In recent years, concepts of Environmental, Social, and Governmental issues (ESG) and how companies are managing them has gained prominence globally.
Canadian organizations are increasingly recognizing the importance of integrating sustainability considerations into their operations and that shareholders are interested in the sustainable initiatives they undertake in order to enable them to better understand how companies are managing the risks, opportunities, and uncertainties around these issues
Along with this, regulators have begun to also recognize the impact ESG has on decision making and as a result, have begun to impose reporting requirements and regulations around these issues,particularly in certain industries.
With today's rapidly changing business landscape, organizations are facing multiple challenges that extend beyond traditional financial metrics. The integration of ESG considerations is emerging as a critical aspect of corporate strategy.
ESG Reporting in Canada
Although ESG reporting is not universally mandatory in Canada, several developments are shaping the reporting landscape with key regulators the Office of The Superinendent of Financial Reporting (OFSI), the Canadian regulator of financial institutions, and the Canadian Securities Administrators (CSA), regulator of publicly listed entities moving towards this framework:
- Federally Regulated Financial Institutions:
Commencing with their 2024 fiscal year, federally regulated financial institutions, including banks and insurance companies, will be required to report on ESG performance, in particular OFSI Guideline B-15 on Climate Risk Management which was put forward in March 2023 with a public reporting deadline of September 2024 for Canada's largest banks and insurers and September 2025 for all other federally regulated financial institutions. OFSI has also indicated it would align this disclosure requirement to the IFRS S-2 – Climate related disclosure requirements. This move reflects the growing importance of sustainability metrics in financial decision-making.
- Canadian Listed Companies:
While ESG reporting is not mandatory for all Canadian companies, increasingly, companies are voluntarily adopting disclosure. However, certain ESG-related provisions apply to Canadian listed companies. For example, in May 2024, first annual reports are due under the Fighting Against Forced Labour and Child Labour in Supply Chains Act, which received Royal Assent in May 2023 for organizations that either are listed on a Canadian stock exchange or do business or have a place of business in Canada and meet certain threshold requirements. Among others is the requirement by Corporations Canada to report annually on the diversity of their board of directors and senior management. The CSA is also developing reporting around climate change also expected to be aligned with IFRS reporting standards.
- Complexity and Gaps: The sustainability reporting landscape is becoming more demanding
Rising stakeholder expectations surrounding ESG performance and transparency have led to prescriptive regulations replacing voluntary guidelines. Despite this progress, Canadian companies are challenged with meeting new regulatory requirements, including evolving climate change risk disclosure expectations. Reflecting Canada's changing disclosure in Canada and develop Canadian Sustainability Disclosure Standards that are aligned with global baseline standards developed by the International Sustainability Standards Board. landscape in the area of ESG, The Canadian Sustainability Standards Board was established in 2022 to work towards advancing the adoption of sustainability Client and Consumer Demand as Catalysts Culture: By actively involving employees in your organization's ESG strategy and initiatives, a culture of sustainability and responsibility can develop.
Client and consumer demand play a pivotal role in driving ESG expectations and regulations with an underlying theme of transparency.
These include:
- Consumer Awareness and Expectations:
Consumers are increasingly attuned to the sustainability impact of their purchases. They expect companies to demonstrate commitment to the planet and its people. Priorities include reducing plastic waste and microplastics, improving labour standards, and lowering carbon emissions. Investors are increasingly integrating ESG factors into their investment decisions and recognize that sustainable practices contribute and impact a company's long-term value and risk management. Creating transparency through product labeling and social media and marketing is crucial for meeting diverse consumer expectations which are ever evolving as they become more educated in what is happening around the world.
- Collaboration and Supply Chain Transparency:
Achieving meaningful sustainability improvements requires collaboration and information sharing throughout the supply chain. ESG reporting and other channels necessitate transparency on material ESG issues, climate risks, and emissions. How can we successfully monitor and regulate the human impact on the environment? Who will monitor such an impact and how are we going to finance such an undertaking? Consumers are demanding responsible supply chains. Consequently, an important challenge in the coming year is to focus on the monitoring, regulation and financing of climate change impacts and other risks related to labour and environmental practices. This in turn impacts a company's already existing concern for industries and organizations of reliable supply chains. Climate change and labour practices have a significant impact on supply chain systems. Creating sustainable supply chain mechanisms is also necessary for reducing the carbon footprint of an industry or organization.
With an expectation by consumers for transparency around these issues, the challenge and priority when it comes to sustainability for organizations will be to set climate goals and standards that are congruent with their goals for efficiencies as they face other barriers.
- Benchmarking and Reputational Risks:
Companies are increasingly recognizing the importance of telling their sustainability story to consumers. However, there are implications if ESG claims are publicly challenged and risks to investors of company's "greenwashing" i.e. representing themselves as being more environmentally responsible than they are resulting in investor confusion and negatively impacting investor confidence. As a result, accurate reporting becomes more and more important and is essential to maintaining market share and preserving value. This in turn has also led to the increased need for new regulation. Consumer and investor demand continues to be a significant catalyst for ESG expectations and regulations.
In today's "cancel-culture," companies are taking consumer expectations and demands more and more seriously. Accountants' Role in Boosting Resilience organizations to thrive sustainably and navigate the challenges of an increasingly evolving business environment.
Critical in today's ESG environment is the need for accountants to move beyond traditional accounting roles and become value-added leaders and influencers on ESG matters. Our role has become more complex, and clients are looking to us to be strategic advisors and to understand a company's broader business agenda and strategy. Critical to doing so in ESG is the need to understand and build ESG knowledge to view a client through an ESG lens and identify material sustainability risks and opportunities and how these impact an organization's long- term performance and value. With the increasing demand by stakeholders for transparency, CPA's can help navigate the complexity of ESG requirements and assist companies in creating and incorporating an ESG strategy into their long-term business Strategy. By actively engaging with ESG issues, CPA's can empower their clients' organizations to thrive sustainably and navigate the challenges of an increasingly evolving business environment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.