Tracking and reporting — a closer look at the “E” in ESG
Tracking and reporting — a closer look at the “E” in ESG
In the next few years, the need to track and report relevant climate data will not only fall on large and publicly traded organizations in Canada. Smaller organizations and businesses will also have a role to play, but few are aware of the scope of their future climate disclosure mandate.
To begin your organization’s transition into strong climate disclosure, focus on the following:
- Assessing which metrics to prioritize
- Ensuring internal controls are in place to preserve climate data integrity
- Investing in the right technology
- Getting leadership buy in
- Finding the right motivation to engage in climate reporting and tracking
Between Canada’s alignment with The Paris Agreement, its 2030 Emissions Reduction Plan, and other similar policies, it’s becoming clear that the country is ramping up its efforts to meet its main overarching climate goal: net-zero emissions by 2050.
In order to make that happen, businesses and organizations of all sizes will need to play their part. Most large and publicly traded organizations in Canada have already been prompted to improve their climate disclosure, whether by regulators, investors, or other stakeholders.
As of right now, smaller and medium-sized organizations, especially privately owned ones, have not felt the same levels of pressure or regulatory scrutiny on climate disclosure. But given the patterns and policy changes we’re observing, that’s likely to start changing in the next three to five years. In Canada, it’s estimated that over 98 percent of all employer businesses are small to mid-sized businesses (SMBs), and that those SMBs are responsible for over 30 percent of the country’s greenhouse gas emissions.
If you’re a leader or decision maker in the private sector, your organization should be preparing to play a larger role in the transition to a greener economy.
What the future holds
Canada’s path towards its environmental objectives will rely heavily on climate disclosure, i.e., tracking and reporting key climate-related metrics.
It’s true that private organizations will not likely face the same level of scrutiny and transparency standards that public companies face. But if you’re part of a public company’s supply chain, you should expect the company to ask you the same types of questions that regulators and investors are asking them. For example:
- What are your levels of greenhouse gas emissions?
- What are your levels of materials consumption and waste?
- Do you know how to quantify them correctly? How can we be sure the data you’re giving us is accurate?
- What are your plans to reduce your carbon footprint in the coming years?
Your ability to answer these types of questions with confidence will play a big role in determining the health of your organization, both financially and reputationally.
What to track
It’s understandable that you may not have the resources or expertise to track all climate-related metrics from day one. Getting an early start on tracking, before you’re compelled to do it, gives you the ability to tackle this problem in stages and prioritize what’s most important.
Across all industries, organizations should plan for the need to track greenhouse gas emissions. They’re broken down into three categories:
- Scope One: All emissions which your organization is directly responsible for, or that come from sources you directly own or control.
- Scope Two: All indirect emissions from the electricity and energy your organization purchases from an outside source.
- Scope Three: All indirect emissions that occur throughout your value chain, i.e., activities that you do not control but may still be responsible to monitor.
You should expect that in the coming years, if it hasn’t happened already, your organization will be asked to track at least Scope One and Two emissions. Scope Three emissions will likely come into play later — they are the hardest to track, but also usually the greatest share of your organisation’s carbon footprint.
Other metrics like water usage, pollution, electricity, biodiversity impacts, and physical materials waste are also important, but need to be prioritized based on the industry you’re in. If you run a small law firm, tracking your physical materials waste won’t be as important as it is for a home builder.
The International Sustainability Standards Board (ISSB) plans to release a new set of reporting standards in June 2023. From there, it will be up to the Canadian Sustainability Standards Board (CSSB) to evaluate how to make those standards work in Canada specifically. The next phase of approval will come from the Canadian securities administrators, and then it will hit the capital markets.
To prepare for this cascade of events, the best starting point for your organization is to conduct a materiality assessment — a thorough and unbiased review of your operations and supply chain, to point out where your biggest issues lie, help you prioritize where you can have the greatest impact, and provide practical steps to reduce your carbon footprint.
Get clarity on today’s most pressing issues
How to track
Data integrity will be central to the reporting process; it’s likely that mandatory climate disclosure will later be accompanied by mandatory assurance practices. Government regulators, as well as companies you do business with, will be the ones asking you for reassurance that the numbers are correct, and that your process for collecting them is sound.
Right now, most ESG data exists outside of well-controlled environments like financial accounting systems. The right way to track your data is to have one source of truth and rigorous controls to maintain it. If it’s not in a central repository and it’s handled manually by more than one person, you’re introducing risk of the data being tainted.
If you have a board of directors, consider creating a special committee in charge of overseeing your organization’s transition to climate tracking and reporting.
It’s also important to consider what level of technology your organization needs, which depends on the size and complexity of your operations. In the past three years, many major software companies have released carbon footprint tracking systems and tools.
If you have a small number of staff, a single physical location, and a straightforward supply chain, you may not need anything more sophisticated than a spreadsheet that gets updated regularly with your activities. As you grow, you may need to rely on cloud-based climate software and dashboards, with some form of automation to make sure it gets updated consistently.
Although it may not be imminent, it’s possible to envision a future where environmental data is just as readily available and verifiable as financial data. Where your emissions will be measured with a similar level of integrity as your revenue or expenses.
Why invest in tracking and reporting
For many organizations, to start the process of climate tracking, reporting, and disclosure may be a daunting and resource-intensive task. Finding the right source of motivation is key to sustaining any progress you make.
Mitigating risk
At the very least, you should consider the risks of choosing not to work towards sound environmental disclosure. We’ve already seen public companies be sued by investors, who claim inadequate climate data and practices will impact future enterprise value, which then puts them in a position of loss.
You may also encounter risks including fines, heightened regulatory oversight, and reputational damage.
Perhaps the most important risk of all is that it will become ever more difficult to secure positive relationships with suppliers and business partners. Even if your organization itself is not large or publicly traded, odds are you sell goods or services to organizations that are held to a higher standard of environmental disclosure. And they will in turn hold you to that standard. If you can’t meet their needs for environmental compliance and assurance, they may take their business elsewhere.
Financial incentives
It’s important to note that not all climate-related initiatives you undertake will save you money, at least not in the short term. For example, recycling materials, and making sure they’re disposed of properly, may cost more than putting them in a landfill.
But there are many opportunities for immediate cost savings that also tie back to your environmental targets. Power and utilities are becoming more expensive, as are physical materials. Some of the physical materials you dispose of can be re-purposed or sold. You’ll never regret taking sensible steps to reduce waste and create efficiency.
Looking at the big picture, your efforts to track and report your carbon footprint can also create positive ripple effects like attracting investors, consumers, and employees. It can also help you gain favour with lenders and potential acquirers.
If you approach your climate reporting with a mindset of simultaneously reducing waste and improving your financial prospects, that can serve as a motivation to stick with initiatives that are worthwhile.
Leaving behind a better world
Some organizational leaders are simply motivated by a desire to help stem the tide of climate change, habitat destruction, etc. thus leaving the world better for future generations. This ambition often leads them to become first movers and innovators in their industry, that end up setting the tone for the competition.
Regardless of your motivation, choosing to act before you’re pressured or forced to act can yield significant benefits: increased agility, employee satisfaction, and more.
Prioritizing the “E” in ESG
Any organization, including private businesses and SMBs, that proceeds with the assumption that in the next few years they will need to build their capacity to track, report, and disclose relevant climate data, will be better poised to overcome future challenges and seize opportunities.
Contact us
To learn more, contact:
Mary Larson, MBA, ICD.D, Partner
[email protected]
514.228.7905
Edward Olson, Partner
[email protected]
250.763.8919
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