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.”
