We surveyed over 100 major public and private sector contracting authorities and 1,251 SME suppliers to large private and public sector companies in Canada. The study revealed that large corporate buyers of goods and services increasingly want to work with sustainable organizations. The shift to sustainable development is therefore a necessity for companies of all sizes.
The good news is that SMEs that adopt sustainable practices will reap benefits. For example, they will be offered new business opportunities, will have an easier time recruiting and retaining staff, and will improve their access to financing and investment.
What is sustainable sourcing?
Investors and other stakeholders are increasingly demanding that large companies report on their ESG performance. Globally, the rate of ESG reporting by large companies has increased from 18% in 2002 to 79% in 2022.
These new requirements encourage large companies to integrate their supply chains into their ESG performance reporting. They in turn pass on these ESG performance requirements to their suppliers, a practice called “sustainable sourcing” (or “responsible sourcing”).
Sustainable procurement is a process of acquiring goods and services that, in addition to quality and cost criteria, also takes into account ESG criteria. As part of this process, purchasing organizations ask suppliers to report on their ESG practices.
Sustainable procurement contributes to a circular economy by reducing the negative environmental and social impacts of purchased goods and services throughout their life cycle. This process considers how a product’s life cycle can have minimal negative impact, from purchase to after use.
Examples of ESG criteria related to supply chains
Environmental Social Governance
Greenhouse gas (GHG) emission reduction practices (energy and transportation efficiency, clean energy sources)
Reduction of waste and water consumption
Ecodesign / Life cycle analysis
Improving biodiversity
Diversity, Equity and Inclusion Practices
Community Investments and Staff Volunteer Program
Social integration initiatives
Sustainable development policy
Environmental and social risk management
Sustainable development training
What ESG reports do clients request?
In Canada, 82% of large prime contractors currently require their suppliers to meet at least one ESG criterion. Of the 18% that do not require anything, more than half (56%) planned to begin making requests within two years of the November 2022 survey. The proportion of large prime contractors that have ESG requirements for their suppliers is therefore expected to increase to 92% by 2024.
As part of our survey, we asked clients what criteria they requested a report on from their suppliers.
In terms of the environment, reducing energy consumption was the most frequently requested reporting criterion. Other areas included packaging choices, improving waste management, reducing greenhouse gas emissions in transport, and using clean energy sources.
On the diversity, equity, and inclusion (DEI) front, buyers are overwhelmingly seeking information on the diversity of their suppliers’ workforces . They are also demanding information on their suppliers’ community investments and support for employee volunteerism.
In terms of governance, the majority of clients told us that they request information on environmental risk management procedures. Support for the mental and physical health of staff and social risk management procedures are among the other governance criteria for which information is commonly requested from suppliers.
The three main requests for information from major Canadian clients regarding ESG practices
Percentage of major clients requesting information on ESG criteria
ESG practice requirements should benefit Canadian suppliers
Applying ESG criteria in procurement is expected to have a fusion database positive impact on the proportion of SMEs that supply large organizations in Canada. In fact, 41% of large contractors surveyed indicated that applying social standards to their procurement practices will have an upward effect on the use of Canadian suppliers, compared to 25% who believe the opposite. This positive effect is also observed with respect to environmental and governance aspects.
For example, large companies working to reduce their carbon footprint will likely seek to source more locally to reduce the transportation distances of certain goods, which is a major source of greenhouse gas emissions.
Entrepreneurs welcome ESG practice requirements
The majority of Canadian business owners welcome ESG requirements. In our survey, three-quarters of Canadian suppliers indicated that they believe adopting ESG practices will benefit their business.
This is especially true among diverse business owners. Members of the LGBTQ2+ community, people living with disabilities, people under 45, visible minorities, immigrants and Indigenous people are more likely to say that adopting ESG practices will benefit their business.
Proportion of supplier companies that find it beneficial to adopt ESG practices
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Business owners who see the benefits of adopting ESG practices
Chart, Business owners who find it beneficial to adopt ESG practices
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Source: BDC, Sustainable Development Survey of SME Suppliers in Canada, November 2022, n = 1,251.
Adopting ESG practices has concrete benefits
Suppliers that have implemented ESG practices tend to generate more profits than those that have not, but only slightly. This confirms the results of a previous study that showed that the most environmentally proactive SMEs record higher profit margins, in addition to experiencing stronger growth in their turnover, than those that are less proactive.
Proportion of companies that are profitable at various levels of ESG adoption
Chart, Proportion of companies that are profitable at different levels of ESG adoption
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Source: BDC, Sustainable Development Survey of SME Suppliers in Canada, November 2022, n = 1,251.
Overall, the adoption of ESG standards has positive effects. It is likely to generate new opportunities and allows companies to record, in the long term, a larger volume of business. The impact is also positive among employees, who generally view these changes in a positive light, which promotes the emergence of a sense of belonging. Access to financing and investments is also easier.
However, implementing ESG practices comes at a price.
While there are many benefits to adopting ESG practices, there are concerns about the additional administrative work and increased operating costs associated with having to comply with new standards.
Integrating ESG standards may require obtaining a new certification. This requires documenting production or service delivery processes and providing evidence that the obligations are being met. This exercise takes up staff time and sometimes involves external consulting costs.
Among the means put in place to comply with ESG requirements, 31% of SMEs hired a specialized resource and 27% called on external specialists. A quarter of supplier SMEs also used an external audit firm to demonstrate that their practices met the standards.
