In October, the annual PRI in Person conference kicked off in Toronto with opening remarks from Luke Gould, the CEO of Mackenzie Investments, a Canadian leader in responsible investing and the lead sponsor of the event. “Sustainability is more than a buzz word. It is the most important progression in how we approach capital markets,” he told the gathered crowd. “Our commitment to sustainability is deeply rooted in the core values of responsibility, active ownership and transparency.”

Over the next three days, the conference convened discussions that highlighted the latest learnings, focus areas and key obstacles for the responsible investment community. Here are our top four takeaways from PRI’s 2024 conference, based on insights and conclusions from the world’s top responsible investors.

1. Sustainability disclosure is the new normal

Around the world, policies and regulations requiring companies to disclose their emissions and sustainability metrics have advanced at varying rates and to different stages of development, from barely nascent to quite mature. The European Union is leading the way with its sustainable finance taxonomy and Corporate Sustainability Reporting Directive. Meanwhile, Canada only recently released its plans to move forward with a green labelling taxonomy and a legal framework for corporate climate disclosures by major companies.

For investors, however, sustainability disclosure isn’t merely optional anymore; it’s essential. On a panel discussing Climate Engagement Canada – an initiative to foster dialogue between finance and industry for a just transition to a net-zero economy – TD Asset Management’s managing director, Priti Shokeen, said that her team now expects portfolio companies to make sustainability disclosures. Even if such disclosures are voluntary from a regulatory perspective, the information is critical for asset managers, especially now that they need to report their own portfolio emissions on ESG-labelled funds.

2. Engagement and divestment both have a role to play

The engagement versus divestment debate has been ongoing in the investor community. Since investors hold sway with companies as shareholders, the “engage” side of the camp argues that investors can more effectively push for change through active engagement. That is, by showing up to shareholder meetings and trying to steer portfolio companies toward decarbonization.

Pro-divestment groups argue that investors should sell shares in companies that operate in specific industries like oil and gas, for ethical reasons and to promote social change by making it harder for these companies and industries to raise capital. According to the Global Fossil Fuel Divestment Commitments Database, there are now 1,638 pension funds, philanthropic foundations and other groups worth more than US$40 trillion committed to fossil fuel divestment. Studies have shown that divesting really works, both to cause the stock prices of climate-damaging stocks to fall and to create additional financial value.

At the conference, it was clear that the responsible investment community has arrived at the conclusion that engagement and divestment should both be on the table, and that no one-size-fits-all approach works best for portfolio decarbonization.

“The idea that [the options are] either engage or divest is a bit of an antiquated, false dichotomy and doesn’t really reflect the reality that I have as an investor,” explained Joseph Bastien, trustee at the Wikwemikong Trust. “We buy and sell companies all the time for a variety of reasons, quite frankly.”

Investors can’t just divest from carbon-intensive industries and wipe their hands of their role in the net-zero transition, argued Deborah Ng, head of ESG and sustainability at GMO LLC. “If we don’t get real-world emission reductions, we’re not going to get to net-zero, and having a net-zero portfolio isn’t going to help,” she said.

3. Companies need transition plans that show capital-expenditure alignment with 1.5°C

It was clear at PRI in Person that investors are tired of waiting for governments to put regulations in place that will require companies to decarbonize. Carmen Velasquez, managing director for sustainable investing at Alberta Investment Management Corporation, said that her team provides specific feedback to companies on a case-by-case basis, from target-setting to scenario analysis – and that companies appreciate this.

But responding to this feedback with concrete metrics can be more challenging. For example, companies struggle to report how their capital expenditures align with a 1.5°C pathway. “There is no path to zero, so [we ask] how are you aligning capex over time?” Velasquez explained, describing how she helps companies think about sustainability reporting.

Company transition plans can help shine a light. “Disclosure defines the problem, action is required to address it,” said Mark Carney, the former governor of the Bank of Canada, during his plenary address at the conference. Reflecting on his work as a world leader in aligning finance with net-zero, Carney said that it took 10 years after the 2015 Paris Agreement for climate disclosure to become mainstream – and we can’t wait 10 more years for disclosures to be incorporated into plans for reducing emissions.

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“Governments should act now by adopting consistent and comparable taxonomies and mandating transition plans for large companies and financial institutions,” Carney said to a round of applause from the 2,000-person crowd. “Plan beats no plan. We are in a climate crisis. You need a plan to get out of it.”

4. Responsible investors must take a balanced and cautious approach to AI

“Can You Invest Responsibly in AI?” was the title of one of the final panels at PRI and a frequent topic of conversation among conference attendees.

There is a trifecta between AI, power demand and the need to decarbonize, said Kirsty Jenkinson, investment director at California State Teachers’ Retirement System. AI is going to present a considerable barrier to achieving net-zero goals, she explained, because of the exponential electricity demand required by the “hyperscalers” (the data centres and cloud computing companies that support modern AI).

On the other hand, AI could heighten and accelerate some of the shifts we need, such as in electricity-transmission bottlenecks. “Hyperscalers are paying massive premiums right now for carbon-free baseload power, [which] is creating opportunities for geothermal and other forms of [renewable] energy,” Jenkinson pointed out.

So how should investors evaluate companies’ use of AI from an ESG perspective? From ethics to privacy, cyber security, human rights and emissions, there are many overlapping ESG considerations that investors and companies need to consider to ensure that AI is being used responsibly.

It’s important for companies to include tech-literate people on their boards who are capable of judging whether it’s properly under control, advised Canadian AI expert Cameron Schuler, chief commercialization officer and vice president of industry innovation at the Vector Institute. Often corporate governance is the least frequently discussed pillar of the ESG framework, but the rise of AI means that responsible investors will need to take a closer look at how company executives are managing the risks it presents.

Jessica Carradine is project lead on Corporate Knights’ Climate Dollars initiative.

The post Four key lessons from the world’s top responsible investors appeared first on Corporate Knights.

In particular, the budget, released Tuesday, failed to clarify how the government plans to make up for its $14-billion climate funding shortfall – the gap that Corporate Knights has identified between federal commitments and funds disbursed as of the end of fiscal year 2024.  

While the federal government didn’t trumpet climate as a priority in its main communications about the budget, new climate funding over the next 10 years was the single largest spending increase in the budget, with a total of $14.2 billion in new climate funding commitments through 2035, according to calculations by Corporate Knights.  Two-thirds of that climate funding is via clean-economy tax credits meant to expire by 2035, while most new spending items are fanned out over the next five years.

The federal government has upped the ante on its running tally of climate funding commitments from 2015 through 2035, from more than $120 billion in Budget 2023 to more than $160 billion in Budget 2024. (While $40 billion in climate spending has been announced this year, only $14.2 billion of that was new in this budget.) But Budget 2024 reissued the same drawn-out timeline for the five climate-investment tax credits that were announced last year. And most of the new spending is backloaded into future years, with less than $1 billion flowing in 2024 to close Canada’s climate funding gap.  

When it released the 2022 budget, the federal government estimated the overall climate funding gap in Canada to be up to $125 billion per year. Over the next 10 years, planned federal climate investment averages $15 billion per year, mostly in the form of investment tax credits. 

This leaves a gaping hole of up to $110 billion a year, which the federal government along with other levels of government and the private sector will need to fill if Canada is going to meet its climate commitments and seize upon clean-economy growth opportunities.  

The federal government expects investments and tax credits for carbon capture, utilization and storage and clean technology to receive royal assent by June (six months after they were introduced in Parliament). It also plans to introduce legislation for the other previously announced tax credits for clean hydrogen, clean technology manufacturing and clean electricity this fall. The government plans to introduce a sixth climate-investment tax credit announced in this budget, called the Electric Vehicle Supply Chain Investment Tax Credit, in 2025. 

The government now estimates that its suite of climate-investment tax credits is worth up to $93 billion, up from $80 billion in Budget 2023. Normalized to gross domestic product, this would translate to about $1 trillion in the U.S., on par with the higher end of clean-economy funding the U.S. Inflation Reduction Act will provide.  

Considering that the lion’s share of the federal government’s planned climate funding over the next decade is via tax credits, it is concerning that none of the government’s six clean-economy tax credits worth $93 billion has yet been passed into law. 

But the government’s current timeline indicates that the most recently announced tax credit for EV supply chains may not be passed into law until after the next federal election. As the United States showed with the Inflation Reduction Act (with total climate spending ranging from $369 billion to $1.2 trillion), targeting clean-economy growth through more straightforward tax rebates tied to actual clean-economy outputs (such as kilograms produced of clean hydrogen), it is possible to move much faster with larger sums of money.  

 The federal budget’s running tally of climate funding commitments through 2035 leapt by almost $40 billion over the past year to $160 billion.

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In a pitch to convince foreign investors to put their money in Canadian industries, Freeland said the federal government has “a suite of policies for the industrial transformation” worth around $120 billion. She pointed to federal climate initiatives such as the $15-billion Canada Growth Fund and more than $80 billion being rolled out in clean investment tax credits.

But there’s a major caveat to all of this: no one is tracking actual investments in the green technologies and infrastructure we need.

At least no one was tracking them until now.

Analysis from a new report from Corporate Knights’ Climate Dollars initiative shows that the federal government is at least $14 billion behind on rolling out the climate funding it had committed to spending by now. And since 2015, there has been a 30% shortfall between what the government has committed to spending on climate and what it has actually invested. It’s critical to close this climate-investment gap in order to close the emission-reduction gap.

By properly tallying up climate investments, starting with the federal government and large corporations, Climate Dollars aims to establish an accurate baseline of where we are at now versus what is required to ensure that Canada meets its 2030 emission-reduction commitments.

“With this report, Corporate Knights has given us a valuable and readable scorecard that highlights federal government initiatives to address climate change across departments and policy instruments. What was promised? What has been delivered?” writes Kevin Page, the president of the Institute of Fiscal Studies and Democracy and former parliamentary budget officer, in the inaugural Climate Dollars report, Committed and Actual Federal Government Climate Spending. “We need this information to assess, debate and adjust our collective plans to reduce carbon emissions.”

Not all countries making significant climate transition investments have had this lack of public accounting on their progress. To document the impact of the Inflation Reduction Act (IRA) – the single largest investment in climate and energy in U.S. history – the White House has published an interactive map that illustrates the levels of investment in the climate transition across the country. In addition, a research team from Rhodium Group and the Massachusetts Institute of Technology has created the Clean Investment Monitor, which provides real-time tracking of all public and private investments in emission-reducing technologies in the United States.

Without this same level of public reporting and research, the knowledge gap in Canada looms large.

The Corporate Knights research team accepts this challenge. Our Climate Dollars initiative is tracking investments in climate solutions year-over-year and compares them against what needs to be spent to reach the country’s climate goals.

Our past research has shown that it will require about $126 billion per year in Canada, including public and private investment, to meet the country’s 2030 greenhouse gas emission target.

While Freeland’s $120-billion tally is a useful starting point, quantifying how much the Canadian government has already spent, going back to 2015, on climate solutions is a harder nut to crack. It requires reviewing budget documents, fiscal updates, economic statements, departmental reports and emission-reduction plans to create an inventory. The Climate Dollars inventory looks across departments, agencies, sectors and types of investments to track the climate-investment announcements, re-announcements and actual expenditures the federal government has made since 2015.

The inaugural report tells a story of the Canadian government’s efforts to both lead the economy through the green transition and position itself as a supplier to the global market. Our research shows that direct federal spending has thus far been the largest source of the government’s funding for climate solutions, followed by loans and equity investments, and then tax expenditures and refundable tax credits.

Going forward, tax expenditures and credits are set to become the largest form of public climate spending. Budget 2023 took an approach geared to compete with the IRA’s investment package and outlined five major investment tax credits: hydrogen; carbon capture, utilization and storage; clean technology; clean technology manufacturing; and clean electricity.

There are risks to climate policy initiatives that rely on the private sector, namely that public–private partnerships tend to be slow or continue to benefit the fossil fuel industry. However, as most capital expenditures in Canada are borne by the private sector, we need Canadian business leaders to rise to the challenge.

To confront the climate threat, we will require a mobilization of capital the likes of which has not been seen since the Second World War.

Tracking climate investments is key to understanding what we should be asking for, and where more funding is needed. It also bolsters accountability by measuring how much progress is made or not made, and why.

An economy in which investment is driven toward the right mix of climate solutions will help achieve an equitable transition to a net-zero economy. Climate Dollars takes the first step toward closing the “say–do” gap for climate investments in Canada, democratizing access to information on the severity of this complex issue and driving changes in policy and behaviour.

Jessica Carradine is project lead on Corporate Knights’ Climate Dollars initiative. 

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