Ottawa has committed to turning Canada into a global leader in environmental, social, and governance (ESG) reporting, and as the time draws nearer for new regulations to hit public companies, analysts say small business stands to get hit disproportionately hard.
Regulations are being crafted by international bodies to ensure consistent global standards. They then feed into the basis of Canadian regulatory proposals. A new Canadian Sustainability Standards Board (CSSB) is set to launch in 2023 and has been tasked to work with the new International Sustainability Standards Board (ISSB), which will have an office in Montreal.
For reporting purposes, greenhouse gas (GHG) emissions have been classified into three scopes. Scope 1 refers to emissions stemming from the manufacturing process. Scope 2 refers to those from operations of a manufacturing facility like heating and hydro. Scope 3 is everything else, from raw material extraction to final consumption and subsequent disposal.
Krystle Wittevrongel, senior policy analyst and Alberta project lead at the Montreal Economic Institute (MEI), told The Epoch Times that the ISSB received feedback from over 700 respondents, including 80 from Canada, on its disclosure standards, and Scope 3 emissions reporting in particular raised red flags.
“There’s a lot of discussion about this out there, but not a lot of discussion on ‘OK, what does this mean for the people that maybe aren’t going to be directly required to report by these regulations, but are indirectly going to have that impact,’” she said.
She wrote in a Dec. 8 report that Scope 3 is often a company’s largest source of emissions and reporting on them is costly and “represents an onerous burden” that many entities—especially small and medium-sized enterprises (SMEs)—don’t have the capabilities to fully comply with.
Scope 3 emissions are also called “value chain” emissions and the “fatal flaw in GHG reporting” since they are also the Scope 1 and Scope 2 emissions of another company. There’s also the risk of double-counting these emissions.
SMEs that are suppliers for bigger companies may have to track their emissions and report back to those companies, which are the ones more specifically targeted by the regulations, Wittevrongel said. This could influence those big companies to favour doing business with SMEs that have the ability to support the required emissions reporting, she added.
“This requirement is therefore likely to create an obstacle for private companies not large enough to have a compliance department,” she wrote.
For those companies that can afford the additional compliance costs, they will pass on the costs to consumers, Wittevrongel said.
“The federal government should be critical of a policy that will be overly burdensome and artificially create winners and losers, while ultimately increasing the cost of living for Canadians. As such, the mandatory reporting of Scope 3 emissions should not be included in ESG disclosure requirements.”
Recommend Excluding Scope 3
The Canadian Federation of Independent Business (CFIB) is urging Ottawa to keep targets for emissions reduction voluntary.
CFIB senior policy analyst Taylor Brown told The Epoch Times that the federation gave feedback on Scope 3 emissions to international regulators during the consultation period.
“CFIB felt that it was important to have our members’ voices in those consultations because they’re opening a new International Sustainability Standards Board office in Montreal, and then that will lead eventually to a Canadian Sustainability Standards Board.”
Brown said the environmental regulations could mean a lot more red tape and add to the financial burden already being faced by struggling SMEs in Canada.
“So we recommend to completely exclude Scope 3 emissions reporting entirely, because it’s just so massive and onerous on the small business community,” she said.
Currently, Canadian businesses aren’t required to publicly disclose anything climate-related, Wittevrongel said.
“We’re getting this ISSB board in Montreal, and we’re going to have this Canadian Sustainability Standards Board. It’s just adding more and more,” Wittevrongel said.
In Budget 2022, the feds said the new ISSB will “develop global sustainability standards to enhance the quality and comparability of international corporate reporting on environmental, social and governance (ESG) factors.”
“The government is committed to supporting the start-up of the Montreal office and positioning Canada as a leader in sustainability reporting,” the budget said.
Regulatory Pressure Grows
The Canadian Securities Administrators said in October and re-confirmed to The Epoch Times that it was continuing to review feedback received on its proposed climate-related disclosure rule published in October 2021 while “actively considering international developments.”
That rule would require companies to disclose their emissions under the three scopes and related risks or provide their reasons for not doing so. An alternative approach was also posited as part of that rule where only Scope 1 emissions disclosure would be mandatory.
For federally regulated banks and insurance companies, the Office of the Superintendent of Financial Institutions and Bank of Canada plan to issue a final guideline in early 2023 for mandatory climate-related financial disclosures, which will be aligned with the international framework.
Aside from regulation, banks are under pressure from investors to reduce their lending to carbon-intensive industries like oil and gas. They also face risks to their reputations for not living up to their climate pledges.
Across various industries, businesses are already taking steps to reduce their emissions and carbon footprint, while investors through ESG strategies are reducing funding to carbon-intensive industries like fossil fuels. ESG compliance reporting may soon become an additional cost.
“If we aren’t careful with what we implement in the future, we can expect that there’s going to be many unintended consequences,” Wittevrongel said, adding that for now the MEI is just raising the issue of Scope 3 emissions reporting.
Brown says that Scope 3 emissions reporting is “just not feasible.”
“There’s just so much coming down the pipeline for SMEs at a time when they have so much else to focus on.”
