Let’s not kill small business in the name of ESG

To say small businesses in Canada have had a rough few years would be an understatement. Nearly one in five are currently at risk of closure.

If regulators tack on extra costs from ESG (environmental, social, and governance) reporting criteria, it may be the final nail in the coffin for many.

Yet Ottawa has committed to making some additional reporting mandatory, and the Canadian Securities Administrators—an umbrella group of provincial and territorial regulators—are looking at imposing such requirements as we speak.

These new requirements for Canadian companies will likely be based on what the International Sustainability Standards Board has developed.

These disclosure standards would, among other things, make it mandatory for publicly listed Canadian companies to report all upstream and downstream greenhouse gas (GHG) emissions, referred to as Scope 1, Scope 2, and Scope 3 emissions.

For instance, take a canola oil processor in Saskatchewan. First, it would need to tally emissions that result from manufacturing. In this case, this means any emissions from that canola oil processor’s manufacturing process, as well as emissions from the fleet of vehicles it owns to make deliveries. That’s Scope 1.

Next, it would need to report emissions from the operation of its facilities. That means getting the emissions intensity information from SaskPower, the local natural gas provider, and any A/C or heating equipment. That’s Scope 2.

Finally, this canola oil processor would need to figure out and report on upstream and downstream emissions. That’s where it gets tricky, because so many things come into play. It would involve figuring out emissions from the farmer who grew the canola crop, from the consumers who used the oil, from the recycling plant where the empty bottle ended up, and even from the processor’s own employees commuting to and from work! That’s Scope 3.

It should come as no surprise that Scope 3 emissions have been referred to as the “fatal flaw” in GHG reporting, as they are the hardest to quantify.

Now, for large corporations, quantifying and reporting on those emissions is an expensive process, but it’s not insurmountable. Most likely, they’ll just end up passing the cost on to the unsuspecting Canadian public and be done with it.

For small businesses, though, this can be lethal. When the U.S. Securities and Exchange Commission considered the idea, it estimated it would cost nearly half a million dollars annually for smaller companies to comply.

That’s not the kind of money small businesses have just sitting in the bank right now, and with 62% of Canadian small businesses still carrying pandemic debt, you can imagine that hiring a compliance officer is pretty low on their list of priorities right now.

Some would argue that since this requirement would only apply to publicly listed companies, smaller businesses would, in fact, be unaffected. But even setting aside the hundreds of small businesses—a lot of them in the resource sector—that are publicly listed, a lot of other smaller firms would be forced to comply, albeit indirectly.

Specifically, these reporting requirements would impede their ability to do business with publicly traded firms.

Take that same canola oil processor. Let’s assume it’s owned by a large public company. When it starts being required to disclose its GHG emissions data, including Scope 3 emissions, it will need to look to each and every supplier in its supply chain to provide their emissions data.

If a supplier—say a rural Saskatchewan farmer—is unable to provide that data, chances are they’ll be dropped as suppliers, or have to settle for a lower price to compensate for the additional resources the processing plant needs to spend to get that data.

That’s one of the reasons why, when the proposed standards were open for consultation, many of the over 80 Canadian organizations that submitted comments voiced their concern.

Small businesses are in dire need of help. The last thing they need is a regulatory slap in the face. Making Scope 3 emissions reporting mandatory would just hasten their demise.

Krystle Wittevrongel est analyste senior en politiques publiques et leader du Projet Alberta à l’IEDM. Elle est l’auteure de « Divulgation ESG: l’inclusion obligatoire des émissions de portée 3 nuirait aux petites entreprises » et signe ce texte à titre personnel.