How ESG is helping Canadian small businesses grow

ESG disclosure is giving some companies an edge

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In the past year André Palaguine has noticed a shift in requests for proposals from major companies. Many are starting to include either mandatory or voluntary requests for information on a prospective supplier’s environmental, social and governance programs.

“ESG has become part of the procurement process of these large corporations,” said Palaguine, the chief executive of Nations Translation Group LP, an Ottawa-based, Indigenous-owned language services company. “You will have an edge and a bigger opportunity (if you have ESG programs). The fact that you don’t have it, even if you have a good product or service, you might actually lose out to someone else.”

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The shift coincided with a major change at Nations. Amid a broader corporate restructuring and rebranding after he joined the company in April 2022, Palaguine launched an ESG team and charged them with creating an action plan for a range of criteria. The plan included goals to improve the company’s energy management, reduce paper use and give back to the community.

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In the past year, Nations switched from a gas-powered backup generator to backup batteries, set up sponsorships and donations to Indigenous organizations and launched a sustainable procurement plan. It’s also pursuing a zero-waste strategy.

“We have customers that consider us an ESG partner,” said Palaguine. “(And we’ve) noticed a lot of appetite and demand for an Indigenous-owned company that’s also ESG compliant. It created interest from big corporations in working with us.”

You will have an edge and a bigger opportunity (if you have ESG programs)

André Palaguine, chief executive, Nations Translation Group

The expectation for large public companies to track and disclose their performance on a host of ESG metrics is trickling down to Canadian small- and medium-sized companies, whose existing and potential customers are increasingly asking them for information on their ESG practices. But while new requirements can present challenges for SMEs, experts say it can also be a boon for business.

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“There’s absolutely no contradiction between being proactive on the ESG front and growing and being profitable,” said Sylvie Ratté, senior economist at the Business Development Bank of Canada and the author of a March study on ESG reporting among Canadian SMEs. “Firms that are the most proactive are also those that perform best in their industries.”

Lindsay Hampson, founder of ThisRock Inc., a sustainability consultancy that works with Canadian small and medium-sized businesses, said clients across multiple sectors — including technology, mining, construction, automotive and chemicals — have found more than half of requests for proposals now include ESG questionnaires, and frequently ask her whether filling them out is actually necessary.

“If your customers are asking you (for ESG information) you can avoid it for a year, but get ready for them not to renew with you if you don’t (disclose or) have a certification,” she said.

The BDC’s March study, based on surveys of 100 major Canadian buyers and 1,200 suppliers, indicated that small- and medium-sized enterprises that don’t report on ESG factors will soon lose out on the opportunity to win big contracts.

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BDC's research shows ESG is important to small business profitability.
BDC’s research shows ESG is important to small business profitability. Photo by Handout

It found that 82 per cent of large buyers now require their suppliers to report on at least one of the three ESG categories, a number that is expected to rise to 92 per cent next year. Just shy of 40 per cent currently require their suppliers to report on all three types of criteria, but 75 per cent said they plan to increase their sustainability reporting requirements over the next five years.

Fifty-nine per cent of SMEs that supply large organizations said they’re now required to report information on their ESG practices. That number was higher for companies that sell to the United States (64 per cent) and to Europe (72 per cent).

“Although more and more large buyers ask for information on ESG practices, we’re more at the stage that they’re just asking for information, they don’t necessarily require suppliers to meet some targets,” said Ratté, noting that reporting asks are not as stringent for smaller companies,. They tend to come in the form of questionnaires asking whether a prospective supplier uses clean energy sources, has environmental and social risk management programs, has managers and employees from diverse backgrounds, and makes community investments and more.

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As the pressure ratchets up on major companies to improve their own ESG performance, they will start asking their suppliers to set and meet their own targets, Ratté said.

Meeting buyers’ ESG requirements isn’t without growing pains. The BDC report found 50 per cent of suppliers said they saw increased operating costs and 36 per cent reported higher administrative burden. About a third of SMEs said they hired a specialist and just over a quarter consulted with external specialists or hired external auditors to assess their practices.

So far, major companies are “trying to be supportive and a little bit lenient” toward smaller companies, Hampson said. She gave the example of General Motors Co., which said in April 2022 it expects its tier one suppliers commit to reaching net zero emissions by certain years and to achieve minimum scores on the EcoVadis sustainable procurement and labour, human rights and ethics certifications by 2025. It has made its own staff available to help suppliers through the certification process, as well as provided educational videos and resources.

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General Motors has made its own staff available to help suppliers reach ESG targets.
General Motors has made its own staff available to help suppliers reach ESG targets. Photo by Jeff Kowalsky/AFP via Getty Images

The BDC report recommended that companies just getting started select key people in the organization who can lead the strategy and who report to management; determine the most material ESG issues to their business, which can be done with free online assessment tools; and find opportunities across the business to improve environmental and social performance. “Simple and measurable objectives” for the near-term can help to get the ball rolling.

But the upfront investment pays dividends over time, Hampson said, by attracting new business opportunities while reducing expenses such as energy use.

“If you want to put in solar panels, track your GHG emissions and set reduction targets, these can all over time be profitable,” she said. “That’s one of the problems with ESG right now is people think that it’s an extra thing that’s costly, but it’s the opposite — it can help increase revenue and decrease your expenses.”

Ratté noted that it can also be a talent magnet. The BDC itself is B-Corp certified — a designation that is given to companies that demonstrate high social and environmental performance and corporate transparency — and she said potential employees frequently bring up the bank’s mission and ESG strategy in interviews.

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Palaguine estimated that in the past year Nations has seen the business grow by roughly 25 per cent, at a time when his sector has otherwise slowed down. “ESG helped us grow,” he said.

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