Welcome to 2024 – the Year of Peak Polarization.

With 49% of the world population in 64 countries heading to the polls in the next 12 months, including a pinnacle moment in the United States on November 5^th, buckle up for a year that will consistently test the balance between environmental/political ambition and economic/societal realities.

And poor ol’ ESG is likely to be abandoned in the process.

ESG, an acronym of the primary lens through which the financial industry assesses the Environmental, Social and Governance risks of a business, had so much potential – emanating from the momentum of Corporate Social Responsibility and balanced by numerous frameworks with shared outcomes, all supporting the United Nations Sustainable Development Goals (SDGs).

Peak ESG occurred at the conclusion of COP26, the United Nations Climate Change Conference in Glasgow in 2021, where organizers touted climate commitments from 197 countries, the Net Zero Insurance Alliance (NZIA), and the Glasgow Financial Alliance for Net Zero (GFANZ). However, ESG had one critical flaw: it was never balanced, never equally weighted across its frameworks. The result has been an unadulterated hijacking of ESG by the “E”, which could lead to the unfortunate demise of the entire trio.

Since that peak, a backlash has ensued, as populist leaders in Argentina, Italy, Sweden and others have reversed commitments in favour of energy security and affordability, NZIA’s membership has been cut in half, GFANZ has quietly walked back its proclamations, ESG funds have been exposed for investing in greenwashing and dictatorships, and US states and pension funds have quickly been adopting anti-ESG legislation.

Get Ahead of the Curve: 2024 Legislative Changes Impacting Canadian Firms

What does this mean for Canadian companies that have embraced ESG principles and built significant  reporting and compliance capacity? Though the moniker of ESG may soon disappear, the legislative changes underway in 2024 will not. Business leaders need to be aware of and prepared for:

• Canadian Securities Administrators (CSA) 51-107 Disclosure of Climate-Related Matters that requires public companies to disclose climate risks and opportunities based on the Task Force on Climate-related Financial Disclosures (TCFD) recommendation starting in 2024.
• Office of the Superintendent of Financial Institutions (OSFI) B-15 expectations for federally regulated financial institutions to mange, disclose, and process-control climate-related risks.
• Federal Regulations requiring large Canadian government organizations with more than $1 billion in assets to publish their climate disclosures and report according to the TCFD framework in 2024.
• International Sustainability Standards Board (ISSB) has issued IFRS S1 and IFRS S2 standards, while at the same time the Canadian Sustainability Standards Board (CSSB) is being formed with a mandate to support the adoption of international sustainability standards in Canada.
• Canadian Parliament has passed Bill S-211 (Fighting Against Forced Labour and Child Labour in Supply Chains Act) to protect vulnerable populations from human rights abuses and exploitation along corporate supply chains with requirements for organizations to document efforts and processes to confirm compliance – the first legislation targeting the “S” in ESG.

These and other regulations will occupy organizations over the coming months. Many will debate whether they will be reversed as in other countries, but that is a dangerous game to play given the uncertain outcome in the United States on November 5^th 2024 and the long road ahead to Canada’s election date on or before October 20, 2025.

A Proactive Approach: Four Key Actions for Business Leaders

What business leaders can consider in the meantime is a “no regrets” approach that focuses on four specific actions:

1. Embrace the Reality that Canada is Equally Polarized, challenged by its own imbalance amongst environmental ambition, energy security, consumer affordability, and regulatory simplicity. This polarization is publicly disguised as east versus west but is increasingly more urban versus rural. Consider testing the resilience of your ESG strategy against various political/regulatory, economic/competitiveness, environmental/technological, and societal/cultural outcomes emerging in the decade ahead that all rest outside your control.
2. Authenticate Decarbonization Efforts, not just because of atmospheric CO₂ risks, but rather because of variability in the cost of all energy mediums (BTUs) which will likely continue to increase as the global demand for safe, secure, scalable, reliable, and affordable energy outstrips supply, which continues to be starved of investment. Consider assessing your energy and water risk, as well as verifying that the products or offsets you are buying, and the actions you are taking, are actually having impact with little to no unintended consequences.
3. Expand ESG reporting, Compliance, and Assurance Efforts by expanding measurement efforts beyond “E” to reflect the full spectrum of E, S, & G – specifically, the issues most material to the competitiveness of the business and not diluted by the ideologies of stakeholders, which often conflict within the ESG spectrum itself. Consider redoing your materiality assessments for relevance to the full economic health of the business first, and then establish process, data, reporting, and compliance systems to ensure bulletproof reporting.
4. Affirm the Quantitative Elements of Reporting Through Third Party Assurance, then focus corporate messaging on ways to unite rather than divide or segment stakeholders. Much work has been done to report in ways that label and placate as opposed to unify around a company’s purpose in the market and contribution to the social good. Consider getting back to basics, with simplicity, character, and confidence.

A Final Thought

As we stand on the precipice of regulatory shifts and societal expectations, it is paramount for Canadian firms to not only adapt but thrive amidst these changes. By embracing the reality of the polarized landscape, authenticating decarbonization initiatives, expanding comprehensive ESG reporting, and affirming reporting elements through third-party assurance, businesses can strengthen their resilience and competitive edge. It’s about integrating the aspirations of ESG into the core fabric of business strategy — ensuring sustainable prosperity for not just the company, but society at large. While the landscape of ESG continues to evolve, one thing remains clear: the commitment to transparency, accountability, and purpose will be the guiding stars towards a successful future. Leaders who take proactive and strategic steps now will be best positioned to navigate the complexities of tomorrow, fostering not only growth but trust in an ever-more conscientious market.

Optimus SBR’s ESG Practice

At Optimus SBR, we power Canada’s top performing organizations to win by:

• Designing competitive strategies, including ESG strategies
• Using scenario planning to test the resilience of various strategies
• Conducting stakeholder and competitive materiality assessments
• Implement and audit process, data, reporting, and compliance models
• Build winning narratives that resonate with markets and stakeholders
• Measuring what matters

Our team is one of the most experienced in the consulting industry, having overseen both the strategy and execution of winning ESG initiatives in some of North America’s most respected organizations.

Contact Us for more information on how we can assist your team.

Brad Ferguson, Senior Vice President, Industries and Government Practice
Brad.Ferguson@optimusssbr.com

Brad Ferguson, GCB.D (ESG) is a Senior Vice President at Optimus SBR who leads the Industry and Government Practice. He is also a former Assistant Deputy Minister who led the ESG Secretariat at the Province of Alberta.