• The company’s warehouse houses the most sophisticated AI robotics.
• The company uses AI to solve world issues.
• The company’s use of AI modernizes the company’s business processes and will disrupt the industry in which it operates.

It’s hard not to have a little grudging admiration for a company that would brazenly claim to be “solv(ing) world issues,” especially as we’re told it had generated only nominal revenue from its operating activities. Anyway, a downside of such focus on AI is that it may push issuers and their advisors into providing AI-related disclosure that’s somewhat disproportionate to its actual relative importance, albeit heavily caveated and caution-laden.

The document also addresses the ever-evolving area of “greenwashing,” providing a few examples:

• disclosure about a target to transition to net zero which can be misleading if the issuer does not indicate what is included in its net zero target and if the issuer has no credible plan to achieve such a target;
• disclosure claiming a material product or service is ESG “friendly” or “compliant” with industry standards which can be misleading without accompanying disclosure identifying the industry standards, the particular factors considered and how they are measured and evaluated.

It advises issuers to:

• exercise caution in using broad terms (such as ESG, sustainability etc.) and if they do use them, in order to avoid misleading investors, we would generally expect details respecting what is meant by the term, which factors are included and how these factors are weighted and prioritized. For example, investors may confuse an issuer’s claims respecting sustainability-related goals with those related to climate-change and net-zero ambitions. Sustainability-related goals may be broader in scope or, for example, prioritize only certain social objectives. Likewise, climate-related goals can include climate-change adaption activities that may not have corresponding reduction in emissions output. As these goals may have distinct objectives with different scopes and outcomes, issuers should ensure that they clearly define the parameters of these goals to mitigate any potential confusion between them.

It almost makes you miss the old days, in which the stuff about MD&A liquidity disclosure was about as complicated as it got…

The opinions expressed are solely those of the author.