The International Financial Reporting Standards Foundation (IFRS) is proposing a new accounting standard to be imposed in Canada by the Intentional Sustainability Standards Board (ISSB). This standard is based on the environmental, social and governance (ESG) concept and is likely to hit Canadian SMEs hard. They have put forward a draft plan.
Currently, there are no Canadian regulations that require businesses to publicly disclose ESG information. If this draft plan passes, this could soon change. The changes that this Climate Exposure Draft proposes are said to introduce the most significant shift in accounting standards since the 1400s.
Amongst other expectations, the proposals include a new regime under which every business is expected to document how every good or service they offer originates, the emissions it generates, the emissions it is expected to generate after the sale, depending on who purchases it and how they use it.
Such a change can be expected to severely burden small businesses that typically have less than five employees on their payroll. The amount of work that would be involved in compiling such data on each product sold by a small retailer would be insurmountable. Even larger businesses that offer a more diverse range of products and services and work with a larger network of suppliers and clients would also have extreme difficulty keeping track.
If the ESG plan comes into effect, many businesses are expected to struggle to meet the standards and will likely need to engage experts such as accountants, consultants, and lawyers in a bid to comply. While this might prove to be a boon for the advisory sector, it could end up destroying a myriad of other businesses.
And they might not have a choice in this. Failure to comply with the rules could result in such businesses suffering losses when it comes to financing, insurance, and other investment. Not to mention the possibility they may end up being sued by some Environmental Non-Governmental Organization (ENGO).
If enforced, the IFRS Sustainability Disclosure Standard will put all companies that manufacture, use, or handle hydrocarbons at risk of being targeted and penalised if they fail to comply with what appears to be an impossible standard.
While some support the new standard as a means of bringing sustainability into all accounting, others point out that the cost of complying with such mandatory financial ESG rules could drive many SMEs into insolvency and promote intrusive tracking of individual consumer behaviour.
To help clarify how sustainability and ESG will work and the role accounting professionals will have, CPA Canada is hosting a free virtual roadshow session in the coming months.
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