Sources: WHO, UNICEF, Atlas of Canada, Grundfos, U.S. Energy Information Administration, U.S. Geological Survey, Environment Canada

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While the private sector took a back seat in Copenhagen, it was front and centre in the lead-up to Paris. Close to a hundred Fortune 500 companies joined the White House-led American Business Act on Climate Pledge, while six of the largest banks in the U.S. issued a call for leadership and cooperation among governments to ensure a strong global climate agreement was reached. Fourteen major food and beverage company CEOs soon issued a joint letter calling for similar action.

Earlier in the year, Europe’s top oil and gas companies had urged governments around the world to introduce some form of carbon pricing. Last September, nearly 350 global institutional investors representing over $24 trillion (U.S.) in assets also demanded that governments adopt carbon pricing and push towards an ambitious global climate deal.

Climate laggards are certainly still easy to come by in the corporate world, but a UN Global Compact-Accenture CEO study commissioned in the run-up to COP21 demonstrates how far the goalposts have moved since 2009. Ninety-one per cent of the 750 business leaders from UN Global Compact participant companies polled agreed that they thought climate was a key issue for their future success, while only 33 per cent thought business was doing enough (see here for an expanded look at what companies are doing to adapt to a 2 C world).

Companies increasingly understand that prioritizing sustainability reduces uncertainty and increases competitiveness on a range of issues that go beyond the clear threat of resource scarcity. The range of social, environmental and governance indicators analyzed in Corporate Knights’ Top 100 Most Sustainable Corporations in the World ranking reflects that.

Issues such as tax avoidance have continued to grow as political hot buttons, with the OECD drafting proposals for dealing with profit shifting and the G20 working together to strengthen enforcement measures. Even noted demagogue and U.S. presidential candidate Donald Trump has seen the political benefit of decrying corporate tax avoidance while on the hustings.

A recent report by the UN Principles for Responsible Investment warned that companies were growing more vulnerable to unexpected increases in tax liability as enforcement action picks up steam.

The companies comprising the 2016 Top 100 Most Sustainable Corporations in the World are those tackling these sustainability problems head on. They are leaders in transparency, in resource productivity and on a range of other social and governance indicators.

Leading the pack is BMW, the German automaker that leapfrogged five competitors this year to take the top spot. Efforts to reduce its carbon footprint, an emphasis on electric vehicles and other governance decisions like linking the salary of its senior executives to their sustainability performance were responsible for its stellar performance (see here for an expanded profile on BMW).

Following close behind was Dassault Systemes, a French software company, and Finnish engineering firm Outotec.

European companies continued to dominate the ranking, comprising 53 per cent of the total. North American companies made up 27 per cent of the remainder, followed by a combined 20 per cent from Asia, Africa and Australia.

There is some evidence that legislation meant to enhance corporate sustainability performance has had an impact on the results. Two countries that have made significant strides in recent years to improve corporate reporting practices – France and England – feature 18 companies in the Global 100. French lawmakers have instituted stronger sustainability disclosure rates through provisions in the Grenelle II Act and are in the process of finalizing regulations establishing mandatory investor disclosure rules regarding climate risks.

The U.K. government, meanwhile, became the first country to require listed U.K.-incorporated companies to disclose greenhouse gas emissions. Today, fully 100 per cent of companies on the FTSE 100 (a share index of the 100 London Stock Exchange companies with the highest market capitalization) disclose their carbon emissions.

Much of the Global 100 performance data demonstrates continued improvement over 2015 results. Water disclosure rates increased from 95 to 97 per cent, while waste disclosure went up six points to 99 per cent. Eighty-seven companies on the Global 100 have now introduced some form of executive compensation based on sustainability performance, up from 85 last year.

These rosy numbers do not hold true across the spectrum. While the number of female board members did increase from 23.7 to 25.6 per cent, the number of senior female executives remained stagnant at 16.8 per cent. As Susan Goldberg explains here, corporate diversity efforts need to look beyond the boardroom into senior executive positions and beyond.

Research and development funding also dropped as a percentage of revenue to 4.4 per cent from 4.6 per cent, likely a function of the weakening global financial picture. Perhaps most worryingly, the CEO to average worker ratio crept up to 90:1 from 88:1.

Corporate Knights’ methodology has been tweaked over the years, but we are mindful that it remains an imperfect method of measuring corporate sustainability performance. Our emphasis remains on using publicly disclosed, empirical data on a range of indicators that have been linked to sustainability through research and analysis, but we are always looking for ways to improve our rankings going forward.

One interesting option involves a green industry score. For the Decarbonizer tool discussed here, Corporate Knights began to use a screen that rewarded companies that were deriving at least 20 per cent of their revenues from environmental markets or new energy. This will be under consideration as either a screen or an additional indicator in the Global 100 ranking in years to come.

Click here to go back to the ranking landing page.

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The Global 100 index (which is equally weighted) commenced on February 1, 2005. The Global 100 is calculated by Solactive, the German index provider. It is available on Bloomberg under the ticker <CKG100 Index> and on Reuters under the ticker <.CKG100>.

It is maintained by Corporate Knights, a Toronto-based media and investment advisory company.

To learn more about the Global 100 Index, sustainability research and benchmarking services, please contact global100 [@] corporateknights.com

Click here to go back to the ranking landing page.

The post 2016 Global 100 results appeared first on Corporate Knights.

However, one company, BMW Group, has earned some sustainability bragging rights for a wide range of measures from energy, water and waste reduction to innovation and diversity. That has propelled the German-based automaker to the top spot on Corporate Knights’ annual Global 100, an index of the most sustainable corporations in the world.

BMW, formally known as Bayerische Motoren Werke, moved into first place, up from sixth place last year, after scoring above 80 per cent in eight of the 12 key performance indicators used to build the rankings. The company’s high scores were in areas such as energy, waste and water reduction and a perfect 100 per cent for linking the salary of its senior executives to their sustainability performance.

Ursula Mathar, vice-president sustainability and environmental protection at BMW Group, said the company hasn’t changed its focus over the past year, but she believes the results reflect “constant engagement and continued work” across the firm.

“What we are trying to do is integrate sustainability in all functions,” she says, citing the company’s 30 production and assembly plants in 14 countries and approximately 6,000 dealerships in 140 countries.

While many companies make similar claims about corporate-wide sustainability practices, BMW has developed a good reputation for its work to try to reduce its environmental footprint. The company points to its most consumer-facing examples: its battery-powered BMW i3 vehicle, the plug-in hybrid BMW i8 models and the more recent BMW X5 plug-in hybrid.

These models, alongside improvements to the weight of the vehicles to make them more energy efficient, have helped BMW report a 4.4-per-cent drop in average fleet carbon dioxide emissions per kilometre in 2014, to 152 grams of CO₂ per kilometre versus 159 g of CO₂/km in 2013. Average emissions were lower in Europe, at 130 g of CO₂/km in 2014, and higher in the United States and China, at 168 g of CO₂/km and 176 g of CO₂/km, respectively. BMW said the regional differences in fleet consumption are due to difference in the types of cars purchased by consumers in those countries. For example, more Europeans tend to buy smaller vehicles compared to the consumers in the U.S.

The company also reported a “major breakthrough” in power consumption in 2014, with more than half of its electrical energy worldwide now coming from renewable sources.

Stronger action around sustainability has also improved the company’s bottom line, which also makes it more competitive and attractive to shareholders.

“Energy efficiency has advantages from an ecological point of view and an economic point of view,” says Mathar.

For example, BMW said it reduced its volume of resources used – including waste, water and energy, as well as its emissions per vehicle produced – by an average of 6.7 per cent in 2014 compared to a year earlier. That led to savings of €15.8 million (US$16.8 million) in 2014. Between 2006 and 2014, BMW said it reduced both the volume of resources used and the emissions per vehicle produced by an average of 45 per cent, saving about €160 million (US$170 million) during the period.

By 2020, the BMW Group has a goal to reduce waste per vehicle produced by 45 per cent compared to 2006, “to the extent that this is technically and legally possible,” according to its 2014 sustainability report.

Where BMW fell short in this year’s CK ranking was in safety, scoring just over 55 per cent.

Mathar says there were no fatalities or other major incidents across its global operations, and believes the lower score is likely due to a broader net the company is now casting to measure its occupational health and safety performance. That includes not just employees on the production line, but also sales people in dealerships and other occupations across the company.

“We are making it more robust to include more employees worldwide into the measurement,” she says.

BMW had a perfect score when it came to the clean capitalism pay link, which measures the connection between compensation of senior executives and the sustainability performance of their teams. At BMW, the better the performance, the higher the pay.

“We don’t only have financial targets to measure the performance of employees, but very specific sustainability targets,” Mathar says.

She says the link helps to encourage employees across the company to work with sustainability always top of mind.

“Sustainability is one of the core values of the company.”

Click here to go back to the ranking landing page.

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Corporate Knights releases the Global 100 Most Sustainable Corporations in the World list in Davos for a reason. We want to make sure the world’s business elite are on hand to witness which of the largest companies around the globe are becoming more resource-efficient and socially responsible, and making meaningful improvements to their governance structures.

It’s both an acknowledgement that some firms have been taking bold and encouraging steps in the right direction, as well as an opportunity to point out that no company is doing enough.

The association with the Davos Man does have its drawbacks. This less than flattering term, originally coined by political scientist Samuel Huntington, connotes insular yet globe-trotting male elites who hold themselves in high esteem – hardly a group that needs another round of backslapping and self-congratulation.\

Many of these same elites played integral parts in bringing about the conditions that led to the financial crisis of 2008, a catastrophic event that few have taken ownership of. It seems a little soon to be looking to them for global leadership on such a crucial issue as climate change.

There’s also the indispensable role that the private sector has played in getting us to the precipice of climate mayhem. One oft-cited 2013 study demonstrated that just 90 companies were responsible for 63 per cent of global carbon dioxide and methane emissions between 1751 and 2010.

The banners held aloft by activists at the Paris climate talks and elsewhere point the finger squarely at Big Corporation. Surely these same companies can’t be viewed as part of the solution?

It doesn’t help matters when many of these same companies have either directly lobbied, donated to or empowered trade groups to muddy the waters and spread climate change denial over the past few decades.

But where does this leave us?

Some leading climate voices like Naomi Klein believe climate change can only be tackled by dismantling our current form of capitalism and ushering in a new age of “managed degrowth,” rendering the modern corporation all but obsolete.

Instead of extinction, we at Corporate Knights are advocating for the reinvention of capitalism in a cleaner form. It entails using the power of markets to grow an economy grounded in a golden rule: Business and society must succeed together.

Crafting this economic system is going to require heavy lifting from citizens, elected officials and corporations alike, particularly when confronting the threat of rising global temperatures. Each of them will need to hold the others to account and pressure one another to do more.

Some impetus will continue to come from mass mobilization, what environmentalist Paul Hawken describes as “the largest movement the world has ever seen.” Other pressure needs to come from economic and political leaders. Each camp has a corresponding role to play.

One poignant example of this is the threat of stranded assets and unburnable carbon. The fossil fuel divestment movement has successfully forced the issue onto the table across much of the western world, beginning with university campuses and spreading out from there.

At the same time, the idea that combating climate change will entail leaving fossil fuels in the ground has begun to gain credence in the financial community thanks to members of the “club” speaking out in favour of it. Economic elites such as IMF managing director Christine Lagarde and Bank of England governor Mark Carney (see here for an in-depth profile) have sent signals to global markets in a way that the popular divestment movement isn’t quite able to.

This is why we’re going to need some Davos Men, and Women, at the solutions table.

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As an organization’s most important and visible decision-making body, boards are an obvious target for scrutiny when it comes to assessing gender diversity. For the record, the numbers indicate that parity is a long way off. According to Catalyst’s 2014 Census, women occupied 19.2 per cent of board seats at U.S. stock index companies and 20.8 per cent of seats at Canadian firms.

But in our ongoing focus on boards, are we missing out on what diversity at other levels can show us?

Corporate Knights’ Global 100 ranking methodology was changed several years ago to incorporate a diversity score that measures both board and senior management diversity. The majority of corporate and legislative efforts, however, continue to focus on the board side.

“I’ve wondered for some time why there’s such an exclusive focus on boards,” muses Jennifer Berdahl, who holds the Montalbano Professorship in Leadership Studies: Women and Diversity at the University of British Columbia’s Sauder School of Business. It may be, she says, because boards are subject to more regulation, because it’s generally easier to appoint a woman to a board than to have her hired in a C-suite position, or because board gender diversity is somewhat easier to track and compare.

But there are caveats to focusing too exclusively on diversity at the board director level. “When you appoint a woman to the board, she’s one of many voices around the table,” Berdahl points out. “A CEO or CFO is a singular voice, and therefore much more powerful – which might be why we see fewer women in these positions than on boards today.” In 2013 (the most recent year for which Catalyst has comparable data), women occupied 22.9 per cent of all senior management positions in Canada, while in the United States, women held a stagnant 14.3 per cent of executive officer positions at Fortune 500 companies.

Berdahl also points out that when women are a distinct gender minority on a board, they have less influence (although the opposite holds true for men). She points to research that shows that when boards lose a woman, they tend to replace her with another woman, thus perpetuating the idea that female members are there primarily to represent “the women’s position.”

Further, because boards are at the top of and relatively separate from the day-to-day running of the organization, their gender diversity may have less of an impact. “C-suite people,” Berdahl points out, “have much more influence over creating a work context and climate” that can lead to more support for and recognition of women’s capacity as leaders.

There’s no linear, one-way relationship between the numbers of women in executive positions and on boards, says Rachel Soares, director of research at Catalyst. While more women in the C-suite presumably gives rise to more female board candidates, it’s also true that companies with more women on their boards had greater representation of women at senior management five years later. What’s more, notes Soares, in these cases the women leaders are far more likely to be in the profit-and-loss positions that have been shown to be so valuable for CEO succession and board service.

Both researchers also point to the fallacy that lack of CEO experience is a valid reason for women’s underrepresentation at the board level. A 2012 Catalyst study, for example, revealed that more than 60 per cent of Financial Post 500 board directors do not have CEO experience. Still, women without that notch on their resumes are more likely than non-CEO men to be passed over for board positions, notes Berdahl.

One take-home is that companies and shareholders need to realize that the CEO title alone isn’t a competency for board service. Another, says Soares, is that organizations would do well to groom leaders beyond the (usually male-dominated) CEO successor shortlist for board service, by appointing women to their own or trusted external boards. “We see men benefiting from that relationship more often. But it is one tangible [strategy] that companies can put in place to really focus on the connection between women officers and women directors.”

In short, the relationship between women’s representation at senior management and board levels is complicated and intertwined. And while there may well be some benefit to teasing out the complexities of those relationships, Soares cautions against privileging one metric over the other. (In that light, it’s heartening that, in Canada, seven provinces and two territories have signed on to new requirements for listed companies to disclose representation of women at both board and executive officer levels.) The focus, she says, should rather be on widening the scope and advancing the topic of women’s representation in leadership positions throughout an organization.

Because we don’t need another study to confirm what we already know: that diversity at all levels is good for business.

The post Boards are not enough appeared first on Corporate Knights.

It was last September, and Carney, presently the head of the Bank of England, had signalled to British parliamentarians that his institution, and the international Financial Stability Board, which he chairs, had just begun an in-depth examination of the systemic risks posed not just by climate change, but by the “unburnable carbon” thesis advanced by the Carbon Tracker Initiative several years prior.

According to the London-based group, the only way to limit global temperature increases to 2 C is to leave vast fossil fuel reserves in the ground – a scenario that could have cascading implications for not just the global energy sector but the investors and governments banking on future profits from those assets.

Carney, a central banker known for his keen interest in financial stability policy, was taking Carbon Tracker’s analysis seriously, and had chosen to venture deep into the heart of the industry most intimately associated with risk mitigation: London’s insurance sector and its most venerable player, Lloyd’s Register, the 325-year-old underwriting giant. After praising insurers for developing new products geared to emerging risks, including the accelerated pace of climate disasters, Carney challenged his audience to ponder the “tragedy of the horizon.” The long-term economic reality, he said, is that only about a fifth to a third of proven fossil fuel reserves can be burned if temperatures are to stay within two degrees of pre-industrial levels.

“If that estimate is even approximately correct,” he said, “it would render the vast majority of reserves ‘stranded’ – oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics.”

Noting that fully a third of global equity and fixed income assets are invested in carbon heavy companies, Carney followed with the sort of early warning that would have been familiar to anyone who watched as he sought to manage the fallout from the 2008 credit crisis. “The exposure of U.K. investors, including insurance companies, to these shifts is potentially huge.”

At the conclusion of the Paris climate conference, nearly 200 national governments pledged to balance renewables and fossil fuel-based energy by 2050 as part of their goal to cut emissions and keep average temperature increases to “well below” the 2 C cap. Developed countries pledged $100 billion (U.S.) per year to developing nations to finance clean energy.

But quite apart from the cumulative impact of these moves, Carney says the custodians of the global economy must begin to think hard about the fact that so much future wealth has been pegged to assets that may be stranded, and thus dramatically overvalued on corporate balance sheets and pension fund portfolios.

In an updated study released in late November, Carbon Tracker estimated that oil, gas and coal sectors have proposed $1.9 trillion in capital investments to access known reserves through 2035. If tapped, the emissions would exhaust the remaining carbon “budget” for the century – i.e., the total amount of fossil fuel that could be burned before the temperature noses above that 2 C threshold. But those investments are directed to extracting only about a fifth of all identified fossil fuel reserves.

Everything else, Carney told the financial executives at Lloyds that evening, is a “carbon bubble” that could potentially pop, or at least deflate rapidly, creating chaos in the global financial system.
How much chaos? “We estimate that the total value of stranded assets could be over $100 trillion based on current market prices,” concluded a report released by Citigroup in August.

The messenger

It’s not so much what Carney was saying, but rather that he was the one saying it. The unburnable carbon message has reached the mainstream with breakneck speed, being endorsed by major financial institutions such as HSBC, Citigroup and ratings agency Standard & Poor’s. The heads of the UN, the IMF and the World Bank have all endorsed its findings, while recent speeches by U.S. President Obama and other world leaders have also made mention of unburnable carbon.

But one no-go zone had remained the change-adverse world of central banking – until Carney began speaking up.

This message, says Carbon Tracker founder Mark Campanale, is especially challenging for the “City” denizens of London, and was best delivered by an outsider. “It would have been a difficult speech to give for an Englishman born into the English way of doing things.”

Beyond that, Campanale feels Carney’s speech at Lloyds ranks with Pope Francis’s heavily publicized pre-Paris homily about the moral imperative to tackle climate change. “It’s difficult to say which was more important,” he said.

Carleton University climate scientist John Stone, a vice-chair of one of the Intergovernmental Panel on Climate Change working groups, says Carney’s concern about the economic implications of global warming go back to his days as a senior policy official in Ottawa, when he’d listen intently to briefings on the topic. “He’s a very serious individual with an understanding of the urgent threat of climate change in economic terms,” says Stone, who compares Carney to Lord Nicholas Stern, the noted British economist and author of a ground-breaking 2006 evaluation of the economics of climate change.

To that gathering of underwriters, Carney also speaks a familiar language. “He’s the most credible of central bankers,” says Alison Kemper, a Ryerson University business professor who has studied the issue of strategically divesting an asset class as large as energy. “He’s remarkably respected.”

The headline in the Financial Times a few days after the speech read “Mark Carney’s climate warning splits opinion.” Love it or hate it, his message has proven impossible for financial markets to dismiss.

Getting stranded

Carney’s journey from his childhood home in Edmonton, Alberta, to a starring role in the climate mitigation drama has been anything but linear. He attended Harvard and later completed a PhD in economics at Oxford. Early in his career, Carney headed to New York and worked for over a decade as an investment banker at Goldman Sachs. Tiring of Wall Street’s relentless pace, he returned to Ottawa in 2003 on an invitation by then governor David Dodge to join the Bank of Canada.

A trim and famously self-possessed figure with a knack for marathon running, Carney spent only a year as a deputy governor before jumping to the federal Department of Finance, where he was involved with hot potato files, such as plugging the income trust loophole that allowed billions of dollars to bypass government coffers. In 2008, Carney was appointed to succeed Dodge, and almost immediately found himself dealing with the fallout of the asset-backed commercial paper (ABCP) fiasco, which involved the meltdown of a speculative market of junk-bond-style assets.

The ABCP debacle, of course, was a kind of trial run for the 2008 global credit crisis, precipitated by Lehman Brothers’ collapse. Canada’s banking sector survived the mayhem because in the years prior to the collapse, senior government officials, Carney among them, had pushed back against pressure from the banking industry to ease loan-loss reserve rules and allow more trading in the sort of exotic speculative investments that crushed financial institutions in New York and London.

In early 2009, G20 leaders gathered in London to consider the wreckage of the global economy. Carney, who was regulating a financial system that hadn’t imploded, emerged as an outspoken proponent of what he referred to as national and international “macroprudential” regulation – essentially, oversight bodies tasked with taking in the view from 40,000 feet. The credit crisis had revealed the multi-dimensional vulnerability of the global financial system, and showed how seemingly sturdy banking institutions like the Bank of Scotland or the ING Group could be waylaid by a frenzy of split-second trading in unregulated derivatives, some of which had no discernible connection to underlying assets.

Coming out of that recession, the G20 created the Financial Stability Board (FSB), at least partially because of Carney’s advocacy in favour of an institution mandated to prevent disasters. In Stephen Harper’s Ottawa, however, the central banking superstar had lost some his lustre after rumours surfaced that Carney had spoken privately with Liberal insiders about a possible political career. Unlike his predecessor, Carney left the post after just one term and accepted, in 2012, a gig as governor of the Bank of England – the first “foreigner” to have ever held that job, as the quality press in the U.K. was quick to note.

As Carney told The Telegraph, “I am going to where the challenge is greatest.”

Although Carney’s immediate task as incoming head of the Bank of England was to manage the ongoing fallout of the collapse of the U.K.’s banking sector while tightening oversight and accountability mechanisms, he soon found himself confronted by a novel analysis of the systemic financial risks of climate change.

Carbon Tracker chose a provocative title for its first report on the subject: “Unburnable Carbon: Are the world’s financial markets carrying a carbon bubble?” The authors pulled together scientific data on the pace of carbon loading in the atmosphere and the estimated book value of known fossil fuel reserves to calculate the maximum amount that could be extracted and burned, given the scientific and policy consensus on the tolerable limits of global warming.

“If you want to meet this temperature target, you can’t burn all those fossil fuel reserves,” explains Stone. “This was a relatively new argument in the whole theory of the greenhouse effect.”

The startling feature of Carbon Tracker’s analysis is that it moved way past the more established debate about the impact of carbon taxes or emissions trading credits on the price structure of energy and painted a radically different future for the fossil fuel sector, driven, as it is, by forward-looking exploration activity. A large part of a fossil fuel company’s share value is currently driven by the reserve replacement ratio, which means that future reserves should remain above 100 per cent. When a company ditches an expensive project, even if it’s not financially viable, it reduces its reserves and negatively impacts the stock price.

Roger Martin, a professor at and the former dean of the Rotman School of Management at the University of Toronto, argued in a recent Harvard Business Review column that oil executives are reluctant to cease or slow exploration efforts because any deviation from what is planned would signal to investors that even their current reserves are overvalued. “It’s not clear just how far their value would fall if the petroleum companies ever hinted that the end of their dance was near, but the drop would probably be monumental,” he wrote.

These implications fall squarely into Carney’s wheelhouse, because they expose deeply buried fractures – like those left in bedrock due to fracking activity – in far-flung financial systems. Major pension and mutual funds that hold fossil fuel stocks may be holding, and reporting, overvalued assets on their books, thus exposing policy holders and investors to long-term losses. Governments that rely on resource royalties base their forward fiscal planning on revenue assumptions that may prove to be shaky. And financial institutions continue to advance giant loans to energy multinationals based on balance sheets that could turn out to be littered with stranded or overvalued assets.

Action plan

Carney has since taken unprecedented key steps to uncover the subtle systemic risks linked to climate change. After an entire day dedicated to the subject of stranded fossil fuel assets, the FSB embarked on a detailed study on how best to create standardized disclosure rules meant to inform investors about the risk of potentially stranded fossil fuel assets.

In response to a House of Commons environment committee request, Carney last October also committed the Bank of England to expanding its investigation of the U.K.’s exposure to such risks.

At the Paris climate conference in December, Carney announced that the FSB is establishing an industry-led disclosure task force on climate-related financial risks under the chairmanship of former New York City mayor Michael Bloomberg. The task force will develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders.

It appears that Carney’s outspoken position on the risks of unburnable carbon has inspired Bank of France governor François Villeroy de Galhau to join the fray. In one of his first speeches since being appointed, he strongly endorsed both the Bloomberg-helmed FSB initiative as well as new French regulations requiring large institutional investors to disclose the carbon exposure in their portfolios. At the same time, he called for greater regulatory action to ensure that the financial sector falls in line with the 2 C carbon goal.

Speaking in French, Villeroy de Galhau told a conference held concurrently with the COP21 climate talks in Paris that these moves will allow stakeholders and the general public to get a better sense of the share of assets related to carbon emissions in the financial sector and its exposure to climate risks.

Whither Canada?

Such outspoken concern about stranded assets has not been on display in Carney’s former position at the Bank of Canada (BoC). A BoC spokesperson says the institution won’t discuss systemic climate-related risk embedded in the Canadian economy, describing such analysis as beyond its mandate. The Office of the Superintendent of Financial Institutions is somewhat more forthcoming, and says it monitors risk to banks and property and casualty insurers related to environmental catastrophes.

Should Carney’s successor at the BoC, Stephen Poloz, be publicly discussing the carbon bubble and the systemic risk to Canada’s economy?

“Of course Poloz should be honest with Canadians about the fact that emissions may be priced soon globally, and when that happens many assets in Canada, in particular those invested in the extraction of oil from bituminous sand, will be stranded,” says Bob Litterman, the former head of risk management at Goldman Sachs. “And I’m not sure he should be discussing it, but he should be aware that asset valuations can shift suddenly as perceptions change.”

Ryerson’s Kemper notes that jurisdictional divides – the provinces control resource policy – may be getting in the way. But she points out that oil revenue is so vital to the country’s economic future – with 12 per cent of the world’s proven reserves, Canada is second only to Saudi Arabia in terms of the extent of the resource – that the central bank needs to monitor threats to the resource and related industries, like transportation and pipelines. “It would be crazy to me that a central banker wouldn’t be thinking about that.”

Not everyone agrees. “You could start with a rhetorical question,” observes Hadi Dowlatabadi, Canada research chair and professor in Applied Mathematics and Global Change at the University of British Columbia. “Would Mark Carney have been able to suggest this [thesis] from his previous role as governor of the Bank of Canada? His approach would never fly in [Harper’s] Canada.”

Carbon Tracker’s Campanale has no such qualms. In his view, the Bank of Canada or Canada’s other macroprudential watchdogs need to unpack several key questions in order to take a reading of the quantum of the long-term risks. Officials should look at the degree to which Canadian capital markets are entangled with fossil fuel and related sectors, and then stress-test those markets, as bank regulators did five years ago with financial institutions, to get a picture of the impact of a “disorderly transition” away from fossil fuel. Campanale also thinks Canada’s pension overseers need to assess the long-term exposure of large public sector pension plans, like OMERS, to stranded assets linked to unburnable carbon.

Lastly, Campanale points out that Canada, as a member of the G20 and thus a participant in the FSB, should move to require issuers to do a much better job of disclosing stranded asset risk to investors. “Any central banker who has oversight over markets has to take a similar approach,” he says, adding that Carney has been clear about a key point, which is that markets will re-price these assets once investors know whether those future oil fields in Alaska or other hotspots will ever be able to produce.

In many ways, Carbon Tracker’s stranded assets campaign has spawned the noisy debate over fossil fuel divestment that grabbed headlines and dominated some political agendas in the past year or so. With Alberta, the U.K. and most U.S. states phasing out coal plants, and with large state pensions, philanthropic and sovereign funds hustling to decarbonize their investment holdings, it seems as if the dirtiest and most carbon-intensive fuels could soon be phased out, or at least consciously excluded.

The precipitous decline of coal and falling price of oil has allowed some analysts to demonstrate with real numbers the impact of holding on to high-risk fossil fuel stocks until they’re well beyond their best-before date. When Corporate Knights applied its Portfolio Decarbonizer to the University of Toronto’s endowment fund, the analysis showed that the pool would have avoided paper losses of half a billion dollars had it sold its carbon-heavy oil and coal assets three years ago.

Still, the pace of change away from carbon and towards a global-scale adoption of renewables is unlikely to be linear. Clean energy experts point to the accelerating decline in the price of solar energy in just five years – a dynamic driven both by the technology and China’s big bet on an industry designed to make the air breathable in its largest cities. One need only look at the information sector to see how epic, industry-crushing, industry-creating changes play out in a decade, or less.

It’s a point not lost on Carney, who is, after all, entirely comfortable in a room filled with people professionally predisposed to ponder what lurks around the next bend in the road. Towards the end of his barn-burning speech at Lloyds, he mused that green finance cannot possibly remain a “niche interest.” But in the next breath, Carney fretted about the converse – how a rapid transition to a low-carbon economy could unwittingly destabilize capital markets that were actually managing to wriggle their way out of a destructive addiction to depleting fossil fuels.

“In other words,” Carney said, flinging an economic paradox out into the crowd, “an abrupt resolution of the tragedy of horizons is in itself a financial stability risk.”

Not one to end on a sour note, the superstar of central bankers brought his talk back to the kind of language global bankers know well.

“The more we invest with foresight, the less we will regret in hindsight.”

The post The tragedy of the horizon appeared first on Corporate Knights.

In the past dozen years, many things have changed – particularly with respect to climate change, now widely acknowledged as a seminal challenge of our time.

Governments have shown up to address what economist Lord Nicholas Stern calls the mother of all market failures. According to the World Bank, more than half of all countries have committed to pricing carbon pollution and over 40 countries are already doing it. By this time next year, 90 per cent of Canada’s population will be living with a broad-based price on carbon.

The markets are beginning to reflect these changes. For the past three years, more money has been invested in renewable power generation than in fossil fuel power, according to Bloomberg New Energy Finance.

Perhaps the most powerful story is told by investment returns. Over the past five years to November 30, 2015, the FTSE Environmental Opportunities 100 Index (which tracks the 100 biggest companies with significant revenue exposure to environmental solutions) has crushed the MSCI World Energy Index (the main global index tracking 107 of the biggest oil, gas and coal companies). The FTSE EO 100 returned an annualized 8 per cent versus the MSCI World Energy Index at just 0.66 per cent.

Some market observers glibly dismiss this outperformance story as being purely based on a tough commodity market, but that is not accurate. Using the Corporate Knights Decarbonizer tool, a sector-neutral strategy that includes best-in-class companies from high carbon sectors on the S&P/TSX Composite would have beat the index by 6 percentage points over the past three years.

The attitudes of retail investors have also evolved. According to Morgan Stanley’s Sustainable Signals report, 71 per cent of investors are interested in sustainable investing.

Yet despite these developments, the total assets invested in mutual funds using environmental, social and governance criteria has grown to $8.4 billion but shrunk in relative terms to just 0.7 per cent of the overall $1.23 trillion Canadian mutual fund market.

Why is so little money being invested in sustainability-focused mutual funds and why hasn’t it grown?

A big historical reason has been the conventional wisdom of most individual investors and financial advisors that investing for good is bad for returns. But a raft of studies is serving to disprove this theory.

A recent study by Tessa Hebb at the Carleton Centre for Community Innovation comparing responsible investment (RI) mutual funds across various asset classes to comparable non-RI funds found that RI equity funds outperformed the average of comparable non-RI funds 63 per cent of the time.

The other reason is that the most responsible investment options are just not that compelling for the average investor. Most traditional RI funds hold the same stocks you would find in a regular fund, from the big banks to big oil. The differentiator is that the RI funds employ a strategy known as engagement where they work with companies on such matters as improving disclosures on climate risks and developing policies on human rights.

While this is important work, investors want to own companies whose primary activities are focused on solving big global challenges including climate change.

On this front, RI funds have been largely missing in action. There are some exceptions: the AGF Global Sustainable Growth Equity Fund has been a standout, with over 63 per cent of its exposure invested in companies providing environmental solutions. NEI Investments also recently added the NEI Environmental Leaders Fund to its offerings, which will allow investors to get exposure to companies solving big environmental problems.

The challenge for the average investor or advisor is how to make sense of which funds are leading the way. While the French government recently announced it will be introducing a label for investment funds in October 2016 to make it easy for investors to see which funds are leading or lagging the “energy and ecology climate transition,” no such scheme exists in North America.

To this end, Corporate Knights has launched the Eco-Fund Ratings to make it easy for Canadian investors to see which funds provide the best combination of economic and environmental performance. Of course, there are social factors that are also important to investors and we look forward to incorporating these factors into future ratings.

In this ranking you will see the top equity funds in four fund categories that best combine superior returns with a low carbon footprint and high exposure to companies earning revenue from the growing new energy and environmental market domains. We hope these ratings will be useful for investors looking to earn clean profits by aligning their portfolio with a better planet.

Click here to go back to the ranking landing page.

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Click here to go back to the ranking landing page.

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The hostility you’ll likely encounter reflects a quality in Canadians I call aquanationalism – the bonding of national identity with romantic images of clear lakes barely ruffled by a canoe’s passing, and the conviction that sooner or later the Yanks will come for our water.

Unhappily, these ideas create a kind of cognitive dissonance that shuts down rational thinking about water at the sound of the word “markets.” This is unfortunate because Canadians badly need a mature conversation about selling our water.

The need for such a conversation stems from numerous tributaries, so I’ll focus on just a few: humanity’s ecological overdraft; our national opportunity; climate change and our own ecological vulnerability. But also this: Canada already sells enormous volumes of water to the rest of the world.

A trickle crosses the border in pipelines, flowing from Canada into Sweetgrass, Montana, and Point Roberts, Washington, for example, in just the sort of bulk export that alarmists claim (inaccurately) could be used to trigger a call option in NAFTA, putting all of Canada’s rivers and lakes up for American seizure. The reasons why it does not are somewhat technical, but the upshot is that no such demands have ever been leveraged off those decades-old and continuing flows. It helps that Canada’s water is nowhere in the future-supply plans of any U.S. state.

Canada “sells” vastly more water embodied in commodities like beef or processed bitumen and in manufactured goods like cars and aircraft. This so-called virtual water is what’s required to produce those products. Water that’s used to make car parts isn’t available for other uses. Of course, that may be worthwhile if our society benefits as a whole from that tradeoff.

Some of this water can be used again. Cattle, after all, pee. Plants transpire water to the air that falls later as rain. Some of it can’t: much of the water used to produce and dilute bitumen is effectively lost – either locked away underground or too toxified for re-use in the foreseeable future.

And the volumes are mind-boggling. The Council of Canadians has estimated Canada’s net virtual water exports for all categories of product at 59.9 billion cubic metres a year. That’s roughly enough to empty Ontario’s Lake Simcoe every 72 days.

On the day last year when Alberta’s bitumen production hit three million barrels, the water consumed was the equivalent of sending a virtual convoy of Exxon Valdez-size tanker loads of Canada’s water south – one every two hours.

And even if Canadians would prefer not to think about those as water sales, the demands of the global marketplace, not just the United States, will make the subject unavoidable.

The broad effect of climate change on the world’s distribution of water can be stated as “the wet get wetter and the dry get drier.” Wet Canada is in fact getting wetter: precipitation over our national territory is rising.
But elsewhere, net declines in available water (the proper term is water yield: basically, precipitation less evaporation) are contributing to social and economic stresses, from the extreme in Syria or South Sudan, to the merely tense in Mumbai or the North China Plain.

The drying out and the increasing wetness are both happening simultaneously, with an edge to the getting wetter, since warm air holds more water. But in very broad terms, the sub-tropics – roughly that band of latitude extending from Mexico City to Denver, and its southern counterpart – are getting drier. Places north or south of those, roughly beyond the 49th parallels, are getting wetter.

Far more people live in the latitudinal band between Mexico City and Denver than do in the band in Canada between Vancouver and St. John’s. That’s not to say that the former are going to rush north and insist that the latter turn over their water. It’s much more complicated than that.

It is to say that water will increasingly preoccupy the minds of Canada’s neighbours and NAFTA partners. They are going to need to talk about it, and Canada should not be a silent partner.

The continental re-engineering feared by aquanationalists involving a continuous flow from the Yukon to the Chihuahuan Desert straddling the U.S.-Mexico border is a literal pipedream. There is not enough cement, energy or carbon budget to build such a monument. Nor money: cheaper alternatives exist to slake the thirst of Hollywood and Hermosillo.

But the issue of fertile land turning to desert will not go away. And as one of only half a dozen countries in the world able to expand food production for export, Canada will face both a humanitarian obligation and a market opportunity.

Of course, with each additional container of frozen pork we export, we also send more virtual water.

Meanwhile, there is money to be made in the technologies that deliver water more cheaply than gargantuan canals – a lot of money.

Currently, Israel and Germany dominate a global marketplace for water-related goods and services anticipated to reach $1 trillion (U.S.) by the end of the decade. Canada, despite its generous water endowment, is barely present.

In our refusal to countenance selling water, Canadians have sacrificed the best means to calculate its economic value (the verboten “putting a price on the priceless”), and thereby denied ourselves the best motive and means for being careful how we use it.

Canada is woefully, abjectly, lacking in comprehensive, real-time, consistent and granular data about its water supply, use or outlook. Despite local advances in a few watersheds, most authorities lack reliable metrics to support decisions about which water-reliant economic activities to promote or constrain.

Companies lack metrics to reveal which innovations to bring to market. Investors lack transparency about those companies at greater risk of water-related shock than their competitors.

And Canadians as a whole are left barely aware of a creeping but ominous risk. While Canada as a whole is getting wetter, the part where most of us actually live is getting drier, with its water yield declining annually by approximately as much as all of us use every year.

A few regions, like heavily irrigated southwest Alberta and British Columbia’s Okanagan, are seeing the bottom of the water tank. Others, like southern Ontario, are running up against the same environmental overload of people against ecosystems as China, albeit on pocket scale.

Even without the aquanationalists’ nightmare, we’re going to need to be very savvy about where and how we sell our water. Making those sales explicit, by putting a price on all of our own water use, is the best mechanism and motivator we have for keeping very close track of it: how much of it there is, how good it is, where it is and how much more of it we can expect.

Canada will need to know all of those things even if we never let another bottle of liquid water leave the country.

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