In an effort to drive sustainable value and mitigate materially financial risk, the global environmental, social and governance (ESG) movement just took a big step closer to enshrining ESG issues as strategic priorities for organizations worldwide.
Leaders of small and mid-size businesses in Canada have been understandably preoccupied with the pandemic, supply chain and cost escalation challenges. But advancing ESG preparedness has now shifted from a future contemplation to an immediate priority. Here’s why.
A growing focus on ESG performance by supply chain partners
First of all, growing pressure to act on ESG issues — including strengthening the resilience of supply chains — has made ESG disclosure requirements a priority for many large, multi-national organizations. Supply chains are vulnerable to ESG risks such as resource depletion, pollution, workforce health and safety abuses, and corruption. These can harm not only a company’s reputation, but also its operations and financial performance.
Managing ESG risks in the supply chain is particularly important because supply chains are complex and risks can arise internally through management practices, as well as externally from third-party suppliers. Global food chains are a prime example: Pandemic disruptions, droughts, and the war on Ukraine are all battering fragile food systems, which likely means more people in the world’s poorest countries will suffer from hunger.
More companies are responding to challenges like these by adopting sustainable practices and undertaking risk-based due diligence, and they’re demanding suppliers comply with ESG standards to ensure sustainable practices flow through the supply chain. Many are using rating systems to evaluate the ESG risk management performance of their direct and indirect suppliers — yet a startling number of suppliers are not making the grade.
Global standards for financial sustainability and climate change information coming this year
Meanwhile, the global ESG environment is quickly moving toward a more sustainable economy, encompassing companies of all sizes. ESG reporting has historically been voluntary and ad hoc, but demands for sustainability reporting are gathering momentum.
In the spring of 2022, the International Sustainability Standards Board (ISSB) issued exposure drafts for two standards. These represent global baselines: one for measuring and disclosing general sustainability financial information, and the other for information related specifically to climate change. The comment period for these proposed standards closed in July and the ISSB intends to review the feedback, make any needed changes and issue final requirements by the end of this year.
The ISSB also intends to complete by the end of 2022 the core elements of a global baseline of sustainability disclosures. Implementation of this baseline will then require action by jurisdictional authorities and market participants to achieve consistency and comparability across markets.
The ISSB will collaborate through a dedicated working group to help jurisdictions understand their capital market requirements for sustainability disclosures. Recognizing the challenges they face in applying these new requirements, the ISSB has indicated it will pay special attention to the needs of emerging and developing economies, as well as small- and mid-sized companies and other organizations within global supply chains.
Canadian Sustainability Standards Board (CSSB) newly hatched
In Canada, responsibility for implementation of the baseline falls to the Canadian Sustainability Standards Board, which was launched in June 2022. The CSSB will work with the ISSB to develop and support the new sustainability disclosure standards for the Canadian marketplace — including our country’s significant proportion of small and mid-sized enterprises.
While the timeline for mandatory reporting has yet to be confirmed, it is expected the CSSB will determine what will be required for sustainability reporting and disclosures in capital markets at some point in 2023. Companies in Canada that want to access capital will soon have to demonstrate they are meeting these standards. They may have to begin collecting data to satisfy the new disclosure requirements as soon as January 2023.
Disclosures of climate-related risks are also developing rapidly in Canada and globally. It’s expected there will soon be alignment among the ISSB’s draft of climate-related disclosures, the U.S. Securities and Exchange Commission’s proposed rules to standardize climate-related disclosures for investors, and Canadian securities regulators proposed National Instrument 51-107 Disclosure of Climate-related Matters.
Prime Minister Trudeau announced a plan at the beginning of 2022 to compel companies to issue climate-related financial disclosures based on the framework established by the Task Force on Climate-related Financial Disclosures. This reflects similar approaches by the U.S., UK, and EU.
The April federal budget announced several measures aimed at achieving a net zero economy, plus climate-related reporting requirements for banks and insurance companies. This will ripple throughout the Canadian economy. Within one to three years, banks and insurers will have to collect information from their clients about climate risks and companies that want to access financing or insurance coverage will need to make climate-related disclosures.
Increasingly, business financing will be accompanied by new ESG requirements. Borrowers will be expected to demonstrate how they promote sustainability in their operations. If they aren’t doing so, capital will become more costly or challenging to secure.