Sustainability in Canada: Evolving Risks and Opportunities

IIA roundtable discussion evaluated how Canadian businesses must respond to address climate-related priorities.

The Institute of Internal Auditors (IIA) Canada hosted a panel of sustainability experts in June 2022 as part of its Chief Audit Executive Round Table series.

Guest speakers included Sara Alvarado, Executive Director at the Institute for Sustainable Finance at Queens University; Chantale Despres, Assistant Vice-President of Sustainability at Canadian National Railway (CN); and Kaylynn Pippo, Acting Director of Research Guidance and Support at CPA Canada. MNP’s Edward Olson, Leader, Environmental, Social and Governance (ESG), moderated the discussion.

Topics covered a wide range of sustainability risks and opportunities facing Canadian businesses. These include Bill C-12, which formalizes Canada’s commitment to net-zero by 2050 — as well as the evolution of mandatory climate disclosures in Canada and abroad, as well as steps organizations must take to achieve compliance.

The conversation also focused on the role of internal audit, action items it must consider when assessing sustainability goals, and how to integrate sustainability with enterprise risk management.

Key takeaways

• Bill C-12 (i.e., the Canadian Net-Zero Accountability Act) requires greenhouse gas (GHG) emissions reduction with the goal of the entire country being net-zero by 2050. The federal Minister of Environment will create targets for 2030, 2035, 2040, and 2045 — and a plan for how to get there.
• Nearly all jurisdictions globally have implemented or are working toward net-zero targets, with recent progress in the United States and the European Union being especially relevant to Canada.
• Transportation, energy, and real estate (specifically, buildings) are Canada’s highest emitters. Addressing emissions across these industries is critical to achieving the country’s 2050 net-zero goal. Electrification, hydrogen, and energy storage will be a core part of the transition.
• Defining the path to net zero is just as important as the commitment itself. There’s a perception that many organizations are simply paying lip service to stakeholder expectations. Regulators and investors are scrutinizing the plausibility of targets and milestones, so corporate ambition needs to be supported by action, measurement, and reporting.
• More investors and regulators are using climate-related disclosures to make financially material decisions. Stakeholders increasingly want to see transparent, accurate, and independently verified data that aligns with a consistent and comparable standard.
  There is an ongoing push to clamp down on reporting that lacks substance, is difficult to audit, or is seen as intentionally deceptive (i.e., greenwashing). Organizations should focus on the best practices championed by capital markets, as these will inform future mandatory requirements.
• Both the U.S. Securities and Exchange Commission (SEC) and Canadian Securities Administration (CSA) have proposed standards for climate-related disclosures. Both expect to introduce new by the end of 2022, with widespread implementation by 2025.
• Getting to net zero will not be possible if organizations only consider their own emissions. It will require efforts across the supply chain to address Scope 1 emissions (produced internally), Scope 2 emissions (energy consumed), and Scope 3 emissions (produced in the supply chain).
• Reporting will become more complex the further down the supply chain it goes, with increased data complexity and accessing third-party data for Scope 3 emissions being the biggest barriers. Greater transparency is needed around the scope, limitations, and methodologies used in reporting. A clear tone from the top down is critical for ongoing progress and success on ESG priorities. The board, executive, and upper management must define the path to improved sustainability and drive strategy and education initiatives that feed into established targets.
• Sustainability is quickly becoming a competitive measure across the global economy. Organizations need to consider risk and opportunity in the near term — the financial costs of inaction, including punitive measures and difficulties attracting customers and investors — along with the challenges of operating in a more climatically unstable world.

The role of Internal Audit

• Validate and verify emissions reduction targets: Internal audit teams can help organizations build substance around their emissions reduction targets by ensuring a plan is in place that incorporates key sustainability risk areas, as well as designing (and monitoring compliance of) controls to limit organizations’ carbon footprints. Their guidance will be especially critical for helping organizations pivot in the near term as regulations and expectations continue to evolve.
• Advise on data collection and assessment practices: Internal audit teams will be a valuable resource for helping organizations expand emissions tracking by ensuring the right governance and data collection practices are in place — as well as identifying the knowledge gaps within the organization and across the supply chain.
• Guide the journey to ESG maturity: Internal audit teams can help senior leaders understand the relationship between sustainability risks, strategy, and the controls that are necessary to drive progress. This includes evaluating where the organization is at from a maturity and materiality standpoint, as well as understanding the relevant sustainability standards, accountabilities, and what steps are necessary to achieve compliance.
• Sound the alarm on emerging trends and priorities: The unique perspectives and skillsets of internal auditors will become increasingly important as sustainability and climate-related issues continue to impact organizations of all industries. Internal auditors have a view of the macro trends and how specific risks can impact the organization. This puts them in a perfect position to shape best practices and keep leaders focused on the most critical material issues.

Now’s the time to start

Expectations around sustainability and ESG are evolving quickly. Organizations that aren’t taking steps to measure, disclose, and reduce their emissions footprint risk quickly falling behind.

Global legislators, including Canada, are making net zero a priority. While 2050 may seem a long way off, these plans hinge on achieving nearer-term milestones. Moreover, stakeholders are already becoming more vocal about the need for transparent and independently verified climate disclosures to make purchasing and investment decisions. And the impacts of a warming world may indeed emerge much sooner.

Here is where internal audit can bring significant value to the table. Organizations will need to understand their sustainability risks and provide reporting that aligns with emerging standards and frameworks to compete and thrive in this new economy. The path to maturity is long and will require a significant re-alignment of mindsets and resources. Internal audit teams can help build in the necessary controls, measure progress, and drive alignment between strategic and sustainability initiatives.

The sooner organizations begin this journey, the easier it will be to build momentum and avoid the costs of complacency.

Contact us

Click here to learn more about MNP’s ESG practice and for in-depth insights, whether you’re just getting started or taking your program to the next level. Or contact Edward Olson, Leader, Environmental, Social, and Governance, at [email protected] to begin the conversation.