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Biodiversity, social factors emerging for Canadian ESG: KPMG

KPMG in Canada's Big shifts, small steps report finds Canada's largest 200 companies can improve their disclosure of emerging ESG topics with improved data collection and set metrics. (Courtesy KPMG in Canada)

A KPMG in Canada report analyzing the ESG disclosures of the 200 largest Canadian companies found most disclose their climate risks and carbon targets, but have room to improve on emerging issues like biodiversity and Indigenous reconciliation.

Titled Big shifts, small steps, it is the Canada-specific report of KPMG’s global Survey of Sustainability Reporting 2022. It looks at the 200 largest Canadian companies by revenue and how they publicly disclose management practices and performance data with a focus on biodiversity, Indigenous reconciliation and respect for human rights.

Katie Dunphy, partner in KPMG in Canada’s ESG practice, said the report comes at a time when there is increasing attention on ESG and disclosure requirements taking effect in Canada and the world.

“It gives us deeper insights into the state of play. What are the emerging trends and topics that companies are dedicating their efforts to, and what do they determine as being material for disclosure? And then it gives a helpful opportunity to reflect on how things are taking shape,” Dunphy said.

The Canadian ESG reporting trends

The report offers an overview of where Canadian companies stand on ESG reporting. Ninety-one per cent of the firms report on sustainability or ESG performance.

Canadian companies tend to do well on reporting climate-related matters. Seventy-two per cent report their carbon reduction targets. More than half (56 per cent) report climate risks in line with Task Force on Climate-Related Financial Disclosures (TCFD) procedures.

But 64 per cent included sustainability or ESG in their annual financial report, which KPMG said highlights the risk that “many companies may be taking a siloed approach to managing and measuring Sustainability or ESG performance.”

Also, 36 per cent of the companies included a formal assurance statement in their sustainability or ESG reporting, trailing the 63 per cent assurance rate for the 250 largest global companies it examined previously.

“The good news is that the majority of Canada’s top-200 companies are really starting to report their progress towards their ESG targets,” Dunphy said. “That’s a really important piece in all of this, I think just the transformation of reporting over recent years from more of a qualitative, storytelling approach to much more consistent types of disclosures that focus on material topics and that pick up on key targets and indicators.”

KPMG highlighted three sectors with the best performance in disclosure rates. Oil and gas topped the list with 100 per cent releasing surveyed reports on sustainability or ESG, 82 per cent including sustainability or ESG information in their annual financial report, and 100 per cent aligning with the TCFD.

Financial services and utilities rounded out the top three.

Biodiversity, Indigenous reconciliation, human rights

The professional services firm looked at Canadian companies' ESG coverage in the emerging topics because they are key risks the business community is addressing and starting to disclose, according to Dunphy.

KPMG emphasizes the importance of biodiversity reporting, with half of the world’s GDP moderately or highly tied to nature and its services, calculated at $125 trillion in value. There is also greater attention on biodiversity magnified through events like COP15 and the importance of natural capital for the economy.

Only 39 per cent of the companies report on Indigenous rights and reconciliation. Oil & gas, utilities and industrial, manufacturing & metals had the best reporting rates, while retail, food & beverage and automotive stood at the bottom.

Though the companies fared better on human rights, KPMG says the majority of the policies are “foundational in practice.”

While the disclosure rates appear mediocre, Dunphy said they are still emerging topics in ESG and are a positive signal that Canadian businesses are in tune with significant social and environmental issues.

“. . .  there is still an opportunity for creating more consistency and robustness in the actual disclosures themselves by taking a thoughtful approach to planning and assessing what the impacts are, and getting a good narrative around what the mitigation and adaptation measures are, and then what the key performance measures are, how the business will be monitoring over time whether or not what they’re doing is in fact effective.”

Preparing for regulations

KPMG sees developments on the horizon that could change how ESG disclosure is conducted.

The expected introduction of securities regulatory requirements may include potential future assurance requirements, which KPMG suggests will increase the rate of assurance statements in Canada.

Other changes that may bolster qualitative reporting include regulations like the TCFD in some sectors or Canadian draft standards and rules under development that are expected to align with the TCFD framework.

The International Sustainability Standards Board intends to finalize its reporting standards in 2023, and the Canadian Sustainability Standards Board is anticipating the work to review and endorse the standards.

Because much of the economy is connected to human rights, biodiversity, climate change and Indigenous reconciliation, Dunphy expects better and more consistent disclosure as people and companies become more aware of their business implications.

The report aligns with research from a fellow Big Four accounting firm, PwC Canada, on Canada's corporate ESG disclosures.

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