1760:
John Wesley, the founder of the Methodist movement within the Church of England, delivers his sermon “The Use of Money,” outlining the basic tenets of social investing, including we “ought not to gain money at the expense of life or by losing our souls.”

1928:

Former World War I aviator Philip Carret launches the Fidelity Mutual Trust (which later became the Pioneer Fund), the first publicly offered socially responsible investment fund. It has earned average annual returns of 12% since inception, besting the S&P 500.

1960:
Martin Luther King Jr. proposes that the AFL-CIO labour union invest its pension assets in housing to lessen economic inequality. With more than US$4.5 billion in net assets, the AFL-CIO Housing Investment Trust has since helped finance more than 100,000 affordable housing units.

1968:
The Medical Committee for Human Rights acquires shares in Dow Chemical and submits a proxy statement proposal to amend Dow’s corporate charter to prohibit sales of napalm to any buyer unwilling to assure the substance would not be used against human beings. Dow quietly ceased production of napalm in 1969.

1970:
Wielding just 12 of 285 million General Motors shares, the Ralph Nader–supported Campaign GM submits shareholder proposals. Six months later, Reverend Leon Sullivan joins GM’s board, becoming the first African-American on the board of a major U.S. corporation. GM also establishes a public interest committee.

1971:
Lawyer Paul Neuhauser, a founding member of the Interfaith Center on Corporate Responsibility, files the first shareholder resolution on behalf of a religious organization, requesting that GM withdraw its business from South Africa until apartheid is abolished.

1978:
Jeremy Rifkin and Randy Barber, envisioning a new strategy for American labour, publish The North Will Rise Again: Pensions, Politics and Power in the 1980’s as a movement builds to democratize pension funds to serve a more holistic economic function.

1980:
Widespread divestiture of economic holdings in South Africa is directly credited with the collapse of apartheid and the Afrikaner minority government. By 1993, when the de Klerk administration took steps to end apartheid, US$625 billion was being screened to exclude investment in South Africa.

1989:
In the wake of the 1989 Exxon Valdez oil spill, social investment executive Joan Bavaria mobilizes a coalition of investors and environmentalists to launch the Valdez Principles, a green code of conduct for business subsequently called the CERES (Coalition for Environmentally Responsible Economies) Principles.

2006:
Secretary-General Kofi Annan rings the bell at the New York Stock Exchange to launch the UN–supported Principles for Responsible Investment organization, which promotes the incorporation of ESG factors into investment decisions and now counts more than 3,000 signatories with US$100 trillion in assets under management.

2008:
The World Bank launches the first green bond. The idea came about after a group of Swedish pension funds wanted to invest in climate projects and went to the World Bank for assistance. By the end of 2020, global green bond issuance topped out over US$265 billion.

2012:
Bill McKibben’s article in Rolling Stone magazine, “Global Warming’s Terrifying New Math,” based on work by the non-profit Carbon Tracker Initiative, launches the fossil fuel divestment movement. By 2020, investors with assets of US$12 trillion had pledged to divest some or all of their fossil fuel holdings.

2015:
Bank of England Governor Mark Carney delivers his “tragedy of horizons” speech, defining climate change as a financial stability issue. By 2020, US$150 trillion in assets had signed on in support of the Task Force on Climate-Related Financial Disclosure, led by Carney and Mike Bloomberg.

2018:
Larry Fink, CEO of BlackRock, the world’s largest asset manager, writes in his annual letter to CEOs that companies had better contribute to society or risk losing BlackRock’s support. Without a “sense of purpose,” he noted, companies will “ultimately lose the license to operate from key stakeholders.”

2019:
In an effort to eliminate greenwashing in sustainable investments, EU governments and the European Parliament sign a landmark agreement on how to classify green investments – the first time a global regulator has designed a labelling system for what counts as a sustainable financial product.

2020:
Morningstar reports that global sustainable funds, which invest based on environmental, social and governance (ESG) themes, climbed to a record US$1.65 trillion by the fourth quarter of 2020, when US$347 billion of new money poured into ESG-focused funds – an all-time high.

2021:
The U.K. government instructs the Bank of England to align its monetary policy with the government’s net-zero emissions target. The BoE says it will adjust its approach to corporate bond buying “to account for the climate impact of the issuers of the bonds we hold.”

The post A short history of responsible investing appeared first on Corporate Knights.

Fancy made three main points:

1. Wall Street is hawking funds labelled as green or sustainable that in many cases are anything but.

2. The much-pedalled idea that sustainable investing is good for the bottom line is a myth.

3. Sustainable investing acts as a deadly distraction delaying what really needs to be done to avoid climate disaster: government stepping in to fix the rules.

As is often the case with whistleblowers, his claims were challenged by conventional wisdom, with the head of sustainability research at Morningstar chastising Fancy for providing “only the sketchiest of evidence to support a rather outlandish position.”

I found myself admiring Fancy’s courage. When his article was first published in USA Today, he was still listed on BlackRock’s website as their chief sustainable investment officer, even though he left the firm two years ago. He has now been removed from the site and, one can guess, the BlackRock Christmas card list.

But the admiration quickly gave way to a deep concern. Not because Fancy is wrong about greenwash being rife in the sustainable investment industry. Although he didn’t mention it, BlackRock’s gold-standard sustainability product (iShares MSCI Global Impact ETF) is literally invested in Spam, a factory-farmed salty heart attack in a can. Try squaring that with the fund’s mandate, which is to invest in “companies that derive a majority of their revenue from products and services that address at least one of the world’s major social and environmental challenges.” Potshots aside, many of the investments in the iShares MSCI Global Impact fund (as well as many of the funds in this year’s Responsible Investing Guide) do offer meaningfully increased exposure to companies like Tesla and Ørsted that are clearly delivering sustainable solutions.

That brings us to the next point. I am little bemused by anyone who makes sweeping statements about the impact of sustainable investing on the bottom line. It’s almost like lumping the four seasons together and saying they are all hot or cold. Many carbon-intensive industries are on a long-term sunset trajectory as they’re being priced out by cleaner options, which is why the Canada Pension Plan’s oil and gas stock holdings have plunged from a quarter of its portfolio 10 years ago to just 2% today. There are half a trillion reasons why a chief investment officer at BlackRock should know this; that’s the dollar amount of returns they sacrificed as a result of not decarbonizing their equity portfolio a decade ago, according to Corporate Knights analysis.

(As a side note, I shared this finding with BlackRock’s CEO Larry Fink when we bumped into each other last year in a Swiss mountain village. I followed that up by leaving an urgent two-word message from the “North American office” at his Hard Rock Hotel in Davos: “Short Exxon.”)

And while the market is frothy at the moment with clean economy pure-plays, the compound annual growth rates for major low-carbon markets (green energy, electrification of transport, plant protein, energy efficiency) are jumping off the charts.

It shouldn’t take a rocket scientist to figure out that you will do better in the long-term the more you dial up your exposure to rising industries (low-carbon solutions) and dial down exposure to those in secular decline (high-carbon problems).

Fancy is right that “systemic challenges require systemic solutions and you need government action to do that.” I also shared his outrage when Larry Fink recently suggested that we can rely on the current incrementalist market approach to deal with the climate crisis, saying “I prefer capitalism to self-regulate.”

But the idea that shelving sustainable investing will make way for the government to fix our problems is woefully misguided. Governments do not solve problems in a vacuum. They solve problems when they feel pressure to do so and when they believe the solutions fall within the Overton window (the range of policies that are politically acceptable to the mainstream population at a given time).

Regardless of the imperfections of portfolio construction, when millions of people vote with trillions of their own dollars to invest in a more sustainable world, it shifts the Overton window of what politicians think is legitimate policy.

We have seen this movie before. After the movement to divest from apartheid South Africa spread from college campuses to blue chip corporations, it provided a window for then-Canadian Prime Minister Brian Mulroney to help galvanize the international community to turn up the pressure. That pressure was ultimately credited by Nelson Mandela for helping to bring about the end of apartheid.

Now we are seeing the same thing happen with the climate, where the fossil fuel divestment movement has spread from universities to the inner sanctum of the Bank of England and the G20.

When you vote with your dollars and your ballots you are more – not less – likely to get better returns.

Toby Heaps is the CEO and co-founder of Corporate Knights Inc. and publisher of Corporate Knights Magazine.

This story appears in the upcoming Spring Issue of Corporate Knights.

The post Editor’s Note: We can’t let greenwash make us lose sight of the prize appeared first on Corporate Knights.

“Directors should recognize that the courts, regulators and investors accept that climate change poses real risks,” veteran lawyer Carol Hansell wrote in a 25-page legal opinion released on June 25.

“They expect that management teams and boards are alert to those risks and opportunities, and are reflecting their assessment of that risk in their strategic thinking and risk management practices.”

Hansell is one of Canada’s top experts on corporate governance. In addition to her distinguished legal career, she has served on corporate boards, and as fellow with the Institute of Corporate Directors and adviser to the Corporate Laws Committee of the American Bar Association.

In her analysis, she states unequivocally that corporate directors have a duty to assess the degree to which climate change will impact a company over the long-term, not just its short-term profits or business plans. They must also ensure that, where risks and opportunities are material to the firm’s business, management must come up with strategies to address them.

Hansell prepared the legal opinion for the Canadian Climate Law Initiative, which is housed at University of British Columbia Allard School of Law and York University’s Osgoode Hall Law School. It is the first in-depth legal analysis of directors’ duties in a corporate governance context by a senior Canadian lawyer.

It comes as the global business community is focusing more closely on the climate crisis and its impacts, both in terms of physical impacts, such as extreme weather, drought and flooding, as well as government policy response and technological changes.

The Bank of England, for example, published its own climate-change disclosure report on June 18, in which it outlines how it will address the impact on the British economy and the financial institutions which it supervises.

“Climate change creates financial risks that are far-reaching in breadth and scope,” the Bank of England noted. “They will affect all agents in the economy and arise through two primary channels: the physical effects of climate change and the impact of changes associated with the transition to a net zero emissions economy.”

The Bank of Canada, the federal Office of the Superintendent of Financial Institutions and the Canadian Securities’ Administrator have all warned about the expected impact on the economy from climate change and efforts to reduce greenhouse gas emissions. Companies in the energy sector are particularly vulnerable, but impacts extend far beyond oil and gas and utilities sectors.

A federally-appointed expert panel on sustainable finance recommended last June that climate-change related risk and opportunity should be a mainstream concern among Canadian business managers and their boards. That panel was chaired by Tiff Macklem, who has since been named at Governor at the Bank of Canada.

Still, a recent report from the Chartered Professional Accountants of Canada and consulting firm Mantle314 show relatively few publicly-listed companies are meeting the standards for climate-related financial disclosure that have been laid down by international advisory groups.

In her legal brief, Hansell made it clear that boards that fail to address climate change risk potential legal liability. She said directors cannot let their personal beliefs about climate science impede their duty to the corporation.

“Canadian courts have accepted climate change and the risks it presents as self-evident and uncontroversial, as has the investment community,” she wrote. It would be nearly impossible for a director to dismiss climate change risk out of hand.”

Nor can directors dismiss the need for action in the belief that the climate crisis will not impact the immediate fortunes of the corporation. The Supreme Court of Canada has ruled that directors must look after the long-term interests of the business.

“The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, [fiduciary duty] looks to the long-term interests of the corporation.”

Corporate directors have a duty to not only assess climate risk, but to ensure that assessment is clearly communicated to shareholders and investors. That disclosure should include the board’s role in climate-change management.

“Above all, understand that it remains the responsibility of the board to be satisfied that it is properly informed about the climate change risks facing the organization and the way in which those risks are being managed,” she concluded.

Shawn McCarthy writes on sustainable finance and climate for Corporate Knights. He is also senior counsel for Sussex Strategy Group.

The post Canadian boards legally obliged to address climate risk, new study reveals appeared first on Corporate Knights.

Australia is the latest country to move forward with climate stress tests. It follows the lead of the Bank of England, which released a detailed discussion paper in December outlining how it intends to run its own tests on banks and insurers.

Canada’s financial industry should take notice. The Bank of Canada announced last year that it intends to run climate stress tests in the future – although when exactly, we don’t know. What could Canadian banks and insurers expect?

We can look to the UK to get an idea.

The UK’s proposed scenarios are by far the most detailed of any central bank and provide important insights into how financial regulators view climate risk. The goal of the UK climate stress test is to understand the financial exposure of banks and insurers to climate-related risks. The test covers both physical risks, such as droughts, floods and extreme weather events, and transition risks, such as sharp increases in carbon prices or changes in unemployment or corporate bond yields resulting from market or technological disruptions.

The Bank of England’s framework consists of three scenarios. The first two involve pathways whereby the world, over a 30-year period, reduces greenhouse gas emissions to limit global warming to below 2C.

The first scenario is an orderly one, where government policies move in a clear direction and firms have time to adapt and manage the transition.

The second scenario is “late policy action.” After a decade of delay, governments are compelled to act. They rapidly implement sweeping policy changes in an effort to dramatically reduce emissions. Asset prices see a sudden, sharp re-pricing.

In the third scenario, the world fails to take steps to limit warming below 2C, resulting in devastating impacts: extreme heat, droughts, floods, forest fires and storms at a level we have not seen before, all with horrific implications for the health and well-being of our economy and natural environment.

UK banks and insurers must run their balance sheets through the lens of each scenario, assess its financial impact and aggregate it across their various portfolios. Following the first phase, the Bank of England will look for areas where banks and insurers diverge in their forecasts and go back to them with adjusted information. If insurers disclose that they expect to phase out certain types of insurance, for example, banks need to revise their lending plans accordingly.

There are also qualitative aspects to the stress test. Participants need to outline what management actions they would take to mitigate risk and position their businesses to thrive in the transition to a carbon-neutral economy. The stress test recommends that companies use the Task Force on Climate-related Financial Disclosures (TCFD) framework to explain how climate change will affect them.

Climate scenarios can’t be predicted based on historical patterns; they are constantly evolving, and there is no one “right” answer. Evaluating the disclosure of climate risks is challenging because businesses often use different data sets.

The Bank of England aims to overcome this barrier by laying out scenarios with specific data points, allowing for a much closer apples-to-apples comparison. The direct nature of the stress test means firms are forced to confront – and disclose – what extreme but plausible climate scenarios could mean for their balance sheets, making it easier for the Bank of England to identify systemic risk.

As the bank’s governor, Mark Carney, said at the launch of the COP26 Private Finance Agenda this week, corporate disclosures need to move beyond the static (current emissions) to the strategic (plans to reduce emissions).

As pressure builds on businesses to disclose what they’re doing about climate change, the UK’s stress test provides a glimpse into the types of climate-risk questions Canadian banks and insurers need to be able to answer. Canada’s economy is far more carbon-intensive than most, and scrutiny from investors and regulators about climate risk is only going to grow.

Companies that can articulate how their business models will support – and thrive – in a low-carbon economy will prosper. Those that can’t coherently explain their plans for a climate-adjusted future can expect to be punished by investors.

In a research note on climate change published in November, the Bank of Canada said its first step is to evaluate the exposures of Canadian financial institutions to climate-related risks. The Bank of England is sharing its stress test findings with the Network for Greening the Financial System – of which the Bank of Canada is a member. There’s no reason Canada’s banks and insurers can’t get ahead of the curve.

It’s not a matter of if, but when: climate stress tests are coming to Canada. For banks that want to demonstrate leadership and understand what climate change could mean for them, the UK’s climate stress test is a good place to start.

Kevin Quinlan is a senior advisor with Mantle314, a Toronto-based climate change consulting firm.

The post Climate stress tests are coming to Canada. Are banks paying attention? appeared first on Corporate Knights.

On Jan. 19 that year, a group of investors wrote a letter to the governor of the Bank of England, Mervyn King, requesting that its Financial Policy Committee look into the systemic economic risks of certain carbon-based assets being stranded. Less than two weeks later, King replied with his own letter assuring that the bank would further evaluate the risk of stranded assets. He also outlined the three key conditions by which the unburnable carbon thesis could plausibly have adverse effects on the economy:

1. The economy is significantly exposed to carbon-intensive sectors;
2. Markets are not already pricing the risk of stranded assets;
3. Any subsequent correction would occur too quickly to allow for an orderly adjustment.

Fast forward to Oct. 30, 2014. Mark Carney, the new Bank of England governor, makes international headlines by stating “the vast majority of reserves are unburnable if global temperature rises are to be limited to below 2⁰C.”

Three days later, Carney committed in writing to monitor the financial risk of unburnable carbon, referencing the Bank of England’s in-depth first draft report on the subject targeted for July 2015.

Meanwhile in Canada, federal Finance Minister Joe Oliver and Alberta Premier Jim Prentice are reeling from the fiscal blow dealt by the decline in oil revenues, and there has not been a peep on the topic of stranded carbon assets from Stephen Poloz, governor of the Bank of Canada.

In remarks on Jan. 13 to the Madison International Trade Association (MITA), Timothy Lane, deputy governor of the Bank of Canada, shed some light on how the bank is looking at the recent dip in oil prices. He highlighted the health of the oil sector as “among the most important” variables the Bank of Canada takes into account in setting policy. But he downplayed the long-term significance of the recent decline in oil prices, because higher-cost oil is still likely to be needed to feed the commodity super cycle driven by the growing global demand from the burgeoning and urbanizing middle class in emerging markets.

Up until recently, unquestioned fidelity in the commodity super cycle and its implications for ever-rising demand for Canada’s expensive oil sands seemed like a safe assumption. Then again, who would have guessed that oil prices would slide 60 per cent in the past six months and that China would agree to put a hard cap on its carbon emissions by 2030, which they did this November?

To be on the safe side, let’s consider the potential risk of stranded oil sands assets in the context of Mervyn King’s three conditions.

1. The economy is significantly exposed to carbon intensive sectors.

In Canada, oil extraction now accounts for about 3 per cent of GDP and crude oil about 14 per cent of our exports.

2. Markets are not already pricing the risk of stranded assets.

That may be the case at the moment, as most oil companies are valued on short-run cash flow and not the health of their long-term balance sheet. But is it a safe assumption that this will hold indefinitely? Remember when Shell had to restate their reserves back in 2004, and their share price was pounded down by 10 per cent, followed by several securities fraud class action suits?

3. Any subsequent correction would occur too quickly to allow for an orderly adjustment.

This condition is subject to the animal spirits of the market. But there are at least four plausible scenarios that could be the pinprick to the carbon bubble.

One is that a major rating agency could move to downgrade oil sands companies. Standard & Poor’s rating service is closely monitoring the oil sands and in a report titled, “What A Carbon-Constrained Future Could Mean For Oil Companies’ Creditworthiness,” S&P stated: “Financial models that only rely on past performance and creditworthiness are an insufficient guide for investors. We note that under a meaningfully lower long-term oil price, the commercial viability of undeveloped reserves and hence the core business model could come into question unless development costs also fall. This could potentially result in a downgrade of more than one notch if we were to place less reliance on undeveloped or probable reserves than at present.”

Second, a large hedge fund could spur a rush to reduce oil sands exposure by shorting the highest cost oil producers with the highest debt levels.

Third, the Bank of England’s stranded carbon assets report due in July could turn market sentiment skittish on high-cost oil producers.

Finally, a strong deal at the Paris climate summit in December – one that sets a global-emissions reduction target – could shake market confidence in the ability of high-cost oil producers to harvest all their assets.

None of this is to suggest that blue-chip majors like Suncor are going to go out of business, especially considering the low “cash cost” of pumping oil from existing operations. But it does raise important questions about further investments in the oil sands, when you consider that 92 per cent of undeveloped oil sands projects need more than $95 per barrel prices to provide a 15 per cent internal rate of return.

If the market begins to accept the stranded assets thesis, Canada’s high cost oil sands will be the first to be abandoned by the impersonal forces of the market.

That’s potentially a big problem, as it doesn’t appear the Bank of Canada and Departments of Finance in Alberta and Ottawa have a Plan B. “The Bank of Canada does not have plans at this time to publish a report similar to that of the Bank of England,” was the e-mail response Corporate Knights received Thursday from a bank spokesperson.

“These are important questions,” she continued. “We carefully study the impact on the Canadian economy of all important developments in the oil market; as you know, we do this in the context of conducting monetary policy in order to achieve our inflation target.”

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