In today’s rapidly evolving business landscape, integrating Environmental, Social, and Governance (ESG) principles is no longer optional—it’s essential. Implementing ESG initiatives and monitoring performance are now fundamental expectations from stakeholders. Governments are tightening regulations, financial institutions are factoring ESG risks into their decisions, and top talent seeks purpose-driven employers. Moreover, customers and investors are increasingly scrutinizing business practices and reporting.
While ESG is often associated with risk management, the benefits go far beyond that, leading to enhanced financial performance and brand trust. We’ll explore these advantages in future posts, but for now, let’s focus on the five major ESG risks every business leader should know as they get ready for 2025.
ESG Risk #1: Regulatory Push for ESG Disclosures for Public Firms
With the introduction of ISSB standards for ESG financial impacts in January 2024, endorsed by government agencies, Canada’s Sustainability Standards Board (CSSB) is actively working to adapt these standards for Canadian industries, with formal adoption expected by 2025.
In parallel, federally regulated financial institutions (FRFIs) in Canada must disclose Scope 1 and 2 emissions by the end of 2024, with Scope 3 disclosures required in 2025, under guidance from the Office of the Superintendent of Financial Institutions (OSFI).
Meanwhile, the U.S. SEC has mandated climate disclosures for public companies alongside financial information starting in 2024. For businesses, early alignment with these emerging reporting standards is key to meeting future regulatory expectations and mitigating compliance risks.
ESG Risk #2: Private Companies to come under climate and ESG reporting requirements
With new requirements for federally regulated financial institutions (FRFIs) to disclose Scope 3 emissions, many private Canadian companies will soon be compelled to report their Scope 1 and 2 emissions. For Canada’s 1.2 million SMEs working with large financial institutions or multinationals, these downstream Scope 3 obligations from both OSFI and the SEC extend reporting pressures to a broader network of private companies, as outlined in the previous risk.
Though Scope 3 reporting for private companies isn’t formally required until 2025, organizations should begin emissions measurement in 2024 to stay aligned with emerging Canadian and U.S. standards. Additionally, new transparency requirements from the Canadian Securities Administrators (CSA) and SEC regulations for ESG funds are pushing private funds to align ESG strategies with stricter disclosure standards, driving broader ESG accountability across private markets.
ESG Risk #3: Focus on the ‘S’ – Social Issues
This year marks a turning point in how Canada addresses its role as a global market leader and the impact of its supply chain activities on the rest of the world. Effective May 2024, Canada’s Modern Slavery Act mandates that companies with international supply chains, such as those in mining and apparel, report on measures to prevent forced and child labor. This intensifies due diligence requirements, as failure to comply could severely damage an organization’s reputation, limit access to capital, and result in substantial fines and legal consequences.
In the U.S., the SEC is expected to propose human capital disclosure rules in 2025, focusing on workforce diversity, employee health, and labor practices. These disclosures will provide stakeholders with a clearer view of working conditions within companies, furthering the push for transparency in corporate labor practices.
Looking forward, the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) will set standards for reporting on social factors such as inequality, fair labour, and human rights, with anticipated implementation by late 2025 or 2026. Together, these developments emphasize an emerging global focus on social issues in ESG reporting, highlighting the growing need for businesses to address and disclose their impact on people as well as the planet.
ESG Risk #4: Greenwashing Litigation
Greenwashing—the act of making misleading environmental claims—has come under increased scrutiny, and companies are now facing serious legal consequences. As of May 2023, over 1,500 climate litigation cases have been identified across 43 countries, with North America accounting for the largest share at over 1,600 cases1.
In Canada, the Competition Act has been strengthened under Bill C-59 to address greenwashing directly. Effective June 2024, companies are now legally required to provide substantiation for environmental claims, with penalties reaching up to $10 million for first offenses. This legislation adds new complexity to ESG reporting, reinforcing the need for integrity and accuracy in sustainability claims.
To mitigate litigation and reputational risks, companies are encouraged to seek third-party assurance to verify their ESG reporting.
ESG Risk #5: The Rise of ESG Assurance and Greenhushing
With the rise in regulatory scrutiny and stakeholder expectations, demand for credible and verified ESG data is growing rapidly. In fact, nearly all investors (94%) believe companies tend to overstate their sustainability efforts2, making third-party assurance a critical safeguard. Canadian investors now emphasize the importance of an external “stamp of approval” on ESG data to build trust and ensure transparency. The recently published International Standard on Sustainability Assurance (ISSA) 5000 standard provides a framework for third-party assurance of ESG data, ensuring its credibility and meeting the growing demand from investors for reliable, verified disclosures. The standard is currently voluntary but may become mandatory as regulators increasingly emphasize trustworthy sustainability reporting.
As ESG requirements tighten, companies that prioritize third-party assurance will stand out, earning stakeholder confidence and proactively mitigating risks of misreporting.
The five key risks outlined—regulatory demands, scrutiny on private firms, focus on social issues, greenwashing litigation, and the need for ESG assurance—highlight the critical role of robust ESG practices and reporting in safeguarding your business.
At YellowYellow, we’re here to turn these ESG challenges into growth opportunities. Let our experts handle the complexities of compliance and reporting, while you focus on what you do best—growing and running your business. We have the expertise to guide you through every step.
Book a discovery call with us today, and let us build a sustainable, resilient, and impactful future for your business together.
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