Pierre Taillefer:
We're not trying to boil the ocean. So the idea is to demonstrate that you have done work, an organization that needs to comply has done work to evaluate its supply chain. And also there's a plan, a plan for improvement. And what I've seen, again in my experience with regulatory compliance, demonstrating that you've done something and that you have a plan for improvement is crucial.
Narrator:
Welcome to Accounting for the Future, A BDO Canada podcast for financial leaders to navigate change and achieve business growth. We'll uncover the challenges financial leaders may not have dealt with yesterday but will definitely have to manage for the future.
Anne-Marie Henson:
Hello, and welcome to BDO Canada's Accounting for the Future. I'm Anne-Marie Henson, and I have the pleasure of welcoming Pierre Taillefer, who's our National Leader for ESG services and a risk advisory Partner at BDO Canada. Pierre has played an active role in helping clients develop their own ESG strategy and has also helped BDO to do the same internally with our own ESG reporting. Pierre, it's great to have you back at Accounting for the Future.
Pierre Taillefer:
Thanks, Anne-Marie. I'm thrilled to be back and to talk about what's going on in the ESG world. There have been some changes since we last chatted and looking forward to giving you an update.
Anne-Marie Henson:
Yeah, well it's great to have you back. And it's been just about a year ago actually that you joined our podcast episode, which was called Putting the G in ESG, which is the governance part of the ESG in the acronym. And maybe before we dive into our topic today, you can just give us a general update on all things ESG. So what's been happening over the past year, has the regulatory or the reporting landscape changed a lot since the beginning of 2023?
Pierre Taillefer:
So where we're seeing more movement, I would say, is globally, first of all and in Europe. And so since the last time we chatted the IFRS Foundation that manages integrated reporting on financial statements and non-financial information came out with two standards that will be applied, we don't know when specifically. The standards cover climate, so greenhouse gas emissions and also other non-financial information that would be disclosed as part of an integrated report. So covering environment, covering social, covering governance, so that is global in nature would first be applied to publicly traded companies, but there is no regulator that has yet stated when those standards are going to come into effect. So that's from an audit perspective, integrated audit perspective, Europe is leading with what they call CSRD, Corporate Sustainability Reporting Directive and the implementation of integrated reporting. And it's for publicly traded companies, but also small and/or large private companies depending on certain thresholds in terms of employees and revenue.
And that CSRD is going to require, it is an integrated audit similar to what is included in IFRS, but it is specific regulation similar to IFRS, but for European countries, and also organizations that are located outside. So Canadian companies that sell into Europe and again, meet certain thresholds in terms of employees and revenues generated in Europe also need to comply. So integrated reporting and auditing of that is starting in Europe.
In Canada, there have been some changes in terms of requirements from a regulatory perspective. OSFI is requiring large financial institutions to report on their greenhouse gas emissions and also their strategies for reduction starting this year in 2024. And we see large banks and insurance companies looking at their client base, who are they financing? So looking at their emissions, the bank's emissions, but also what they called financed emissions. And so that is one regulatory framework that is in effect in Canada and could have an impact on a client of a large bank depending on what size of a loan you have from that bank. And then finally, and we'll talk about it a bit later, we're seeing a lot of activity over the last couple of months on Bill S-211, which is Canada's Anti-Slavery Act.
Anne-Marie Henson:
Well, it's funny because it seems like there are a lot of things happening and yet still a little bit of uncertainty to companies and business owners about how it impacts them and what type of reporting they fall under. And it seems for the time being anyway, still quite applicable to very large organizations and financial institutions, right?
Pierre Taillefer:
Well, what we're seeing in North America is, again, so there's no regulatory requirement in the US or in Canada to report on ESG specifically and so when we talk about E, greenhouse gas emissions, water waste, when we talk about S, principally diversity, equity and inclusion programs and also supply chain, and when we talk about G governance, and what we had talked about last year, it's board, codes of conduct whistleblower ethics programs. So there's no requirement yet to report on that from a regulatory perspective.
Having said that, we see a lot of larger organizations and publicly traded companies forging ahead with ESG programs. And so depending on where our listeners are in terms of the value chain of a publicly traded company, they may be reaching out sooner rather than later and asking, "What are you doing from an ESG perspective?" So I think for most understanding where they are in the value chain of a publicly traded company is really important, starting to think about ESG, but there is still a lot of uncertainty in terms of when regulatory requirements will come into effect. And when they do, talking about IFRS, it will first touch publicly traded companies.
Anne-Marie Henson:
Thanks so much for that little update. And here we are today to talk about this relatively new bill in Canada, bill S-211 that I think is going to impact many Canadian companies and not just extremely large ones or public companies. And before I ask you to give us some context into what this bill is and what its impacts could be, I did want to take note of the fact that I think this might be the first time on this podcast that we're talking specifically about a legislative change. Normally we look at general trends and what's happening in the world and how it could impact the finance function. But I think that this bill is really interesting because it could be quite far-reaching both where you are, the company, in the value chain and your own value chain. And I think it could be the start of what might be more aggressive or strict policies and regulations in the future. So maybe we just start with a general overview. Can you tell us what is Bill S-211?
Pierre Taillefer:
Right. The requirement, like I said, is Canada's Anti-Slavery Act. So we're not the first jurisdiction or country in the globe to implement an anti-slavery act. It is one that ultimately the objective is that Canada's supply chain adequately manage the risk of child labor and forced labor within its supply chain. So companies operating in Canada and subject to the regulation understand who they're buying from and that they have properly managed the risk of child labor and forced labor in their supply chain. So as you said, it is very far-reaching. It applies to publicly traded companies. It also applies to private companies that produce, sell, or distribute goods in Canada or import goods to Canada and have 20 million in assets, 40 million in revenue and/or 250 or more employees over the last two of three financial years.
The regulation comes from a government entity called Public Safety Canada. That is, again, significant in its reach because it's not only touching publicly traded companies, it will touch many private companies. And understanding what the regulation requires and how far to go is a challenge right now. When we see... And I've done a number of regulatory compliance engagements in my career. The first year is when regulation comes out, it's a law and a law doesn't specifically tell you what you need to do and how to do it. And so there's going to be interpretation of how to apply this law. Having said that, companies that are subject to it, by May 31st, 2024 need to complete a questionnaire on Public Safety Canada's website and also prepare a 10-page report, a maximum of 10 pages that needs to be made available on their website that demonstrates how they're managing the risk of child labor and forced labor in their supply chain.
And supply chain isn't defined, so it doesn't mean your immediate supplier, ultimately it means back to the original products that are, or the minerals or the inputs into the production of a product which goes right back to the source. So understanding what the requirements are and how to interpret that because it is a risk-based approach to child labor, force labor in your supply chain is up to interpretation. And that's what we're doing right now is helping organizations understand whether they need to comply or not. And if they do, what do you do? What does that mean?
Anne-Marie Henson:
Well, that's really big. And May 31st is coming quite fast.
Pierre Taillefer:
Tomorrow, to a certain extent.
Anne-Marie Henson:
Exactly. Yeah, no, absolutely. And I guess, I mean, you've touched on it a little, but why is this bill so important for Canadian companies to understand and to comply with and what does this mean for them?
Pierre Taillefer:
Well, the first thing is non-compliance could result in fines, and so they talk to penalties on Public Safety Canada's website. And putting that aside, which is a risk in the context of non-compliance, it's important because it is in the context of ESG, one of the broadest and far-reaching regulation that I've seen coming out of the ‘S’ piece. And so under the social, and specifically supply chain, they're not where... In supply chain, when we look at supply chain, we look at greenhouse gas emissions within an organization's supply chain and also child labor, forced labor. This regulation focuses on child labor, forced labor. Again, the first one that's coming out, there is a certain level of, well, as I said before, interpretation in terms of what needs to be done to be able to report and it could result in penalties.
So very important to understand for our organizations, for all organizations in Canada, whether it's applicable or not, and then determine what you do. And given that it's a risk-based approach, my perspective is starting small and continuous improvement. So it's a requirement, in effect, the first report, March 31, you need to evaluate or understand whether it impacts you or not, or are you in the supply chain of a larger organization that has to comply because they're going to be reaching out to you to ask you, our clients, our organizations in the business world how they're minimizing the risk of child labor, force labor in their supply chain.
Anne-Marie Henson:
Oh, that's a good point. You could look at this criteria and say, "Oh, well I don't have 40 million dollars of revenue or 20 million in assets and therefore I don't need to comply with this today." But if you are the supplier of a company that does, they're certainly going to be coming to you to ask for this information. So good thing to be aware of whether or not you do meet that criteria that you have to start thinking about how you're capturing this information and maybe you might have to report on it in the future. So I'm guessing you've started having discussions with companies about this. How are people reacting?
Pierre Taillefer:
There is a lack of awareness. In general when... So, actually, BDO in the fall, we did a LinkedIn campaign on implementation of this requirement, and we did have some conversations, but not a lot. And since January, I would say a lot more organizations reaching out to us to say, "Okay, help me figure out if this applies to me or not and what I need to do?" So it has been generally a lack of awareness that this regulation exists. And first report is May 31. Having said that, that report covers the 2023 year. Most companies that we're talking to, entities that we're talking to have not covered the different topics required to be included in their response to Public Safety Canada and in their report for the 2023 year.
So it's going to be understanding what the requirements are, and then... Well, so they've been saying, "Okay, what do I do now? I haven't implemented this." And we're looking at a practical approach. And the first step is really, as you said, you as an organization may not need to comply, understanding where you are in the value chain of a publicly traded company or an organization that does need to comply is very important. So that's the starting point. Do you need to comply or not? And if not, where are you in the value chain of a company that does? Based on that, you may need to evaluate your supply chain or not. And when you do, we are looking at what's called a risk-based approach to your suppliers.
Anne-Marie Henson:
I guess when you think about the value chain and the risk of child labor or forced labor, there would likely be some industries that could be more impacted or more at risk than others. So can you share your thoughts about which ones might have to have a more sort of heightened skepticism or heightened look when they're taking a look at their value chain?
Pierre Taillefer:
Just to take a step back, in terms of what needs to be done is a risk assessment, effectively of, what is the risk of child labor force labor in my supply chain? And that, as you said, is going to impact certain industries more than others. I would say manufacturing and distribution and also retail are going to be heavily touched by this because of the fact that a lot of the goods, again, to go back to what the requirement is, you produce, sell or distribute goods or you import goods into Canada.
So industries, organizations within an industry need to evaluate, well, what is the risk... Where do I buy from? And what is the risk of child labor force labor from where I buy? And so manufacturing and distribution and retail will be heavily touched. That doesn't mean others won't be. Technology, if you're buying pieces, if you're buying computers from countries outside of Canada, that is included under the regulation. So you're not necessarily manufacturing, you may be distributing. It is also what do you buy and from where does it come? And so we're having discussions right now with real estate as well, real estate managers who buy HVAC and systems that they include in their buildings from outside of the country, well, it will apply to them if they meet those criteria.
So it's a risk-based approach. And the risk is based on, what do you buy, so what are the products? And also where do you buy from, which is a significant risk element to consider. Canada overall is going to be less of a risk in terms of child labor, forced labor buying within Canada, buying from certain geographies around the globe have a higher risk of forced labor, child labor, and that needs to be considered. So the concentration, where are you... So first of all, what are you buying from and where are you buying from. Depending on the organization and how you source that will have an impact on what you need to do.
Anne-Marie Henson:
And I guess looking at some of these areas like tech, manufacturing, food and beverage where there is a lot of importing of goods from different geographies, what are some of the common practices that you expect might change as a result of this bill? Because we're talking about this bill and the first report being due on May 31st, but I expect that this is going to be annual going forward, so it's not a one and done kind of thing. So what are the types of things that you expect might change as a result of this?
Pierre Taillefer:
So interesting, I was at an agriculture conference this week and we were talking about upcoming regulation and talking about Bill S-211, and there were a number of questions that I got in. So an organization doesn't necessarily need to comply, I need to comply. So organization A needs to comply, it buys from organization B, how do you get organization B to move, to be able to evaluate its supply chain? Because ultimately organization A has a due diligence and risk assessment process to put in place, but they also need participation of their suppliers. And so there is going to be a lot more outreach and stakeholder engagement with suppliers within a value chain to understand how risk is being managed. And ultimately the way...
And I've seen it already in certain organizations that have supplier codes of conduct. So that's one thing that we're going to see more and more, are more supplier codes of conduct, evaluation of suppliers based on their ability to report or not on this risk of child labor, forced labor to qualify as a supplier of an organization that needs to comply. And also an organization that needs to comply will also apply supplier codes of conduct to its supply chain.
Ultimately, as I said before, the objective is that Canada's supply chain, the risk of child labor and forced labor is mitigated. Where an organization is unable to get the information from its supplier, I think there's going to be delisting of that supplier, and so an inability to sell because you're not able to provide that information to your client. So for me, the trend is definitely towards supplier codes of conduct. It may be as well organizations assisting their supply chain to be able to comply. Something I've seen in the ESG world as well, you have your key suppliers, are they able to respond to you in terms of child labor, forced labor? Do you have options to supply from, are there other suppliers that you can get those key products from? And if not, well then how do you help your suppliers be able to comply? So it really is teamwork, what I've seen in a number of circumstances where a company's going to help its supply chain be able to provide the information they need, those are trends that are going to come. Yeah.
Anne-Marie Henson:
That's really interesting, actually. And I guess hopefully as well leads to generally a lot more transparency in the supply chain and openness of communication about those types of things. So that's great. And I think I wanted to just connect this back to our original discussion about putting the G in ESG, talking about this bill from a governance perspective. So in an organization that has to comply with this bill, whether they themselves or because they're a large customer who asks for it, who takes ownership of this reporting obligation, and who at an organization might need to be involved in this process?
Pierre Taillefer:
Right. So far, the conversations are at the upper management level. So purchasing is operational in nature, so definitely procurement, the purchasing department. But if I go higher, we've had conversations with CEOs, Chief Operating Officers, COOs, with IT, information technology groups, where are they buying equipment from with compliance if an organization has a compliance function because this is a regulation that needs to be complied with. I would also say HR has been involved in understanding, this is change management to a certain extent, or actually to a large extent in companies and HR gets involved to identify areas where I talked about it before, concentration risk can exist depending on how employees are treated in different countries, and HR has visibility on that. So it's more operational than it is financial reporting in nature in terms of who owns this within a company.
Anne-Marie Henson:
And I guess there must be, you're starting to see in these conversations that you're having with companies, some challenges that they're facing. So how are you helping them and basically what are you trying to help these companies overcome as they're trying to process this new piece of legislation that's having an impact on them?
Pierre Taillefer:
Right. Number one is creating awareness. Number two is, does this apply to me or not? And so I was just on a call this morning with an organization that we thought it may apply to, and then we understood or through discussion and understanding of what they do, well, ultimately it's not going to touch them directly, they don't have a report to submit, but they are part of a value chain where they need to start considering this.
And so number one is, does it apply or not? And then number two is, what do I do? And there is no clear or 100% demonstrated answer to that. It's a risk-based approach, which means you're not evaluating your entire supply chain. So what we're suggesting, or what I suggest is, okay, let's get your list of suppliers. So you figured out that you need to comply. Who are your suppliers? What's the location? What are the products that you're buying? And let's start with say 10 or 15 of those suppliers and start engaging, outreach, understanding what they do in evaluating the risk of child labor and forced labor. That for me is where to start and is a reasonable process. Again, there are certain information that will need to be disclosed in the report that needs to be on a regulated company's website. It's a work in progress for me in terms of how you implement. It's impossible to evaluate your entire supply chain, and that's not what the regulation says either.
So it is implementing a process, identifying areas where there may be gaps in your ability to respond to questions or the questions... You may not have done a risk assessment for child labor, forced labor. Well, talking about what you're going to do. So first thing, does it apply or not? Second thing, let's look at your suppliers and evaluate the risk. What do you buy from where? And let's develop a roadmap for getting to responding to the questionnaire by May 31, getting the report repaired and then how are you going to improve over time the responses depending on what you've responded.
Anne-Marie Henson:
Well, I like that approach, and I think that might be comforting to some listeners who are seeing this as maybe overwhelming or a daunting task. This is, like you said, a journey of continuous improvement and something to work on. But I think that doing nothing might not be the right answer. So starting with what's achievable, what's within your grasp and working on that in the future to build on this reporting, right?
Pierre Taillefer:
At the conference I was at, again, this week, a number of people said, "We're not trying to boil the ocean." So the idea here is not perfection, the idea is to demonstrate that you have done work, an organization that needs to comply has done work to evaluate its supply chain, and also there's a plan, a plan for improvement, and what I've seen, again, in my experience with regulatory compliance, demonstrating that you've done something and that you have a plan for improvement is crucial and it allows you over time to implement a more robust process around managing that risk in your supply chain.
Anne-Marie Henson:
Well, I think that's probably going to provide relief to some people who are wondering what to do. So thanks for that. I have one last question for you, just what's the future of ESG reporting looking like to you? Give us your crystal ball predictions and what we can expect for the next couple of years.
Pierre Taillefer:
Yeah, so I wish I had a crystal ball, Anne-Marie. It's still uncertain. So we definitely see Europe ahead in terms of integrated reporting, and they will continue on that trajectory. It does have an impact on Canadian/US organizations that are selling into Europe. And so when the European influence will rub off on North America is not certain.
I would say that between two to three years from now, normally ISSB would be adopted in Canada, there will be integrated reporting, ESG... So there's ESG fatigue, when we talk about ESG organizations or the business world says, "I don't want to hear about ESG and I don't know what it means." But it's not going away, or the concepts of ESG aren't going away. Sustainability and integrated reporting is going to happen, I would say between two and three years in Canada for publicly traded companies. There's also the Accounting Standards Board in Canada that is working on integrated audit standards for private companies. I would think that that's possibly five to 10 years down the road, two to three years, ISSB, and it will start with what is limited assurance on integrated reporting moving to reasonable assurance over time.
Anne-Marie Henson:
Okay. Well, it's good to know that things are happening gradually. I agree, I think people definitely feel ESG fatigue, but I think we need to accept that it's just one of those acronyms that are going to form part of our daily lives. As business owners, it's something that you just need to constantly think of the same way you do your financial statements or your tax returns, right?
Pierre Taillefer:
Yeah. And the thinking is it's not only, what is the financial result you achieved, but how did you achieve it? And that trend is not going to go away. When is it going to become a regulatory compliance, that's the million-dollar question, it will come.
Anne-Marie Henson:
Well, it's great and I'm looking forward, I'm sure we'll be talking again on a regular basis-
Pierre Taillefer:
Any time.
Anne-Marie Henson:
... about what's happening. So I just want to thank you for your time today. I hope our audience appreciated this discussion. I'd also like to thank you, our listeners for tuning in today and to all of our episodes. I'm Anne-Marie Henson, and this has been BDO's Accounting for the Future. Please let us know if you found the topic interesting and useful, and remember to subscribe if you liked it. We'll see you next time.
Narrator:
Thank you for listening to BDO Canada's Accounting for the Future. Past episodes and related insights are available at www.bdo.ca/accountingforthefuture. Or you can go toApple Podcasts,Spotify, orGoogle Podcasts to subscribe. For more information on BDO Canada, visitbdo.ca.