ESG beyond compliance

Climate-related emergency response and futureproofing held much of the corporate sustainability spotlight this year, presenting urgent challenges related to ESG. But it's important to acknowledge that climate is just one of numerous interconnected ESG risks that CEOs are contemplating, highlighting the need for a strategic approach to sustainability.

Whether it’s emerging regulations, disruptive technology or changing consumer perspectives, ESG is ultimately about helping organizations create and protect value to facilitate long-term sustainable growth. No surprise, then, that the 2024 KPMG Canadian CEO Outlook shows that ESG has become the top operational priority for Canadian CEOs.

The extreme weather events of 2024 across Canada, including devastating floods, wildfires and heatwaves, underscore the urgent need for businesses to focus on climate risk exposure. Although addressing climate risk continues to be vital for sustainability—evident with 92 per cent of business leaders expressing concern about its climate-related extreme weather this year—78 per cent of Canadian CEOs identified regulatory and reporting obligations as the primary reason for prioritizing ESG.

Several ESG regulatory developments impacted Canadian companies, most notably Bill C-59 provisions aiming to prevent greenwashing and protect consumers from misleading sustainability claims. Business leaders, already grappling with the vast scope of ESG and sustainability demands, now must weigh the financial and reputational risks of unverified environmental and social claims that could impact operations and profitability.

Acknowledging that sustainability is a crucial strategic priority, Canadian CEOs are committed for the long haul, with 75 per cent anticipating that it will take at least three years to see substantial returns on their investments—a projection that aligns with the 62 per cent of Canadian sustainability leaders who are adopting a more strategic ESG approach.¹

Canadian CEOs are engaging with their Chief Sustainability Officers (CSOs) to embed ESG into core organizational strategies. They are concerned about long-term corporate sustainability, access to capital and resilience to short and long-term ESG risks. Moreover, CEOs are now involving the entire executive team to effectively operationalize sustainability initiatives.

While it’s promising to see that half (55 per cent) of Canadian CEOs say it’s possible to address all ESG priorities on the docket, this conversely suggests that 45 per cent might be uncertain about managing everything under the sustainability umbrella concurrently. For example, despite hints of increasing confidence from CEOs on the role of technology and talent in advancing ESG goals, more than 50 per cent of CSOs surveyed still identified these areas as significant barriers. This discrepancy highlights a potential misalignment between executive optimism and operational realities on the ground.

55% of Canadian CEOs agree it’s possible to address all their ESG priorities

Just over half (53 per cent) of Canadian CEOs believe their sustainability claims can withstand scrutiny. The rest may be unsure of their claims' accuracy. While consistent ESG reporting and new regulations are beneficial, they also present challenges for companies trying to maintain credibility. Here’s a snapshot of the significant headwinds impacting the ESG regulatory and reporting landscape:

Under Bill C-59’s anti-greenwashing legislation, organizations must substantiate environmental and certain social claims about their business, products or services with adequate and proper tests, and in accordance with internationally recognized methodologies. This applies to all public-facing sustainability claims and commitments, from net-zero targets, carbon neutrality, material ESG risk exposure, ethical supply chain practices and environmental friendliness. This is crucial for maintaining credibility and trust—and, now, avoiding legal issues and significant financial penalties under Bill C-59.

2024 also marks the inaugural year for reporting under the Forced Labour and Child Labour in Supply Chains Act, with 90 per cent of reporting entities publicly committing to improving their performance in combating modern slavery in their supply chains. Heads of sustainability must consider the risk of “social washing” to ensure their organizations remain not only ethical but also compliant with Bill C-59, avoiding any potential reputational, financial or legal repercussions.

The Canadian Sustainability Standards Board (CSSB) is full steam ahead in addressing the need for robust ESG standards to drive significant improvements in the way companies report their sustainability efforts. Following this year’s consultation period, the CSSB is set to finalize its first two disclosure standards—CSDS 1 and 2—by the end of 2024. This will be followed by guidance from regulators, policymakers and the Canadian Securities Administrators (CSA) regarding potential mandatory reporting requirements in 2025.

Canadian organizations will continue to be affected by emerging and evolving sustainability reporting requirements in Europe and other jurisdictions. On the national front, the government announced its plans for a Canadian taxonomy to streamline classification of sustainable investments. Adhering to the taxonomy can significantly improve a company's ability to access sustainable finance, clean energy tax credits and other government incentives, demonstrating a strong commitment to achieving net-zero emissions by 2050.

Small and medium-sized businesses (SMBs) face a similar scope of ESG risks related to climate change, affordable energy and new legislation, but they face these challenges with even greater resource constraints.

In 2024, 63 per cent of Canadian CEOs said they are still struggling to fully embed ESG into their business as a means of value creation. This isn’t surprising given the hurdles highlighted by CSOs, including C-suite buy-in and a lack of budget to invest in ESG initiatives necessary for a long-term strategy. Operationalizing ESG involves integrating sustainability considerations into day-to-day operations and long-term strategies.

To illustrate this interconnected approach, let’s consider the example of decarbonizing the supply chain—a top priority for Canadian CEOs.

Again this year, CEOs reported that the complexity of decarbonizing Scope 3 emissions—specifically supply chains—is their top net-zero obstacle. Implementing a strategic, integrated plan for decarbonization is crucial to aligning sustainability goals with cross-functional business operations. An extensive evaluation of supply chain emissions needs to incorporate a thorough understanding of the various material decarbonization risks relevant to operating regions, industries and sectors.