Opinion: Small companies are breaking under the burdens of mandatory sustainability reporting

Andrew McLaughlin is vice-president, legal affairs, and general counsel of Major Drilling Group International Inc. He chaired the national ESG Summit Canada in 2023.

“I don’t know how smaller companies are going to do it.”

It was a blunt comment that cut through the conference room like a knife. Uttered by the chief sustainability officer of a large mining company, he was referring to the ever-increasing reporting requirements for publicly traded companies, noting in particular the impending national implementation of the International Financial Reporting Standards (IFRS) sustainability reporting standards.

His comment at last October’s ESG Summit conjured images of a sea full of small market cap companies across the country going from treading water to sinking under the growing burden of reporting. He acknowledged that it’s a vastly different reality for large companies such as his that boast entire departments dedicated to reporting – as these are the ones for whom the disclosure standards are largely written.

Now, more than seven months later, his bleak observation is more poignant than ever. I’m a senior executive at a small company (under $1-billion market cap) that’s just gone through another annual wave of report preparation. It’s admittedly ever-more challenging to keep the reporting ship afloat. Here’s a brief snapshot of what this specifically entails for us:

Beyond our normal day-to-day tasks, over the last few months our Sustainability Co-ordinator and I were once again charged with pulling together our annual sustainability report, management information circular, annual information form, and now for the first time under recently adopted federal legislation, our modern slavery report. While we received lots of input and support from our colleagues (many of whom are also stretched to keep up with quarterly financial reporting) and external advisers, it’s a far cry from having entire departments dedicated to these efforts.

So, to the question of how smaller companies are doing it: in our experience, it’s a slog.

The obvious solution might be to just throw more people at the problem. While that’s a common and well-trodden path in some contexts (e.g. see the recent ballooning of the federal civil service), it’s an expensive approach that doesn’t guarantee better results. In fact, many smaller companies are succeeding because they haven’t taken this approach, rather they intentionally remain lean and operations-focused. This is precisely what we’ve heard some of our investors say they appreciate about how we operate. Other small companies simply don’t have the luxury of being able to add legions of employees to their reporting ranks.

We’ve also noticed there’s real value in having those leading the reporting effort also being deeply involved in implementation, as they can help bridge the gap between operations on the ground and disclosures to the markets. However, this means facing the usual trade-off between reporting versus doing – i.e. diverting a lot of time, money and energy toward reporting that could have gone to helping carry out projects that make a positive sustainability difference on the ground.

I can point to various concrete examples where we’ve had to put implementation efforts on hold to focus on meeting pressing reporting deadlines. This happened most recently when my colleague (our Sustainability Co-ordinator) and I were leading the effort to establish a small group of field-level operations experts charged with identifying and implementing tangible and meaningful decarbonization initiatives on the ground across our 15 countries of operation. At the risk of losing some of the momentum, we ended up putting that effort on the side-burner temporarily to focus on getting our various pressing public disclosures past the finish line.

While we remain fully supportive of the broader efforts to streamline and mandate sustainability reporting standards, it does present significant and unique challenges for smaller companies. To stay afloat in this new reality, part of the solution will be for smaller companies to increasingly leverage digital platforms. Many will need to rely further on external consultants.

As we barrel toward the national implementation of the IFRS sustainability reporting requirements currently being considered by the Canadian Securities Administrators, it’s crucial that the small company reality be taken into account. And for those companies currently considering going public, this may serve as a useful reminder of some of the growing challenges involved in life as a reporting issuer.