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Imminent arrival of global sustainability standards impacts the future of your business

August 11, 2022

Imminent arrival of global sustainability standards impacts the future of your business

Synopsis
6 Minute Read

As efforts to codify ESG gather steam, we look at how Canadian businesses can prepare for new reporting standards.

Partner, Enterprise Risk Services & Leader, Environmental, Social & Governance

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.

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What Canadian leaders and business owners should do immediately to protect the future well-being of your business

It may be helpful to keep in mind that stronger ESG performance is good for business in multiple ways, including lower financing costs, more opportunities for growth, stronger resiliency, and improved stakeholder relationships and reputation.

With the imminent arrival of sustainability standards and intensifying expectations of banks, insurers and supply chain partners, small to mid-sized business (SMB) owners need to act now to realize these advantages.

There are obvious concerns about the costs and burdens associated with meeting new standards, but there is a practical way to address these: a defined transition period with a pragmatic transitionary strategy focused on adding value and building resilience.

Although we don’t yet know what the final reporting standards will be, their direction and substance are clear. As large companies set ESG targets to reduce risks, measure progress and report consistently, SMB leaders should be moving forward in synchrony.

Some guidelines for how to begin:

  • Determine the expectations of your supply chain partners — Supply chain partners are integral to delivering on sustainable environmental, social, and governance practices. Going forward, optimizing supply chains will require more information sharing among partners.
    Purchasers are establishing ESG teams that define the information suppliers need to provide and how they must provide this data. Understanding these requirements and complying in a timely manner will soon be essential to maintaining supply chain relationships.
  • Establish your organization’s sustainability maturity — How well developed are your organization’s sustainability practices? Improving sustainability performance should now be a fundamental component of corporate strategic planning, but many business leaders have yet to even ask this question.
  • Understand the new reporting regime and compliance requirements — While global ESG reporting standards are still in development and will impact capital markets first, they will cascade across the Canadian economy.
    Business leaders need to understand what information must be collected and reported, and the protocols for doing so. You should stay informed regarding national and international reporting frameworks and disclosure practices, and the shifting regulatory landscape.
  • Establish a transitionary strategy with a defined timeline — The right ESG strategy builds resilience and creates both near-term and long-term value. The wrong strategy can be distracting and costly. 
    Concern about missteps is one of the biggest barriers preventing organizational leaders from starting the journey. Objective third-party ESG expertise can be valuable to help boards and management teams effectively align corporate strategy and ESG priorities. Experienced professionals can also provide guidance on an appropriate, efficient and affordable path forward.

It’s important to appreciate that the shift to strong ESG performance is incremental. To deliver sustained outcomes, there needs to be a pragmatic level of goal-setting, a practical timeline, and regular progress monitoring. This should begin with understanding the baseline — assessing where the business is today so leaders can establish appropriate goals for tomorrow.

Pressure to address ESG issues from governments, regulatory bodies and supply chain partners will continue to intensify. Bottom line: the sooner organizations start on a path to a sustainability strategy, the sooner they will capitalize on risk mitigation, value creation and growth.

Stay tuned for upcoming articles on the fundamentals of ESG success for Canada’s businesses – from identifying gaps and overcoming obstacles to measuring progress.

Contact us

Edward Olson is the National Leader of MNP's Environmental, Social and Governance (ESG) practice and is also a Partner with the firm’s Enterprise Risk Services (ERS) practice.

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