ESG risk: Conquering the future of sustainability and uncertainty

More than a compliance issue, it’s a fundamental business challenge

 By 2026, it’s anticipated that your business will face more scrutiny over sustainability efforts, social impact, and governance transparency than ever before.

While ESG strategies were initially seen as a pathway to corporate responsibility and long-term resilience, the reality is, it’s much more complex.

ESG investments don’t always align with shareholder returns, which can lead boards to feel frustrated with policy hurdles (like Bill C-59), shifting regulations, and rising costs. The net-zero transition — a goalpost for many organizations in recent years — has largely slowed due to tighter budgets, complex rules, and compliance hoops. Inconsistent global action has added to the frustration, particularly from high-emitting nations that hinder progress.

Both a risk and an opportunity

In 2024 alone, more than 3.4 million hectares of land were scorched by wildfires, with the Jasper wildfire causing nearly $880 million in insured damages. Events like this are not just environmental disasters, they’re also financial ones.

And many of Canada’s largest companies are still playing catch-up. A review of more than 250 corporate sustainability reports found that most companies are not financially quantifying their climate risks or fully embedding ESG into their strategies.

The question is: Is the risk that companies aren’t Bill C-59 compliant, or is the opportunity to rewrite Bill C-59?

The social side of things

The social component of ESG is a business imperative. Organizations face increasing scrutiny over how they engage with people, communities, and society’s expectations.

Indigenous rights and reconciliation remain a significant focus in Canada. Businesses operating on or near Indigenous lands need to navigate risks related to land use, cultural preservation, and trust. Beyond compliance, consultation and partnership with Indigenous communities are a baseline expectation, not just from regulators but also from the public.

At the same time, Diversity, Equity, and Inclusion (DEI) efforts are at a crossroads. With the U.S. pulling back from formal DEI commitments, it leaves Canadian organizations with questions about the future of DEI looks like.

That being said, DEI remains a core expectation for businesses, especially among younger workers and customers who want to see authentic progress. Failing to uphold these values can erode your reputation, trust, and limit your access to talent.

Governance is a growing target

As ESG reporting requirements tighten up, the risks of weak governance grow.

Organizations are under pressure to deliver consistent and transparent ESG reporting. Falling short of this, like through omission, misalignment, or greenwashing, can result in regulatory penalties and/or reputational damage.

Meanwhile, boards need to be held more accountable than ever. A lack of ESG oversight or meaningful engagement is inexcusable. Boards need to not only understand emerging risks, but they also need to be actively involved in how those risks are managed.

Additionally, the risk or regulatory and legal liability is on the rise. Whether it's failing to meet climate targets or deliver on diversity metrics, organizations are being held to account. Strong governance structures, with clear accountability, a detailed strategy, and an engaged board, are needed to mitigate operational challenges and financial exposure.

Canadian CEOs seem to be taking ESG more seriously than their global peers, with 29 percent ranking it as a top priority, according to one survey. That being said, the lack of readiness for mandatory ESG disclosures could expose businesses to regulatory, reputational, and operational risks.

Despite these warning signs, there’s still a lot of optimism. ESG initiatives have already started driving positive change in Canada, from innovation to sustainability gains. But for these efforts to deliver long-term value, businesses must treat ESG as both an opportunity and a risk. That means building better awareness, improving reporting, and taking proactive steps to align strategy with action.

Risks to watch

Environmental risks

Climate change impacts: Increased frequency of extreme weather events (like wildfires, floods, and heat waves) disrupt operations and supply chains, especially in resource-intensive sectors.

Carbon transition risk: More stringent emissions regulations and carbon pricing could increase operational costs for companies that fail to decarbonize.

Biodiversity loss and resource scarcity: Diminishing natural resources and biodiversity loss create long-term risks for industries that rely on land, water, and energy.

Greenwashing allegations: Companies overstating or misrepresenting ESG efforts face reputational damage, regulatory penalties, and consumer backlash.

Social risks

Indigenous rights and reconciliation: Businesses operating on or near Indigenous lands face risks related to land disputes and community relations, along with growing public and legal scrutiny.

Diversity, equity, and inclusion (DEI): Weak DEI strategies and failing to deliver on those commitments could lead to employee turnover, difficulty attracting talent, and reputational harm.

Labour relations and workforce well-being: Failing to address fair wages, mental health, and working conditions could be a challenge for employers, especially in high-turnover industries.

Governance risks

ESG reporting and compliance: Inaccurate or inconsistent ESG disclosures can result in penalties under evolving national and global reporting standards.

Board accountability: Weak governance practices around ESG priorities, like a lack of board oversight or stakeholder engagement, can lead to shareholder activism or reputational harm.

Regulatory and legal liability: Rising lawsuits and regulatory scrutiny for failing to meet ESG commitments could increase operational risks and financial exposure.