Thank you.
According to Frédéric Bastiat, the difference between a good economist and a bad economist is that the latter considers only the visible impacts of public policies, while the former also considers the foreseeable impacts. In the current conversation about climate and the financial sector, the visible things are major financial institutions, such as banks and insurance companies, and large publicly traded companies. Small and medium-sized businesses are less visible, but they will nevertheless experience impacts in a foreseeable way. We are here today to ensure that you, as legislators, do not forget to consider them as you're making your decisions.
Regulatory bodies and consultants are putting a lot of pressure on the financial sector to disclose environmental, social and governance information in the annual reports of publicly traded companies. These are known as ESG reports.
Today we'll focus on one component of these reports, the environmental component, which always includes calculations of scope 1, 2 and 3 emissions. To understand what that means, let's look at an aerospace parts manufacturer at Mirabel. That manufacturer has to start by measuring the direct emissions from their manufacturing process. Those are scope 1 emissions. Then, it has to account for the emissions generated by operating its facilities: heating, cooling, electricity and so on. Basically, what that means is that the manufacturer has to ask Hydro-Québec what the carbon intensity of its electricity production is. Those are scope 2 emissions. Finally, the manufacturer must calculate and report emissions associated with its products for their entire life cycle, from supplier to consumer, until they reach the end of their useful life. That includes all emissions, from the mine where the bauxite was extracted to the use of the plane, to the recycler where the plane ultimately ends up at the end of its useful life. Those are called scope 3 emissions.
We're interested in the fact that scope 2 and 3 emissions are obviously counted twice because they refer to another company's scope 1 emissions, as well as the cost and complexity of the calculations.
Although the Office of the Superintendent of Financial Institutions, OSFI, did not see fit to estimate what this would cost Canadian SMEs, the U.S. Securities and Exchange Commission estimated that it would cost between $490,000 and $640,000 U.S. to implement these processes in SMEs in the first year. I don't know if you know a lot of small business owners, but I can tell you that the ones we talk to don't have that kind of money sitting in their bank accounts to pay an army of ESG consultants.
Some people say that small businesses would not be affected, because these requirements would only apply to publicly traded companies. The thing is, hundreds of SMEs are listed on the Toronto Stock Exchange, so they would be affected, and a number of other businesses would be indirectly affected.
To fully understand how these companies would be affected, let's revisit our aerospace parts manufacturer. This company might be an SME, but it's more likely to be a large manufacturer, such as Bombardier. The company's business relationships depend on the price, quality and reliability of its products. That's how it stays competitive. However, when Bombardier has to report on its scope 3 emissions, it will have to obtain that data from its suppliers, who will then have to request it from their own suppliers. As a result, even if SMEs are not directly targeted by these regulatory requirements, they may still have to pay the price and comply in order to keep their corporate customers.
As you study the relationship between finance and climate, we encourage you to keep in mind how many of the restrictions meant for big business end up having an indirect and disproportionate impact on SMEs, despite your best intentions as legislators.
Thank you.