Sandra Odendahl has been working in sustainable finance since before the term existed. Over her nearly 25-year career, Odendahl—who this spring joined BDC, the federal government-owned development bank, as head of sustainability and diversity—has watched the space gradually go mainstream, with more and more companies measuring and managing their emissions and the risks climate change poses to their business. 

Now, in a bid to formalize sustainable finance, regulators around the world—including in Canada—are instituting laws to hold big public companies accountable for their impacts on the climate. 

Most legislation in the works, however, doesn’t capture the trillions of dollars controlled by privately-held companies, leaving stakeholders like Odendahl worried about the potential for missed climate targets. 

“Most of [my career] has been spent thinking about the large actors,” she said. 

“It’s important to have the largest players with the most capacity and the biggest impacts start to move the needle. But we are not, as a society, going to get to net zero without small- and medium-sized businesses.”

The Canadian Securities Administrators—the umbrella organization that oversees Canada’s provincial and territorial securities regulators—is one of the growing number of bodies around the world creating rules to govern how publicly-traded companies manage climate risk. 

The proposals in Canada, the U.S. and elsewhere would require those companies to provide detailed reporting on their carbon emissions and plans to reach net zero. Climate-finance advocates see such rules as an important part of the effort to shift capital from carbon-heavy assets into those that contribute to a net-zero global economy. 

The public companies the regulations would target, however, are already doing more on the climate front than their private counterparts.

A report from management consulting firm Bain & Company and CDP, a non-profit that operates a climate-disclosure framework, found that 64 per cent of public firms by market capitalization report environmental information, compared to just one per cent of private firms. 

“For our public companies, they have a bit more pressure on them that they’re going to have to meet the regulatory [standards],” said Shelley Gilberg, national ESG markets lead at professional services firm PwC Canada.

Gilberg said the absence of private-market regulations shouldn’t exempt these firms from establishing environmental, social and governance plans. And in some ways, she said, they’re in a better position “to do ESG right.”

One reason, she said, is that public firms may focus more on filing reports to meet disclosure standards rather than on actual actions, like decarbonizing their supply chains, for example. 

“They’re not trying to respond to ratings agencies’ checklists…and trying to figure out, ‘how do I tick all these boxes?’” said Gilberg. “They’re able to narrow in and say, ‘what do my customers care about? What do my employees care about?’” 

Not having to hit quarterly targets or beat analysts’ expectations also lets private firms do the kind of long term planning that climate-risk mitigation requires but that can negatively impact returns in the short-term, said Gilberg. 

Lucy Hargreaves, head of public affairs and policy at Patch, a carbon offset software platform, said there are real barriers for private firms to create credible and effective climate plans despite the impetus to act. It takes time, money and people—resources that can be scarce for small and mid-sized enterprises. “Unlike large companies who have multi-person sustainability teams to think about these things, medium sized companies don’t,” said Hargreaves. 

It can be confusing for smaller companies to navigate the growing range of climate-risk disclosure and planning systems, a concern Hargreaves said she heard resoundingly from company representatives at COP27 in Egypt last month. 

It’s an issue Odendahl is grappling with at BDC, in the development bank’s own business and in its role as a founding member of an OECD initiative to extend sustainable finance practices to small and medium-sized enterprises. The scores of existing frameworks for climate reporting don’t always work for SMEs, she said, businesses that often don’t have the tools to measure emissions, for example.

“The approach that we’re taking is: How do we advise our clients on where to begin? How do we provide them with right-sized tools and templates and advice that make sense for the size and scale of their business?” That involves striking a balance between a tailored approach and one that can scale, said Odendahl.

“It’s a tension between too much complexity and too much simplicity that gives you useless results.”

BDC—which invests in startups and venture capital funds, as well as lends money to entrepreneurs—doesn’t have formal processes for evaluating the climate risk and impacts of their clients and portfolio companies. But Odendahl said BDC will sometimes gather environmental information, like energy usage from buildings or transportation, to help determine how to advise or finance a client. 

“Our goal is indeed to have environmental and social considerations embedded in the way we do everything,” said Odendahl. “Are we there yet? I don’t think so. But there’s pockets where it’s totally happening.” 

For larger private firms, pressure is mounting from investors. Canada’s largest pension funds, for example, look at ESG factors in all portfolio companies, regardless of size or market status. 

CPP Investments evaluates all companies’ climate-related risks and opportunities. Caisse de dépôt et placement du Québec (CDPQ) specifically asks all firms to disclose climate risk and plans using the Task Force on Climate Related Financial Disclosure, a widely used framework through which firms report their direct emissions and supply-chain emissions, and set targets to manage down their carbon footprints. The pension fund allows “some adjustments” for smaller companies that don’t have resources to comply with the framework, said CDPQ spokesperson Kate Monfette in an email. 

“It is important for us to support companies at every stage of their development and accompanying them through the process of either presenting their first sustainability report or continuing to improve the disclosure is part of the expertise we bring to the table,” wrote Monfette. 

CDPQ and CPP Investments are among several Canadian pension funds—including British Columbia Investment Management Corporation, OPTrust and PSP Investments—that are part of the ESG Data Convergence Initiative. The global coalition of investors and investment managers is trying to create a common way to evaluate and compare climate plans and progress at private companies. “Lack of quantitative, comparable, longitudinal and meaningful ESG data… has made it impossible for investors to assess ESG progress and burdensome for companies to report on,” reads a statement on the group’s website. 

Earlier this month, the United Nations flagged the dearth of environmental tracking at private companies as a threat to net-zero targets. The organization’s Net-Zero Asset Owner Alliance urged members—global banking, insurance and investment firms that have agreed reaching net-zero emissions in their operations by 2050—to ramp up environmental requirements for their private portfolio companies, stating that the “uneven focus” on public companies in their climate strategies “is a risk that threatens alliance members’ portfolio-wide decarbonisation targets.” 

Gilberg said the gap between companies’ and investors’ interests in addressing climate change and their capacity to act is propelling a bevy of new climate technologies onto the market to help companies measure and manage their environmental impacts. “We scan the tech landscape around ESG solutions, and it’s proliferating like crazy,” she said. Six months ago, Gilberg said there were 110 companies with ESG solutions on her radar; now there are 240. 

“[Companies] are looking for solutions that can make a more seamless and more navigable process,” said Hargreaves, who said that’s why firms are attracted to platforms like Patch, which connects carbon-credit buyers with vetted suppliers. “That’s everything from footprinting your emissions, to developing a net-zero plan, and understanding how to reduce your emissions, and then what portion of your plan is going to involve purchasing carbon credits.” 

Gilberg thinks tech can also help ensure smaller and private-market companies’ climate plans are credible in the absence of regulatory oversight. “If you think about ESG reporting being the equivalent for public companies, it’s going to need to be at the same standard of: do you have risks and controls? Is this well vetted? Is it auditable?” she said. “That can’t happen without technology.”