A major report published Monday says Canada lacks adequate rules around investing in an era of climate change.
The report, released by Principles for Responsible Investment (PRI), a body of financial institutions supported by the UN, ranks Canada as “a low-regulation jurisdiction” that relies on voluntary measures to align business investment with responsible climate action. PRI’s report recommends that Canada revise its laws to make climate concerns part of investors’ legal obligations.
PRI found that Canada lags behind other nations when it comes to regulating how pension funds and other asset managers consider the sustainability impacts of their investments. “Our own analysis shows that many Canadian investors may be interpreting their legal duties in ways that discourage them from considering sustainability impact goals, even where pursuing such goals can help them discharge their duty to achieve financial return,” the report says.
PRI urges federal regulators to provide clear guidance on how investors should go about incorporating sustainability factors into their decision-making, and how they should report on their progress toward sustainability goals.
Specifically, regulators should clarify when sustainability impacts can or must be considered by pension authorities in discharging their legal fiduciary duties (the duty of care by investors to their shareholders or pension fund members). And to avoid any doubt, regulators should declare that climate change is indeed relevant to a pension fund’s long-term financial performance.
Maintaining healthy, long-term financial returns depends on the viability of environmental and social systems, the report says. That’s particularly true with regard to climate change and the loss of biodiversity, for which the earth is reaching the boundaries of sustainability.
“The world is facing environmental and social emergencies – for example, the crossing of planetary boundaries – which pose material risks to the basic quality of life for current and future generations,” the report says.
“Canada still lacks the kind of economic policies that would signal to investors its long-term commitment to an equitable transition to a low-carbon economy,” it concludes.
Canada’s financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), has stressed the need for “sound climate risk management” in the country’s financial system. To date, however, OSFI has failed to implement a mandatory approach to risk management beyond a broad expectation that banks, pension funds and insurance companies disclose their practices.
Conservative backlash stifles ESG investing
There has been a growing trend of pension funds and other large institutional investors incorporating environmental, social and governance (ESG) factors in investment decisions. However, ESG investing remains far from being a business-as-usual practice, and there has been a backlash from conservative investors and politicians (particularly in the United States) who view it as politicizing investment decisions.
The financial and investment risks arising from climate change have been well documented by organizations such as the Financial Stability Board, an international body representing the world’s central banks. They include physical risks from flooding, extreme heat waves and other weather phenomenon; policy-related challenges as governments seek to transition away from reliance on fossil fuels; and risks that new technology will supplant existing businesses.
A report produced nearly four years ago by Canada’s Expert Panel on Sustainable Finance urged the federal government to clarify the concept of fiduciary duty to make it clear that long-term investors must consider “non-financial issues” that could undermine economic performance.
That panel was chaired by current Bank of Canada Governor Tiff Macklem and included such industry luminaries as Barbara Zvan, now chief executive officer at Ontario’s University Pension Plan, and Andy Chisholm, a board director with the Royal Bank of Canada.
The PRI report urges the federal government to take specific action to improve sustainable finance regulations. Under Finance Minister Chrystia Freeland, the federal government has been slow to respond to the expert panel’s recommendations.
ESG investing integrated
In an interview, Senator Rosa Galvez applauded the direction of the PRI report, saying she hoped it would prompt concerted action from Freeland.
Galvez introduced her own legislation, Bill S-243, the Climate-Aligned Finance Act, that reflects many of the PRI recommendations, but that bill is stalled in the upper chamber due to opposition from conservative senators.
“Integrating sustainability goals across the investment industry is critical,” Galvez says. “It is urgent for pension plans and other institutional investors, with respect to their fiduciary duty, to be looking at the long term, but they remain focused on the short term.”
