Sustainability-related disclosures – bringing Canadians together!

As we addressed here, the International Sustainability Standards Board has issued its first two exposure drafts, General Sustainability-related Disclosures and Climate-related Disclosures, which were both open for comment until July 29, 2022.

If you doubted that this was big news, here’s a recent bulletin from politician Leslyn Lewis, a current contender for leader of Canada’s Conservative party:

  • The International Financial Reporting Standards (IFRS) has a new accounting regime that is based on ESG and applies to all small and medium-sized businesses. This new system tracks the “life-cycle” of every single product and service that a business generates. Meaning that small business owners will need to track where a product comes from and the emissions the product generates (which, of course, differs depending on the purchaser and the user).
  • Ironically, while these nonsensical rules will be imposed on businesses in Canada, Canadian businesses operating in China, India, and other nations won’t impose such measures on local operators. 
  • Make no mistake – the aim of these policies is to completely overturn our economic structure that is dependent on local production. In fact, Canadian businesses will be rewarded under this structure if their enterprises don’t produce anything because they will have a lower carbon footprint… 

Whatever one might think of Lewis’s mischaracterizations and exaggerations, it’s notable that the project would ever have hit her radar. Actually, Canada probably generated more than its fair share of the many negative comment letters received by the ISSB. This is from the Coalition of Concerned Manufacturers and Businesses Canada (“Bravely Safeguarding Canadian Jobs”):

  • (The Coalition) would like to express its extreme opposition to the IFRS proposals on ESG standards. Overall, this incredibly complex regime will create a red tape nightmare that will drive up the costs of doing business significantly at a time when inflation is already running rampant, create many unproductive costs and headaches for businesses and the economy generally and make little difference to the climate.
  • In Canada, about 50 per cent of GDP and the majority of net new job creation is represented by the small- and medium-sized business sector (SMEs). Red tape is a perennial concern for SMEs and the proposed ESG reporting standards represent a monumental increase in red tape for no discernable gain. It is not surprising that these complex standards are being endorsed by professional communities such as accountants, consultants, lawyers and regulatory bodies as this will greatly increase their workload and remuneration at the expense of the productive SME sector. Instead of supporting the ESG thrust, however, these professional communities should be sounding the alarm about how destructive, unworkable and unaffordable it will be to businesses and the economy overall. Estimates of added costs that will be incurred by SMEs for such requirements as scenario analyses, among other subjective items, are likely to put many firms out of business…
  • Internal contradictions within the ESG system proposals also raise questions as to the real objectives of advocates of the system… In Canada, the current federal government practices the glaring hypocrisy of imposing standards on domestic business that have a so-called “gender lens” (presumably part of the “S” in ESG), yet Canada continues to import significant amounts of oil from Saudi Arabia which would never remotely pass muster from a “gender” perspective.

While not at all sharing the general vehemence (as I’ve said before, I think the ISSB should generally push as hard as it can), some of those points, and others in the letter, appear to me at least partially valid – I’m also worried that the whole thing will become a grinding compliance exercise, used to feed various forms of professional avarice, and contradictions and hypocrisies do indeed run wild in this area. Still, the “Coalition” shows little real concern for inter-generational equity (an observation elsewhere in the letter that “much damage and wealth destruction will happen in the meantime if the ESG standards proceed” would be a sign that the standards are actually achieving something, given the nature of the wealth in question) and the notion that their letter might persuade the ISSB to “abandon the current plans for a complex and costly ESG regime” seems at best quixotic.

The Explorers and Producers Association of Canada likewise “does not support the current draft as proposed and, given the extensive work to fix the current draft, we recommend that other more valuable efforts under securities regulators be pursued.” Canadian industry wasn’t all negative though. Electricity Canada was mostly positive, highlighting a few specific areas of concern, and advocating a phase-in period, with flexibility on reporting time in the early years of implementation, in order to accommodate the learning curve of issuers and provide time for the industry to adjust its processes in order to meet the reporting requirements proposed in the Exposure Drafts.” Although I think there sometimes may be some merit to such arguments, it seems to me such exemptions and concessions will best be assessed by local regulators rather than in the body of the standards. Electricity Canada suggests that “the ISSB’s efforts will be most successful and meaningful by aligning with the projects of local securities administrators that are already underway,” but I doubt whether that’s practical.

Oh, and it’s true, Canada’s “professional communities” mostly supported the proposals too!

The opinions expressed are solely those of the author

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