Essential ESG insights: 22 key considerations for Canadian companies

4. Are there existing Canadian laws related to ESG?

Yes, there are some laws to be aware of. Here is a quick overview:

Bill C-97 (2019)

Parliament amended the Canada Business Corporations Act to require corporate directors and officers to consider the interests of a broader range of stakeholders when acting in the corporation’s best interests.

Result: Directors and officers must now consider the interests of employees, retirees, pensioners, creditors, consumers, governments, and the environment in their decision-making processes.

CSA Staff Notice 51-358 (2019)

The Canadian Securities Administrators issued a notice emphasizing the need for boards and audit committees to receive proper orientation and sector-specific information to understand climate-related issues.

Result: Directors must be provided with sufficient information — including management's materiality assessments — to support effective oversight and evaluation of climate-related risks.

Canadian Net-Zero Emissions Accountability Act (2021)

Parliament passed legislation formalizing Canada’s aim to achieve net-zero greenhouse gas emissions by 2050. The act establishes legally binding emission reduction targets for 2030 and subsequent five-year intervals.

Result: The federal government must develop and implement plans to meet net-zero targets. The legislation and resulting targets will continue to have cascading effects across the economy through 2050.

Bill S-211 (2023)

The Fighting Against Forced Labour and Child Labour in Supply Chains Act aims to reduce the risk of child labour and forced labour in supply chains used by Canadian businesses. This legislation encourages businesses to prioritize the “social” component of ESG as a central tenet of their business strategies.

Result: Effective January 1, 2024, impacted businesses must report annually on forced/child labour in their supply chains and any measures to resolve ongoing occurrences.

Bill C-59 (2024)

The Fall Economic Statement Implementation Act introduced comprehensive legislation to amend, among other things, Section 74.01 of the Competition Act to target misleading environmental claims.

Result: Businesses must ensure that environmental claims about their products or practices are based on adequate and proper tests or validated by internationally recognized methodologies. This includes claims about the benefits of a business activity or a product's environmental impact.

5. How could ESG impact my business and capital access?

Access to capital is increasingly coming with new ESG information requirements. Understanding these requirements will be essential for business resiliency and growth within the national and global economy.

Net Zero Banking Alliance (NZBA): The NZBA is a growing industry-led consortium of global banks that are committed to aligning lending/investment portfolios with net-zero emissions by 2050. Participating banks pledge to set intermediate targets for 2030 or sooner and annually report on their progress. Canada’s largest banks have all committed to the NZBA. 

Office of the Superintendent of Financial Institutions (OSFI): Canada’s banking sector must assess and report on climate risk to the federal regulator.

Banks will require client greenhouse gas (GHG) emission data to meet these commitments and regulatory requirements. Businesses that fail to supply this data may face higher interest rates or even be denied loans.

Impacts on business-to-business transactions

The impacts of ESG span the entire business landscape. Buyers will increasingly prioritize suppliers with strong ESG commitments and businesses must be able to demonstrate their ESG practices throughout their supply chains. The inability or unwillingness to report on environmental and social factors can put businesses at a competitive disadvantage when vying for contracts.

Laws and regulations are still developing in Canada. Still, it’s reasonable to expect any expectations or best practices that are currently voluntary will eventually become mandatory throughout the entire value chain.

6. When will ESG standards become mandatory in Canada?

The Canadian Sustainability Standards Board (CSSB) was created in 2022 to assess the applicability of sustainability disclosure standards in Canada. It completed a public consultation period on the Canadian Sustainability Disclosure Standards (CSDS) in June 2024 and is now evaluating all responses. CSSB will likely make its recommendations on Canadian standards before the end of 2024.

CSSB has aligned its disclosure requirements with the International Sustainability Standards Board, a body created by the International Financial Reporting Standards Foundation. These global standards are intended to provide a baseline of sustainability-related information for economic and investment decisions and have been in place since January 2024.

The CSSB does not have the direct authority to set disclosure standards for Canada. However, the Canadian Securities Administrators (CSA) have indicated they will review the results of the CSDS consultations and consider changing reporting requirements based on CSSB recommendations. The timing for this mandatory reporting is still unknown, though CSA has indicated it will begin with capital markets.

7. Will ESG disclosures need auditing?

ESG audits are not currently mandatory in Canada. Still, businesses should proactively implement robust data collection and control mechanisms in anticipation of future legal and regulatory requirements.

Establishing strong internal processes will prepare companies for potential mandatory audits, enhance sustainability practices, improve stakeholder trust, and provide a competitive advantage in the marketplace.

8. Are companies assessed on ESG disclosures?

Rating agencies (e.g., MSCI, Sustainalytics, S&P Global) evaluate companies on their ESG performance. These ratings are provided regardless of a company’s ESG maturity or whether it discloses any sustainability-related information — and are becoming increasingly influential as investors use them to make informed decisions.

Proactive ESG practices can significantly enhance a company's ESG ratings, thus helping attract more investors and potentially lowering the cost of capital. Staying updated on ESG rating criteria and actively improving ESG performance can help companies position their sustainability and responsible governance practices more favourably. 

9. How do disclosure requirements compare in the U.S. and Europe?

The United States Securities and Exchange Commission (SEC) issued rules to enhance and standardize climate-related disclosures by public companies and in public offerings in 2022. Two oilfield services companies subsequently sued the SEC and, in 2024, it announced it would stay the rules to avoid regulatory uncertainty while the case was before the court. 

The European Union announced the adoption of the Corporate Sustainability Reporting Directive (CSRD) in 2022. The CSRD requires all listed companies that conduct business in the European Union (except micro-enterprises) to report their sustainability performance. CSRD also introduces more detailed reporting requirements and a mandatory audit (assurance) of reported information. 

10. Should my company adopt a voluntary ESG disclosure strategy to foster forward-thinking practices?

There are numerous benefits to voluntary ESG disclosure, including meeting investor and stakeholder expectations. Major proxy advisory firms, like Institutional Shareholder Services and Glass Lewis, are updating guidelines to include climate-related disclosures. These guidelines will impact TSX 60 companies from 2024.

Implementing ESG practices early allows companies to refine their processes, improve data accuracy, and set measurable goals. This forward-thinking approach can lead to better risk management and operational efficiencies. It will also lead to better business resiliency and long-term value creation.

Adopting ESG principles requires a fundamental shift in business strategy, principles, and risk management. Companies must invest time, capital, and expertise to build a sustainable, ESG-aligned business model. This transformation demands a long-term commitment to reshaping operational frameworks and embedding ESG into the core of the business.

By starting now, companies will be better prepared to meet updated guidelines requiring climate-related disclosures. Voluntary adoption of ESG disclosures can also position companies as leaders in sustainability, build trust with stakeholders throughout the value chain, and secure a favourable position in the future regulatory environment. 

11. What ESG topics should I address?

The most important first steps for ESG strategy development are to consult with stakeholders and conduct a materiality assessment. This will help companies identify and prioritize their most significant ESG issues while building trust, strengthening stakeholder relationships, and supporting long-term business sustainability. 

• Stakeholder consultation: Engaging with stakeholders can provide valuable insight into their expectations and concerns. This collaborative approach ensures that the company's ESG initiatives are aligned with stakeholder interests, leading to more relevant and impactful outcomes.
• Materiality assessment: A materiality assessment involves identifying the ESG priorities and initiatives that will drive the most value for the business and mitigate risks most effectively. It allows companies to allocate resources efficiently and communicate priorities and progress on material ESG issues.

Avoid the risk of self-selection

Companies should not approach materiality assessments/consultations believing they know what is most important to their business and stakeholders. This will lead to confirmation bias and investing time and resources on topics that do not deliver value.

Given these processes will be uncharted waters for many companies, it may be prudent to work with a strategic advisor who can either guide you through the process or perform the work on your behalf. A well-constructed materiality assessment and stakeholder engagement process will enhance buy-in from stakeholders — especially if they feel confident that the process is independent and unbiased.

12. What are the risks of voluntary disclosure?

Voluntary ESG disclosure carries several risks, including:

• Reputational damage from inaccurate reporting
• Increased scrutiny from stakeholders,
• Potential legal and regulatory consequences for misrepresentation
• May reveal sensitive competitive information about the company

ESG disclosures also require considerable time and resources and challenge companies to adapt to continuously evolving standards and expectations. 

Does this mean you should ignore or avoid reporting? No. Done right, it can generate immense long-term value for the company. Understand what needs to be disclosed and when, and then ensure disclosures are accurate and transparent.

13. How does a company mitigate risks linked to voluntary ESG disclosures?

Strong board oversight and a framework for transparency and accountability are critical.

Board oversight and expertise

The board should engage with management and have a voice in supervising ESG initiatives, establishing controls, and integrating ESG into company strategy. Directors must also understand ESG risks and opportunities, industry trends, and competitive analysis. Continuing education (e.g., suggested reading, guest speakers, etc.) is recommended for all board members.

Transparency and accountability framework

Consider adopting the pillars of the Task Force on Climate-Related Financial Disclosures (TCFD) framework for structured ESG disclosures.

• Strategy: Communicate the material climate-related risks the company has chosen to focus on and the company’s path to resiliency as circumstances evolve.
• Governance: Identify the role of the board and management in helping the company navigate climate-related risks.
• Risk management: Explain the company’s process for identifying, assessing, and managing climate-related risks.
• Metrics: Disclose the measures and targets the company is using to assess risk and performance on ESG-related targets.

While the TCFD has officially disbanded, the pillars are still relevant and included within the CSDS.

14. How do I calculate my company's carbon footprint, greenhouse gases (GHG), and Scope 3 emissions? 

Calculating your carbon footprint involves considering various emission scopes related to your activities. 

Scope 1 emissions

These are direct emissions under your control, such as burning fossil fuels for heating, cooking, or transportation in your vehicles — and on-site industrial processes that release greenhouse gases.

Scope 2 emissions

These are indirect emissions from purchased electricity, heat, or cooling. While you did not directly trigger these emissions, they represent the embodied carbon footprint of your energy consumption.

Scope 3 emissions

These include all other indirect emissions in your value chain. This is the most comprehensive category and potentially a massive contributor to your overall carbon footprint. It can also be challenging to calculate because they involve activities beyond your direct influence.

Scope 3 emissions may include:

• Business travel and employee commuting.
• Production and transport of goods and services you use.
• Waste disposal and associated emissions.

While Scopes 1 and 2 can be calculated using your data (e.g., fuel consumption, utility bills, etc.), Scope 3 estimations often rely on industry averages or life cycle assessments of your product and service usage. Most companies face a long road of mapping and understanding their supply chain before the hard work of engaging with each supplier to influence future change can begin.

15. What about climate risk? 

Climate risk encompasses the exposure of people, property, and businesses to different climate hazards with the potential to cause losses.

Canadian companies must consider a wide range of hazards when determining climate risk due to the country’s vast geographic and climactic diversity, from the Pacific to the Arctic to the Atlantic. Major hazards that can impact Canadians and their assets include wildfires, floods, extreme heat and precipitation events, windstorms, and hail — among other extreme events.

16. Which climate risks should I prioritize?

The frequency and magnitude of most hazards including severe flooding and wildfires is increasing in Canada and can impact previously under-exposed assets.

Prioritize risks based on your business operations and geographic locations. Consider also evaluating your exposure to climate risks that might become relevant to your industry and your portfolio going forward.

17. Which climate change scenarios should I prepare for?

International regulatory standards do not mandate any specific risk assessment methodology or climate change scenario analysis. Rather, companies should consider a variety of plausible scenarios/pathways of global warming and policy responses (i.e., shared socioeconomic pathways - SSPs).

Based on current and forecasted global GHG emissions and observed temperature patterns, the International Panel on Climate Change (IPCC) believes warming will likely exceed 2°C by 2100. As such, it recommends companies consider a variety of warming scenarios that include a best- (SSP1-1.9) and worst-case (SSP5-8.5) scenario when assessing, managing, and disclosing climate risks.

18. Where can I find data to assess climate risks?

Accurate and purpose-driven data is essential for effective risk evaluation. In many cases, public data may lack necessary detail on changing climate conditions, resolution, and types of climate risks.

Many private providers and/or climate models provide data for localized asset exposure assessments, specific to each climate risk that might impact your business. Private providers will also have background knowledge, data, and modelling expertise, which can be a massive value-add to companies.

19. How do I start with climate risk assessment and disclosure?

Start by creating a comprehensive inventory of your asset locations and gathering data about their historical exposure to different hazards. This creates a baseline to compare potential future losses across climate change scenarios and quantify your risk going forward. From there, you can determine the overall risk to your operations and identify strategies to mitigate your climate risk.

20. What data do I need to start?

Gather data on asset types, locations, and operational costs (energy, maintenance, loan repayment), along with data about historical events that may have affected the assets such as wildfire or flood damage. This data will form the foundation for a comprehensive climate risk assessment of your portfolio.

21. Operating in Canada and the U.S.: Key considerations for climate risk assessment

Canada has less centralized climate risk data than the U.S., which provides baseline data at the Federal level. Canada has a patchwork of datasets that don’t easily integrate at a national scale, requiring specialized expertise to gather and assess climate risk. However, climate risk companies are developing strategies to provide climate risk services more efficiently across national and international borders.

22. Operating in Canada and Europe: Key considerations for climate risk assessment

Europe’s more mature climate disclosure regulations mean it has accessible data both from public and private sources. Canadian companies that work in Europe must disclose their climate risk in line with European standards. Consulting companies are offering climate risk services across North America, Europe and beyond, helping international companies meet data, risk management, and disclosure requirements.

Unlock new value in a changing world 

The journey to ESG maturity is long and challenging, but companies that effectively understand, measure, and quantify the associated risks and opportunities can unlock significant value. By aligning with shareholder concerns and demonstrating a commitment to sustainability, businesses position themselves for both resilience and growth in the evolving market landscape.