1 Products and services may be offered by Royal Bank of Canada or by a separate corporate entity affiliated with Royal Bank of Canada, including but not limited to Royal Mutual Funds Inc., RBC Direct Investing Inc. (Member–Canadian Investor Protection Fund), RBC InvestEase Inc., RBC Global Asset Management Inc., Royal Trust Company or The Royal Trust Corporation of Canada
In spring 2023, the Canadian government announced a number of measures designed to help build the country’s low-carbon economy. Tax incentives and grants were introduced and investments to help businesses develop their ESG policies were put on the table.
The funding was tied to the government’s 2030 Emissions Reduction Plan – a roadmap that outlines a sector-to-sector path for Canada to reach its emission reduction target of 40 per cent below 2005 levels by 2030 and net-zero emissions by 2050.
Policymakers know to achieve these targets they need to help businesses build their capacity to reduce their footprint.
As Trevor Holness, a Senior Manager of Government Incentives at BDO Canada, notes, this means it’s the perfect time for organizations – whether large or small – to start mapping out their ESG strategies.
“As a business leader, it’s time to ask what sorts of environmental sustainability initiatives your company can lean into,” he says. “Not just because it makes sense environmentally or at a stakeholder level, but because of these incentives which can be tapped into. You have to start looking at what your business’ needs are right now and then how to respond.”
Holness adds whether it’s benefiting from a tax incentive for manufacturing or receiving a credit for implementing solar panels, the supports we’re seeing at the federal level are setting the stage for Canada to move into a new stage of its economy – and it’s important that every business that can gets on board.
His colleague Pierre Taillefer, BDO Canada’s National Sustainability & ESG Leader, agrees.
“It’s a complete shift in our economic model,” Taillefer says. “What we’re seeing is varying levels of organizations implementing ESG programs, even though there’s a real lack of knowledge in terms of what that means. It means ‘business transformation,’ and the fact that, over time, an organization will be evaluated on their financial results as well as on how they achieve those results. They will effectively need to integrate ESG into their operations and demonstrate how they’re economically and socially responsible – this integration of financial and non-financial aspects as a basis for evaluating an entity’s performance is completely new.”
He notes that since the economy has always been focused on shareholder value, this shift toward focusing on the stakeholder can be confusing. “Organizations don’t understand what it means for them – or how they can tap into available government funding programs, federally, provincially, and/or municipally to formulate new internal ESG policies.”
So what should business owners do?
As a starting point, as both Holness and Taillefer suggest, organizations should perform an ESG Risk and Opportunities assessment. This will allow entities to identify what risks exist if ESG factors are not integrated into how they operate.
From an opportunities perspective, this assessment allows organizations to potentially identify new markets, new product offerings as well as funding available in the implementation of an ESG program. One specific topic of receiving significant attention at the present time is greenhouse gas (GHG) emission footprints. The footprint identifies how much GHG an entity emits to generate their products and/or services. Eventually, organizations will want to perform an audit of their entire value chain as this will be included in organizational GHG footprints over time.
For this reason, “You have to ask what’s in your supply chain, who are you selling to, how the workers creating your products are being treated… and everything needs to be above board,” Taillefer says.
Education is also critical, especially when it comes to differentiating between two often confused terms related to GHG – carbon neutral vs. net zero emissions.
“Net zero is not carbon neutral,” notes Taillefer. “If you’re net-zero you’ve transformed your operation as much as possible to decrease emissions, using energy efficient equipment and only for the gap you cannot reduce to zero do you offset with carbon credits. When you’re carbon neutral, you buy credits – greenhouse gas offsets (you invest in a forest, for example) – but you may still pollute.”
He adds the government’s aim with many of the initiatives they’re currently putting forward is to help organizations achieve net-zero, but that may not be possible for all operations simply because of their current funding situation or economic standing. “You have to analyze your numbers and set clear KPIs or goals for your company based on its needs and where you know it’s headed in the future.”
With a Risk and Opportunities assessment, businesses leaders can then delve into the federal initiatives available to better understand which are most appropriate for them and their operations. As Holness notes, there are programs that offer either tax credits or direct funding.
“A company can take either a reactive or proactive approach to funding. Tax credits are credits for things that you’ve done in your tax year, so a business can spend the money today and then claim those costs on their taxes later… this is the reactive approach,” he says.
“Direct funding, however, is a proactive approach – it’s a cash-flow enabler. You have to go to the government and prepare a business case that explains how you’ll use the funds on offer and what the return on investment is, and then enter a competitive program to secure those dollars. The amount of time you have to execute the project itself is timeboxed based on the program. As you get into larger values, the timeline tends to grow.”
Because many of the initiatives mentioned in the spring 2023 budget get businesses thinking about their long-term plans, Holness says this is the stage where a leader and their team should also think about where the organization will be in five or 10 years.
“You have to almost overlay where you’re headed with the funding you can receive to see the limitations you’ll face and understand how they’ll impact your business overall,” he says. “That’s kind of what we do – we figure out where you are, where you need to go, what you need to do to achieve that, and figure out your limitations.”
With everything mapped out – from an organization’s inputs and outputs to the funding elements they can tap into – a businesses’ final step (beyond execution, of course) is to roadmap an action plan that will set them on the path toward achieving the government’s 2030 emission targets for their specific industry or sector.
“For a lot of organizations, 2030 is tomorrow from a systems place, so roadmapping everything out and tapping into the funding available to help you reorganize your systems is critical,” says Taillefer.
This step can be particularly difficult for smaller businesses which, Holness notes, typically have to juggle day-to-day issues with forward-thinking strategies.
“These are the organizations that really need to step back and think about how they’ll utilize what’s been made available, what their capabilities are, and what’s realistic. For them, tax credits may not be ideal because they don’t have the immediate capital to invest, but direct funding could work,” he says.
It’s also critical to ensure the incentives announced by the federal government don’t distract you from your business’ core activities.
“Just because something is made available doesn’t mean it makes good sense for you based on your emissions or financing. It always comes back to figuring out where your business stands, what resources exist to help you improve the functioning of your company, and then to build out and implement a plan that make sense organizationally. You don’t want to fit a square peg into a round hole when it comes to ESG.”
As for the question of whether improving the operational sustainability of one’s organization is actually something that should be done right now, the answer is yes.
“The commitment from the federal government is pushing organizations to move – even though it will be a challenge to hit specific targets by 2030 as well as 2050. Europe is way ahead of the game; shareholders are demanding more from organizations; employees want to know what the companies they’re involved with do, what their carbon footprint is, how they’re working to protect the planet,” Taillefer says.
“Change is coming, so businesses need to prepare for what’s next.”
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.