The business of ensuring compliance with environmental, social, and governance (ESG) factors is booming, and a study by the Business Development Bank of Canada (BDC), a government agency that works with entrepreneurs and smaller businesses, suggests that its clients get on board the ESG train or be left in its dust.
However, ESG is facing considerable criticism and BDC does acknowledge the costs and administrative burden that compliance involves.
BDC’s study “ESG in Your Business: The Edge You Need to Land Large Contracts“ released March 30, which surveyed major buying organizations in the public and private sector and their small and medium-sized suppliers, concluded that 50 percent of suppliers say ESG leads to new business opportunities, 32 percent say it makes it easier to recruit and retain employees, and 31 percent say it improves access to financing and investment.
“The BDC confirmed what we’ve been saying in their headline when they say ‘small businesses left out of big contracts without ESG reporting.’ I find it very interesting in that they’re trying to spin it as a positive but that sense in and of itself it’s inherently very negative,” Krystle Wittevrongel, senior policy analyst and Alberta project lead at the Montreal Economic Institute, told The Epoch Times.
The BDC report also discusses obtaining environmental and diversity certifications. It provides guidance, as do consultants, on how to implement an ESG program and improve ESG performance.
One of BDC’s six business lines is “advisory services” provided by its own employees as well as external consultants. In the 2022 fiscal year, BDC earned revenue of $28.9 million from advisory services.
BDC spokesman Jean Philippe Nadeau told The Epoch Times that the advisory services include optimizing a company’s operations in terms of costs, energy, and resources, while also reducing waste.
Nadeau said that “BDC does not currently have an advisory solution specific to implementing ESG solutions or improving ESG scoring specifically” but that it does offer free tools to get businesses started.
A Boon for Consultants
Aswath Damodaran, professor of corporate finance at New York University’s Stern School of Business, told NTD News on March 11 that ESG is just a “marketing tool.”
“It [ESG] made a lot of people wealthy—bankers, consultants, measurement services—it does nothing for companies other than let them strut their goodness credentials,” he said.
ESG consulting has become an industry on its own. In Feb. 2022, Verdantix reported that the overall global ESG and sustainability consulting market is expected to reach US$16 billion by 2027, which represents a 17 percent compounded annual growth rate (CAGR) over the period from 2022 to 2027.
By comparison, Wittevrongel notes that the global market for DNA sequencing, which was estimated at US$6.5 billion in 2022, is projected to reach US$16 billion by 2030, with a CAGR of only 11.9 percent during those eight years.
“Every time you mandate something new or have these new requirements, there’s a flurry of lawyers or consultants or accountants or whoever, that are going to get rich, basically quantifying and reporting it,” Wittevrongel said.
More regulation in the form of sustainability disclosures is coming for businesses, as the Canadian Sustainability Standards Board is expected to be operational soon.
The reasons behind the rapid growth of the ESG consultancy sector are due to businesses having to adopt new regulations, the push toward net zero, and how investors are increasingly using ESG ratings and rankings to make investing decisions, according to an Aug. 15, 2022, blog post by KindLink News Centre.
The message from consultants and BDC is that all kinds of opportunities can arise from adopting ESG, but firms have to keep up with market demands and expectations.
Accounting firms like Grant Thornton, management consultants like McKinsey, and banks like HSBC are all offering ESG advisory services.
Added Reporting and Cost
The BDC study reports that currently 59 percent of small and medium-sized enterprises (SMEs) that supply large organizations are required to report information on their ESG practices.
For example, under the environmental criteria, this would include steps taken to reduce energy consumption, use environmentally responsible packaging, and reduce raw material consumption.
Under the social criteria, employees should come from diverse backgrounds, and under the governance criteria, procedures should be in place to manage environmental and social risks and provide support for employee mental and physical health.
BDC’s study concludes that the most environmentally proactive SMEs are more profitable and grow sales faster than the less proactive ones.
“Far too many small businesses are still missing the point: adopting ESG practices benefits their business,” BDC’s vice president of research and chief economist Pierre Cléroux was quoted in a March 30 press release.
Taylor Brown, senior policy analyst with the Canadian Federation of Independent Business (CFIB), which represents over 97,000 small businesses, told The Epoch Times that the CFIB has yet to truly gauge its membership on ESG.
“It is fair to assume that the additional ESG reporting will increase costs for SMEs, especially on the environmental side since business owners would need to hire externally to collect that sort of information (such as emissions),” she said.
‘Game’ the System
One of the behaviours regulators are trying to crack down on regarding ESG is “greenwashing.” According to Canada’s Competition Bureau, “greenwashing” is where a company promotes its products or services as more environmentally friendly than they really are.
And this also applies to the ESG scoring system, says Damodaran. Consultants aim to help companies improve their ESG scores.
He says that “any time you have a scoring mechanism, companies are going to game it.”
He gave the example of how universities may seek to improve their rankings by appearing to be more exclusive in admitting students. So they drop the cost of application to encourage more students to apply, and then let fewer students in, he explained.
Thus, he adds that greenwashing is a “feature of ESG—not a bug in the system.”
“The minute you have ESG scores, you are going to have greenwashing.”
Damodaran added that there’s no evidence that ESG shows up in improved cash flow, growth, or reduced risk.
