Simon Hutton:
We do see more and more companies are recognizing that sustainability performance, commitments and so on is really part and parcel of not just building firm value, but also protecting firm value over the course of time.
Anne-Marie Henson:
Hello and welcome to "Accounting for the Future." I'm your host, Anne-Marie Henson, and today we're discussing how organizations are embedding sustainability and resilience considerations into their risk management framework, responding to rising regulatory and stakeholder pressures, and making data-driven decisions that balance transparency without falling into the trap of greenwashing. Here to share his insights, I'd like to welcome Simon Hutton, who's our National Sustainability Leader at BDO Canada. Simon has over 15 years of experience providing sustainability advisory services to senior executives in various sectors. His sustainability experience extends over growth strategy analysis, business planning, modeling competitive differentiators, and corporate communications. Simon, we're really thrilled to have you on the podcast today.
Simon Hutton:
Thank you. Wonderful to be here, I'm looking forward to this conversation with you.
Anne-Marie Henson:
That's great, and I know you and I have had many discussions about a lot of the new regulation that we've seen over the past couple years regarding, you know, sustainability, ESG, and the needs for sort of Canadian companies to report on certain things that they haven't in the past. So, I'm really looking forward to hearing about, you know, what's changed and what you see coming in the future so that companies can adapt properly. So, let's start with that. Actually, you know, there have been, it seems a lot of changes that we've seen happening in the sustainability landscape, even just in this past year, not just for Canadian companies, but I would say across North America, we've seen a bit of a reassessment of, you know, their, what their previous strategies were and, you know, what policies are in place and perhaps should be modified, changed or removed altogether. You know, with this ever-changing landscape of expectations and regulations, how are Canadian companies adapting to that, and what would you say is really different this year that you haven't seen before?
Simon Hutton:
Yeah, great question, Anne-Marie. Thank you. It's interesting to reflect at this point a little bit, right? In terms of what has happened in past years. And it was only five years ago that the CEOs of Canada's largest pension funds came out and in a joint letter stated publicly to the investment community that they wanted to see consistent sustainability reporting in the business community. They did this because they know matters of sustainability can impact cash flows, right? It can impact cash flow quality, it can impact cash flow quantity. The two things that comprise valuation, and that's because managing sustainability can generally better than management of things like risk, things like capital, things like growth and things like talent and all these things very much impact the quality and quantity of cash flows.
So, that was only five years ago, I'd say since then sustainability has evolved from being simply a reporting exercise to more being a core integral part of building business resilience. We see big buyers in the supply chain. We see investors, we see new regulations these days that are very much driving a higher demand for credible sustainability data. And so those demands from big buyers, from investors, from new regulations, some of which you'll speak about today, those things have very much reshaped the expectations and the extent to which they apply to the broader business community in Canada. And so as a result, we do see more and more companies are recognizing that sustainability performance, commitments and so on, is really part and parcel of not just building firm value, but also protecting firm value over the course of time.
Anne-Marie Henson:
Well, thanks for that. I think it's a really great summary of what we've seen happen and change over the past few years. I like what you're saying in terms of it, you know, matters of sustainability sort of becoming more and more integral to your day-to-day operations and you know, what your strategy is and how it fits into it, rather than having it be sort of a separate element of a business strategy that you have to think of. Well, based on these, you know, conversations and the work and advisory you've provided to various companies, what would you say is top of mind today for Canadian business leaders when it comes to getting sustainability right?
Simon Hutton:
So, I'd say the critical issue at the moment that we're hearing from Canadian business is really across the board relates to supply chain and supply chain risk management, one, two, greenwashing is very much topical at the moment because of amendments to Bill C-59, and also in a lot of cases credible reporting. And the tariffs that we all know about and new regulations are very much at the center of this. I'd say supply chain regulations and tariffs very much these days are for a lot of companies, especially in the mid-market, unearthing risks for the first time, and creating new reasons to start to think about how we can invest in supply chain resilience and also how we can invest in supply chain mapping. And historically, historically, most Canadian companies haven't necessarily had a full picture of what their supply chain looks like, meaning they haven't necessarily known where their suppliers operate, where exposure resides, where concentration risks reside, or what other risks might be hiding behind the scenes. That is changing quickly as a result of a couple of things. New reporter requirements like Canada's Modern Slavery Act, as well as the tariffs that have come to light over recent months. These things are very much forcing, in a sense, forcing the hand of the Canadian companies to get better at mapping their supply chains at a level of detail. And that really is uncovering a set of risks that weren't previously known. Those might range from forced labor exposure also to unexpected tariff impacts that can directly impact profitability and the bottom line.
So, supply chain is a big deal at the moment. It is central to thousands of Canadian businesses that are very much impacted to supply chain risks. At the same time though, amendments to Bill C-59 and the anti greenwashing regulation, this is forcing companies to increasingly pay attention, to increasingly scrutinize the claims they may have made on sustainability. And also I'd say at the same time, for larger organizations, boards and investors are more and more demanding credible data on sustainability, and in a lot of cases are requiring that said data be auditable, okay? And so this is also something that's new. So, I've said a lot just now, but the three major things that I have highlighted, just to recap, supply chain risk management, okay? This is increasingly a big deal. This is not going to go away. That trend is one directional, new greenwashing rules with Bill C-59 and also for many credible reporting. And as you know, Anne-Marie in a lot of cases, missing the mark or ignoring some of these things can be an expensive exercise. And so in speaking to clients on these matters, we really wanna encourage folks to just start taking incremental action and start taking practical steps. You don't have to do everything at once, that's not necessary, but you do wanna start and building incremental successes, this is so important.
Anne-Marie Henson:
What I find really interesting about what you just said, I'll pick off on the first of your sort of three items or, you know, sort of reasons why companies are looking much more closely at sustainability today, about sort of the general supply chain management and how integral sustainability is to that. What I find really sort of interesting is that it seems to be when you, you know, you're explaining this in a way that, you know, sustainability isn't just a one-off so you can check the box and say that you've done what you have to with regards to that. There's a bigger piece around general, like enterprise risk management, right? Like what is in your supply chain? Who are you sourcing from? Do you have geographic risk? Do you have risk with potential forced labor? Like what is it exactly that, where are you sourcing your goods? I'm a little surprised to hear you say that this wasn't part of company's risk management's process in the past, or maybe not as prominent as it is today. So, do you know why there's been that shift?
Simon Hutton:
I think the shift from being relatively absent to being more present is part and parcel of the, maybe at least two things. Canada's Modern Slavery Act has made it mandatory that organizations with sales more than 40 assets, more than 20 million, do supply chain reporting as it relates to the risks of forced labor in their supply chains. The penalties for not doing so can be up to a quarter million dollars. And so that's one reason why thousands of Canadian companies have had to start to take a look, that's a forced hand, right? From a regulatory point of view. The other geopolitical risk that has come to life recently, of course is the tariffs-
Anne-Marie Henson:
Right.
Simon Hutton:
And so those tariffs are also making companies take a second look at their supply chains, think about things like contingencies, thinking about things like alternatives in their supply chain that could reduce tariff exposure. So, when we think about the why, I'd say those are two things that are quite different that have really changed the need for thousands of Canadian companies across the board to look a little bit deeper.
Anne-Marie Henson:
Right, and I guess that could, you could argue that's perhaps at least one positive coming out of the tariff uncertainty these days-
Simon Hutton:
Absolutely.
Anne-Marie Henson:
Is that it's bringing sort of business leaders, c-suite, boards to the table to talk about supply chain, supply chain risk sustainability in a way that they perhaps haven't in the past.
Simon Hutton:
100%. 100%, and so, you know, the upshot of the tariffs as an example, like you say, is in time, Canadian supply chains evolve, become more diversified and become more resilient and become more robust. And that would be a huge positive for Canadian businesses. It would be a huge positive for the Canadian economy.
Anne-Marie Henson:
Yeah, absolutely. No, thanks for providing that insight, Simon. And I'd like to talk about something else that we've seen happen a lot more recently. The, you know, the coverage in the news is almost daily, you know, extreme weather events, you know, in Canada, when we look at, you know, the increase in terms of forest fires. In my neighborhood, you know, basement flooding has almost become just a regular occurrence of the summer with, you know, the really significant rainfall. So, we're seeing this happen in different countries worldwide through a variety of different weather events. So, how are companies sort of protecting themselves or trying to protect themselves from that supply chain risk, specifically when you look at these types of extreme weather events?
Simon Hutton:
Yes, yes. This is a very important question, especially as we look to the future and we think about things like, how do we build more resilience in the Canadian economy? So, historically the answer to your question is, a lot of organizations have not, right? That there hasn't necessarily been a catalyst or a reason for them to consider the risk of climate as it relates to asset decisions, as it relates to supply chain risk. And of course that's changing now for the reasons that you have highlighted, Anne-Marie. And at the same time, the data as of June, 2024 suggests that less than half of Canadian mid-size businesses have a clear understanding of their supply chain map, okay? And so for reasons we are discussing, that's not necessarily ideal because in many senses, supply chain is now your biggest risk, call it a sustainability risk or not. And so this is something that must be integrated into things like enterprise risk management. At the same time, this is potentially a really interesting opportunity, and the good news that we see unfolding is that more and more companies are shifting. Shifting from a place of reacting to disruptions, right? Which is something of course they have to do, to taking a more proactive approach and building more resilience in their supply chain upfront. And so a lot of folks these days are starting by mapping their most critical suppliers and also importantly integrating climate and geographical risk into their procurement decisions. And it's important here that companies also start thinking about contingencies. And I say this because there's a number of companies that have a lot of supply chain risk in the form of concentration risk, okay? And in many cases there isn't a lot of contingency planning. So, a lot of work we do these days is helping clients think that through, and map out their supply chain, map out their concentration risks and help them understand what those risks look like, qualify them, quantify them, and also help understand how to better manage them. So, I think, you know, at the highest level, investing in supply chain today can very much reduce exposure to tomorrow, right? To the risk of tomorrow. And unequivocally, companies that do this well, they will be better positioned than their peers over the course of time, build and protect value in their respect to companies.
Anne-Marie Henson:
Right. Well, thanks for sharing that. And it's good to know that this is becoming a lot more sort of front and center as companies are trying to, you know, build out their strategy with regards to supply chain and, you know, protect themselves ultimately from these kinds of risks. It doesn't sound like they're going away anytime soon, unfortunately. It looks like we're gonna see more and more of them. So, making sure that, you know, c-suite and boards understand where their supply chain is potentially most vulnerable, I guess will really help them succeed in the future and be more competitive. So, I'd like to ask you about some decisions that are, you know, often companies have to make, especially those that are in sort of infrastructure, real estate development, you know, those that have very capital intensive types of sectors.
Simon Hutton:
Yes.
Anne-Marie Henson:
There is, you know, perhaps one of these questions when you're thinking of strategy and how to protect yourself is to decide whether or not you want to build an asset or lease an asset, right? They come with various pros and cons. You know, I definitely fondly remember my university days where we used to, you know, do Mock assessments of whether they should buy or lease in school. So, but perhaps climate risk at the time wasn't necessarily one of the factors we were looking at very closely. I'm sure that's something that's a lot more important today. So, how should they factor in climate risk into those types of decisions?
Simon Hutton:
Yeah, yeah, so interesting to reflect on the education there, right? And how at the time climate wasn't necessarily part of the picture. Fascinating how things have changed. So, yeah, to your question, Anne-Marie, I think to, you know, to your point really, location decisions have always been very strategic, right? And now more and more climate risk makes those decisions increasingly critical. And so factor in things like heat stress, mapping of flood history, wildfire exposure, which has been a huge thing here in BC over recent years. Insurance costs, all these factors are very much important when choosing where to build or where to lease. These are risks that have been demonstrated to be shown to be increasing over the last, you know, two decades we've seen a rapid uptake, uptick, if you will, of things like wildfires and things like flooding, things like heat stress. And so with these types of events manifesting more and more, I think because of it's literally in their face, business leaders are realizing that things like physical climate risk very much can influence insurance premiums, asset values, long-term resilience. And that of course can impact how decisions are made that relate to some of these core assets. And so more and more climate planning really is becoming an important part of making decisions that are informed not just for compliance reasons, but for the sake of business continuity and stability over the course of the years. And, you know, in talking to clients on this sort of topic, at the end of the day, what we don't want is our, I'll use an analogy, we don't want our clients to cross the road without looking both ways, right? And so failing to look at climate risks when making something like an asset investment decision would be just that, it would be a kin to crossing the road and only looking left only to find out that you are struck by something that's coming from the right at a later time. And so being more thoughtful, being more strategic, being more analytical and critical about some of these climate risks is generally a win-win situation at this stage, given where things are at and how the climate is also evolving.
Anne-Marie Henson:
Yeah, that's really interesting actually. And it reminds me of a recent situation. One of my clients that I work with are, they're a supplier to mostly the mining industry. And there's one company in particular that has asked them instead of my client sort of manufacturing in their own facility and then having the goods shipped to the mining areas, which are a lot more remote and subject to more extreme weather events, they've actually asked, this company has asked them to build a mini facility on the mining property so that they can avoid a lot of the potential issues where, you know, it's more, they're located more up north, there are a lot more fires there, sometimes there are roads that are blocked. And so it is becoming more and more prevalent that companies are making business decisions based on these risks if they think that it's perhaps too high of a cost to take a chance.
Simon Hutton:
Yeah, I mean, it's a really interesting example of sort of centralizing supply chain to minimize risks, right?
Anne-Marie Henson:
Exactly.
Simon Hutton:
Yeah, yeah. Very interesting.
Anne-Marie Henson:
And when you look at companies today-
Simon Hutton:
Yeah.
Anne-Marie Henson:
What are perhaps, you know, some of the bigger mistakes that you've seen when it comes to sustainability reporting?
Simon Hutton:
Mm-hmm. I'll highlight two today. I think the two biggest mistakes that we see manifesting is overpromising and then under measuring. And companies and in some cases governments across the world have often gone about setting very ambitious sustainability targets, but often lack the credible data and the evidence to back them up. And that disconnect can really erode trust, right? It can erode trust with investors, with customers, with employees, with taxpayers, with all manner of stakeholders. And we've seen this play out in some cases where organizations make announcements or aspirations around things like Net-Zero commitments that are quite distant, for instance, Net Zero 2050 as an example, but struggled to establish a baseline of their emissions or the supply chain impacts on their emissions. And thus they're really making a very bold, in some ways courageous plan, but haven't necessarily thought through and granularly what it would take to get there. And so that can create a challenge whereby sometimes you then see organizations pulling back from commitments they have made. And sometimes that can impact credibility, right? Sometimes that can impact trust, making a big commitment and then pulling it back. And so if there was a lesson, I'd say start by keeping it relatively simple with what you can measure today and build from there. I often say to clients in talking about things like this, there is a real benefit to starting with one or two things you can confidently do. There is a real risk to identifying five wonderful, bold, aspirational goals, but not having the confidence that you can execute on them. And so, starting small, starting practical, using that to build momentum and credibility and confidence amongst your stakeholders is really, really important, right? And after you have a couple of wins, you build excitement, you build momentum, you build confidence, and then you're so much better placed to take on the next thing versus the opposite, right? And so our encouragement generally is don't try and do too much too soon. Start with what you can be confident with, make it work, create a win, use that momentum to build more.
Anne-Marie Henson:
Well, Simon, I love that, and I think that that you could easily apply that to many different aspects of business (crosstalk) or even your own personal life, right? Like it's-
Simon Hutton:
Oh, 100%, yeah.
Anne-Marie Henson:
It's great to have a stretch goal, and I think it's important that companies get excited about having an ambitious target, but within that, there have to be more realistic, measurable, and achievable challenges, right? So, that you can start to sort of like chip away at the big rock rather than just say, we're gonna conquer this in one shot. So, I think it's really great advice.
Simon Hutton:
100%, and like you say, the exact same thing is true for building a corporate strategy-
Anne-Marie Henson:
Yeah.
Simon Hutton:
And an action plan, the exact same thing is true. And so the carryover absolutely exists in this context.
Anne-Marie Henson:
Yeah, absolutely. So, Simon, you know, maybe we can talk about something I think we're seeing more and more recognition of these days about greenwashing and the traps of falling into that. I think sometimes it's not intentional, companies will set themselves a very lofty, ambitious target like we just spoke about, and will perhaps feel compelled to report that they're doing well and they're progressing towards that goal. So, you know, understanding that there's a much tighter lens on greenwashing today than there may have been in the past. Like, how can companies talk about what they're doing from a sustainability perspective and, you know, report on their progress without falling into that greenwashing trap?
Simon Hutton:
Yes, I think at the highest level, being real, being measurable and being verifiable are a few things that are really important, especially these days with the changes to the Competitions Act through Bill C-59, which has created anti-greenwashing regulation in Canada. And so with that change, overstating sustainability claims really now is more than a reputational risk, there's a legal risk and there's a potential financial penalty. And so more than ever, being verifiable, being measured and being real in what you're saying, or claiming or stating on any of your communication channels is really, really important. And so as a result of this, naturally as companies are evolving, they're taking a more measured and careful approach by taking stock of the new regulations and really working to validate the statements that they're making and using credible data to do that, and being transparent about where they are on their journey and also where they are not. And in a lot of ways, the strongest reports that we see relating to sustainability, whether it be an ESG report in financial notes, or on a website, the strongest claims and statements and reports that we see really are the ones that balance ambition with humility and with honesty. And that's that, you know, that's really important to note, balancing the ambition with humility and with honesty, and sharing progress, but also being very realistic and forthcoming about acknowledging challenges and where work is still needed. And ultimately that's where credibility in this space comes from, right? From making measured claims that are backed by data and communicated with integrity and transparency. And I can't really state enough, it's very hard to reverse stains in this context. And what I mean by a stain is if I make a claim that is uncredible and it becomes known in the public domain, even if I make one false claim of 20 and that one gets spotlighted, it completely undermines the other 19. And it also makes it hard for me to reverse what I've done. It will take many, many months or many, many years to build back that credibility that I lost with one misstep. And so it really is a space where being meticulous and thoughtful and careful is increasingly important.
Anne-Marie Henson:
Yeah, absolutely, and I'd imagine even more so today with social media, bad news travels quite fast (chuckles) on platforms today. It's funny what you're saying reminds me a little bit of a super interesting panel that I attended last year, and it was geared towards the governance side of sustainability. But there were three executives on the stage in similar industries, but that were at extremely like varied stages on the sustainability sort of journey. One you could argue, was at the forefront, they'd been talking sustainability for 40 years, right? And really their whole operating model was built around sort of a sustainability circular economy. There was another executive who was running a company that was maybe in the middle of that journey, and then there was another one who had done very little, but they were all really honest and transparent about what they had done, what they hadn't, and where they were going next.
Simon Hutton:
Yeah.
Anne-Marie Henson:
And the transparency was really eye-opening to see, and again, it's leads to I think, trust, right?
Simon Hutton:
Yeah.
Anne-Marie Henson:
Trust from your board, trust from your stakeholders to be able to say exactly where you're at and you know, what your plans are if you have some room for improvement, but without sort of exaggerating where you are today.
Simon Hutton:
Yes, yeah, being imperfect is absolutely okay and it's appreciated.
Anne-Marie Henson:
Yeah, absolutely.
Simon Hutton:
Right? And pretending to be perfect when you're not, that's where things get a little bit messy.
Anne-Marie Henson:
Yeah, for sure. Well, I have one last question for you then.
Simon Hutton:
Okay.
Anne-Marie Henson:
And we can sort of end on this note. I think there is a recognition, I think with the new regulations that are making it a must have not a nice to have around sustainability, and especially what you said before about the measurement and the reporting and the data behind it.
Simon Hutton:
Yes.
Anne-Marie Henson:
So, why should CFOs and boards with all of the other challenges and priorities that they might have on their plate, why should they care about sustainability data today?
Simon Hutton:
Yes, yeah, yeah, strong question. So, I'd say these days, right? And this historically hasn't always been true. 20 years ago, this probably wasn't true, but these days sustainability is a financial management and valuation issue. And as a result, this is a important thing for the CFOs of the world to take stock of. There was a major study done just two years ago, an empirical study that looked at valuations, and this study showed that top performers on matters of ESG and sustainability versus the median performers, won a valuation increase of between four to 19% higher. So, from a valuation perspective, this is really, really powerful. Even if you take the low range at 4% and then you cut it in half and say it's only 2% for valuation to be increased by that magnitude, by doing better on matters of sustainability is very telling in terms of how the market is rewarding folks that do better on sustainability. There is also a lot of risk on the opposite side of the spectrum.
There is a lot of risk to manage these days for CFOs, right? And if we just think about some of the things that we've spoken about today, and some of the potential financial penalties that can manifest in the Canadian context, right? And so when we think about Bill S-211 and the Modern Slavery Act, penalties for getting that wrong are up to a quarter million dollars. In the case of the anti greenwashing regulations and the changes to the Competitions Act, the penalties of getting it wrong there are up to $10 million for the first offense, and then they increase in magnitude. And so these are potentially serious penalties, right? And so there's a lot of reasons for CFOs to take stock of these things and to take stock of the data that's gonna help elevate valuation, for instance, but also manage and mitigate the risks that we're all currently facing in the Canadian business community. I'd say over and above those things, over and above those things, we have a ton of evidence now that tells us that major customers are asking for hard numbers, right? They want evidence of doing better. This is showing up in RFPs, it's showing up in due diligence. And so having strong data keeps opportunities moving and really does create more space to differentiate in a very competitive environment, okay? And so there's a few things at stake here, all of which are important, and ought to be top of mind for CFOs across the economy. I think at the end of the day, right? Strong sustainability data creates value. It can protect value and it can build transparency that can inform smarter decision making and create numerous benefits in the business. Again, both from a value creation point of view and also from a value protection point of view, a risk management point of view.
Anne-Marie Henson:
That's great. Yeah, and I don't know any company that's not looking for a way to increase its valuation. So, that's a very compelling (crosstalk) reason in itself outside of the risk mitigation, so-
Simon Hutton:
Indeed.
Anne-Marie Henson:
Yeah. Thank you so much, Simon. This was a really great discussion, and I'd like to thank you for your valuable time and your perspective today. I hope our audience appreciated this discussion. If you like this episode, make sure you leave a review or comment and click the Follow or the Subscribe button to stay tuned for our new episodes. Thank you to 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." We'll see you next time.