Backed by government taxing powers, Canada’s provincial and territorial bond market receives high scores from credit rating agencies. The $1-trillion market for these bonds helps to finance schools, hospitals, social services and other provincial spending. Institutional investors have traditionally had little concern about environmental, social and governance (ESG) risks on these bonds since they are used to provide needed public services.

But climate risks are beginning to change this picture, according to a new report released last month by the Principles for Responsible Investment (PRI), a global network of more than 5,000 investors representing US$121 trillion in assets.

This is especially the case in Alberta and Saskatchewan, where provincial governments are determined to maintain fossil fuel production, despite the scientific consensus that carbon emissions must be curbed.

“Climate transition risks are significant for Canadian provinces with substantial fossil fuel sectors,” says Jasper Cox, a fixed-income analyst with PRI, in an email interview.

“Provinces’ economies and revenues can be heavily exposed to these industries, and to any fall in demand or more stringent regulations.”

With such heavy dependence on the fossil fuel industry, Alberta and Saskatchewan are susceptible to declines in their tax bases and growing transition costs due to changes in fossil fuel demand or regulation. The report notes that revenues from oil sands bitumen account for 17% of Alberta’s total revenues.

As the province with the largest greenhouse gas (GHG) emissions, Alberta faces the largest risk. In 2019, it released 58,000 tonnes of GHGs per 1,000 population, or 755,000 tonnes per 1,000 units of gross domestic product (GDP) (units are expressed in constant U.S. dollars).

Saskatchewan’s emissions were lower than Alberta’s, equating to 56,000 tonnes of GHGs per 1,000 population, but represented a higher proportion of its economy, at 834,000 tonnes per 1,000 units of GDP.

By comparison, Quebec emitted 9,000 tonnes of GHGs per 1,000 population (the lowest emissions per capita in Canada), with Ontario close behind at 10,000 tonnes per 1,000 people. By GDP size, both provinces came in at 179,000 tonnes per 1,000 units.

“Investors must assess the practical ability of provinces and municipalities first to meet net-zero targets and secondly to succeed economically during and after the low-carbon transition,” the report says.

Higher borrowing costs coming, just not yet

The strong implication in the report is that climate transition risks are likely to make debt from provinces with large fossil fuel industries less attractive to investors, eventually forcing these governments to issue bonds at higher interest rates to stay competitive in Canadian and international bond markets.

“Higher credit risk would put upwards pressure on borrowing costs, although the latter will also depend on a range of other factors,” Cox says.

High on the list of other factors is the price of oil and gas, which, at least for the time being, is far more significant to issuer ratings than ESG risk.

In January, Moody’s Investors Service upgraded Alberta’s credit rating, citing “high oil prices above pre-pandemic levels.”

Last September, DBRS Morningstar upgraded its trend on Alberta bonds from stable to positive, noting recent “strong energy prices” and plans to reduce the government’s deficit. The company acknowledged that Alberta has the largest provincial emissions but noted it has achieved a recent decline in emissions intensity.

For Saskatchewan, DBRS Morningstar recently confirmed its stable trend, also noting a “recovery in resource revenue” and deficit-reduction measures. However, it noted that Saskatchewan’s carbon and GHG costs pose “modestly negative” risk, citing its dispute with the federal government over Ottawa’s plans to phase out of coal-fired electricity by 2035.

Current high oil and gas prices could be a temporary situation as the world adjusts to shortages created by the war in Ukraine. This could mean raters are underpricing climate transition risk, especially if there is a rapid decline in oil and gas prices or the global climate continues to deteriorate badly.

This is a possibility that was raised at a PRI webinar in June on Canadian government bonds.

Climate transition risk “has faded a bit into the background at the moment,” said Saad Qazi, associate portfolio manager at Manulife Investment Management. “From a longer-term perspective, you could argue that it is being mispriced.”

Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance.

The post Investing in bonds? Climate risk looms over government bonds in oil and gas-rich provinces appeared first on Corporate Knights.

Over the next decade, up to $1 billion in annual funding will be needed to protect and restore habitats, meet global conservation goals and reduce atmospheric greenhouse gases using nature-based solutions, according to assistant professor Diane-Laure Arjaliès and fellow researchers at the University of Western Ontario’s Ivey Business School.

“The biodiversity and climate crisis will not slow down if we are just going to rely on the government, so let’s find a solution,” says Arjaliès, who since 2019 has worked with Carolinian Canada, a national conservation organization; local environmental groups; and First Nation communities in southern Ontario in the design and evaluation of the Deshkan Ziibi Conservation Impact Bond (the Anishinaabe name for the Thames River).

The bond, being piloted over a five-year period, aims to attract new sources of capital beyond traditional government grants and private philanthropy for a highly populated, ecologically threatened section of the Carolinian zone.

A social finance firm made the initial investment in the bond, with government, private sector and NGO partners committed to repay the funds with interest if goals of native tree replanting and conservation improvements of 150 acres near London, Ontario, are reached over five years. Ultimately, Carolinian Canada and its partners aim to renew 1,000 acres in the zone.

Significantly, the bond’s designers adopted the principle of “two-eyed seeing” that recognizes the duality of Indigenous and Western perspectives, with First Nation communities acknowledged as co-partners bringing culturally valid approaches to land stewardship. 

“We brought a different perspective into the development of the conservation impact bond that is not typically included, [namely] the human connection, the cultural component and the fact that we see the land as kin,” says Emma Young, senior environment officer for the Chippewas of the Thames First Nation. Meaningful collaboration, she adds, is akin to “weaving a stronger rope.”

Ivey’s Arjaliès says she is “confident” of the potential to scale up conservation bonds globally, assuming investors are willing to be patient for the long-term reward: a healthy, sustainable environment.

The post Can conservation bonds repair Indigenous relations and endangered habitat? appeared first on Corporate Knights.

The London-based investment bank revealed this week that it had downgraded the high-grade corporate bonds of the entire U.S. electric utility sector, citing “a confluence of declining cost trends in distributed solar PV power generation and residential-scale power storage.”

Barclays warned that solar and storage combined is “likely to disrupt the status quo.” It already has in Hawaii, and it expects California, New York, and Arizona to closely follow before spreading to the rest of the United States.

“In the 100-plus year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power,” the bank said. “We believe that solar plus storage could reconfigure the organization and regulation of the electric power business over the coming decade. We see near-term risks to credit from regulators and utilities falling behind the solar plus storage option curve and long-term risks from a comprehensive re-imaging of the role utilities play in providing electric power.”

As Barron’s reported, “It’s a noteworthy downgrade.” Electric utilities, it added, “make up nearly 7.5 per cent of Barclays’ U.S. Corporate Index by market value.”

It’s not like the industry hasn’t had earlier warnings. A year ago, the U.S. utility industry’s own trade group, the Edison Electric Institute, released a landmark report warning of a transformation in the sector not unlike that which disrupted the telephone sector and airlines.

“The financial risks created by disruptive challenges include declining utility revenues, increasing costs, and lower profitability potential, particularly over the long-term,” wrote Peter Kind, the report’s author.

Journalist Stephen Lacey, who wrote about this growing disruption to the utility sector in the fall 2013 issue of Corporate Knights, referred to it as the “utility death spiral.” Since then, there have been many reports citing how the dramatically falling cost of solar and other renewables and big-scale energy efficiency efforts are impacting the traditional fossil-fuel business model. McKinsey’s Jeremy Oppenheim is whistling a similar tune, as Corporate Knights recently reported.

The change beginning to take place was bound to happen, billionaire and anti-Keystone activist Tom Steyer told Corporate Knights in an interview appearing in our latest issue. “If you look at the energy generation and distribution business in the United States, Thomas Edison would feel quite at home since it is the system he set up. Is there any other business in the world that is still the same after 100 years?”

It won’t and can’t last, he added. “The telecom industry went from very old-fashioned stuff in 1983 to things that my parents never heard of. Advancements in clean energy are poised to do the same.”

As Paul Gilding wrote today in his excellent commentary on RenewEconomy, “The market is working … and fossil fuels are losing.” Gilding drew attention to the massive value being destroyed, particularly at European utilities, which have seen major coal projects cancelled as expected growth in China and India shrinks.

But coal is just the first on the firing line, said Gilding, who points out that schemes like carbon capture and storage – i.e. clean coal – are “either delusion or at best an expensive PR campaign.” After coal, oil will be walked to the firing line. Then gas.

“This is not a problem at all for the economy, as they will be replaced with new companies and new industries, which will create new jobs, new wealth and new innovations,” wrote Gilding.

“But it is a major problem for the incumbents who will cease to exist and for their owners who will lose their money. Unless we have that conversation honestly and openly, we are setting ourselves up for pain and suffering we can easily avoid or at least minimize by thinking through the consequences and being better prepared for their departure.”

The post Barclays’ big risk appeared first on Corporate Knights.

The bond markets have grown into a $100 trillion oxygen chamber for finance ministries and businesses. Standing at the gates are Standard & Poor’s Ratings Services, Moody’s Investors Service and Fitch Ratings – the most powerful oligopoly in the world. The Big 3 have a 95 per cent market share of the global credit ratings market, which gives them the power to deem who breathes in the capital markets and who suffocates.

The rating agencies serve a critical function labelling which debt is safe, but they are only as good as their proprietary models. Sometimes the models miss important factors, like when they slapped AAA ratings on financial products based on mortgages extended to NINJAs (folks with No Income, No Job and no Assets).

When the NINJAs’ throwing stars popped the housing bubble, AAA turned into junk overnight, sending the global economy reeling into the Great Recession. The U.S. government’s Financial Crisis Inquiry Commission reported that “the mortgage-related securities at the heart of the crisis could not have been marketed and sold without [the rating agencies’] seal of approval.”

From the time of tulip mania in the 17th century, bubbles have been a reality of capitalism. The question is, what will the next asset bubble be and how can we begin to deflate it? The conventional wisdom chalks the European sovereign debt crisis up to there being more Porsches in Greece than taxpayers declaring 50,000 euro incomes. But the reality is more ominous.

There are strong indications that we may be brushing up against the mother of all asset bubbles: an economic model of growth premised on short-changing Mother Nature. Popping this asset bubble intentionally amounts to “a global suicide pact” in the words of UN Secretary-General Ban Ki-moon.

The four countries at the heart of the eurozone crisis – Greece, Italy, Portugal and Spain – have something in common. They not only had their sovereign debt harshly downgraded, but are also among the largest ecological debtors in the world, running the green into red at twice the eurozone average, according to the Global Footprint Network.

Shedding further light on how nature is creeping onto balance sheets, the UNEP-backed Environmental Risk Integration in Sovereign Credit Analysis (E-RISC) has found that resource price swings of 10 per cent can push trade deficits up by between 0.2 and 0.5 per cent of GDP.

Treating the environment as an off-balance sheet item has always been a ticking time bomb–in the long term. After the Copenhagen climate talks collapsed, the time horizon was pushed even further into irrelevance by the rating agencies. While we were waiting for government to bring nature onto balance sheets, the markets beat them to the punch, thrusting us into an era of rising and volatile resource prices.

This is difficult to digest for anyone who lived through a 20th century that delivered rising living standards and a population soaring from 1.6 billion to 6 billion, while prices for the 33 most important commodities declined by 70 per cent. However, in the past decade these declines were completely erased or reversed due to demand from Asia and other emerging markets. Real commodity prices have risen by 147 per cent since the turn of the century. With 3 billion more middle class consumers expected to join us by 2030, we are in the midst of a revolution that places resources ahead of capital and labour at the heart of public policy and business strategy, according to a recent McKinsey report.

Amidst this resource revolution, rating agencies risk being caught flat-footed once again. The UN Secretary-General’s High-Level Panel on Global Sustainability noted that rating agencies largely ignore environmental issues and “do not take account of likely changes in resource prices.” The panel suggested that if ratings were sensitized to such matters, there would be a more urgent financial interest in mitigating negative impacts and leveraging positive ones.

At a time of intense scrutiny by regulators and their large ‘universal owner’ shareholders, rating agencies have a chance to take a proactive approach. Just as the Big 3 have shown leadership in the past by taking into account unfunded pension liabilities and longer-term demographic risks to fiscal health, there is now an opportunity to show leadership by integrating natural resource factors into rating models.

The E-RISC methodology integrates 20 indicators to assess natural resource-related risks to sovereign creditworthiness, including most saliently: change in trade balance from a 10 per cent change in resource prices expressed as a percentage of GDP; ratio of the country’s ecological footprint over its biocapacity; and change in trade balance from diminishing productivity due to overuse of productive land and marine areas.

Integrating these metrics into ratings models as a starting point would be good for the global economy, good for the rating agencies, and good for the planet.

The alternative is to keep ignoring Mother Nature’s signs, which are increasingly less discrete if the massive flooding of Standard & Poor’s executive offices during Superstorm Sandy is any indication.

The post Risky resources appeared first on Corporate Knights.

This financial instrument is known as a Social Impact Bond (SIB), a new form of impact investing that has sparked widespread interest since its inception several years ago. The idea originally emerged from the British Prime Minister’s Council on Social Action, which spurred the creation of the non-profit group Social Finance. The group went on to pioneer the first pilot program in 2010 at the Peterborough prison north of London, in partnership with the British Ministry of Justice. Alisa Helbitz, director of research and communications at Social Finance, says that prison recidivism programs have been an early target of SIBs because they have clearly defined outcomes, but “we are already seeing the model applied across a range of other social services.”

Most SIBs are structured as follows: The government identifies a social problem that it wishes to tackle, and finds an organization like Social Finance to act as a facilitator. The philanthropic or private sectors provide capital, and non-profits implement carefully crafted programs that have been successful elsewhere. All of the stakeholders agree to the same performance indicators, which are assessed by a third-party organization well-versed in evaluating success in the particular area (e.g., an anti-poverty centre). The government only pays for the programs that achieve measurable progress.

Harvard University economist and former Obama administration official Jeffrey Liebman prefers the term pay-for-performance contracts, as SIBs are not in fact bonds (there is no guaranteed return on one’s investment). “The way our governments currently fund social service programs produces insufficient innovation and weak performance,” he says. “The goal is to make it so the government only pays for what works.” Shifting the risk away from taxpayers onto private investors allows for greater innovation and accountability, not only for government programs but within the non-profit sector as well, he argues.

SIBs are structured to create preventative programs that save the government increased social and financial costs down the road. “Governments are aware that an ounce of prevention is worth a pound of cure, but they remain reluctant to move from these legacy programs to a more preventative model,” says Laura Callahan, a senior expert at McKinsey & Company’s social sector office. As the capital for pay-for-performance contracts is originally derived from other sources, the hope is that this becomes more politically palatable for governments to sell to the public once true savings are demonstrated.

In less than three years, SIBs have drawn interest from the national governments of Israel, Canada, Ireland and the United States, along with numerous state and local governments. Social Finance’s American sister operation says that it has been in contact with over 30 jurisdictions. Both left- and right-leaning politicians have been publicly supportive of the idea, with President Obama’s administration to launch pilot programs inside the Labor and Justice departments this year. Governor of Massachusetts Deval Patrick, a Democrat, announced plans last fall to establish SIBs tackling juvenile justice and chronic homelessness. The Conservative government in Canada announced in November it would begin experimenting with SIBs.

Established donors of foreign aid and developing countries are also open to the pay-for-performance model. The Center for Global Development has been conducting research into “cash on delivery” programs and working with Social Finance to explore different models. One idea involves Development Impact Bonds, a form of SIB where development agencies replicate the role of governments in paying for successful outcomes. The American non-profit Instiglio has partnered with the state of Antioquia in Colombia to design Latin America’s first SIB. “Developing economies do offer formidable challenges, but if structured the right way we’re confident they will become an important tool for improving human welfare,” says Michael Belinsky, co-founder of Instiglio.

Despite evident enthusiasm from numerous governments, proponents such as Liebman and Callahan urge caution in embracing this model too quickly. No concrete evidence currently exists for the effectiveness of SIBs, with pay-for-performance programs lasting five to 10 years. The Peterborough prison pilot won’t end until 2016, and despite anecdotal evidence of success there is little else to go on.

One of the biggest concerns is around feasibility. Thus far, SIBs have focused on social issues where demonstrating progress is reasonably straightforward. Measuring prison recidivism is simple, says Katherina Rosqueta at the University of Pennsylvania’s Center for High Impact Philanthropy, but what about mental illness or teacher quality? “People aren’t yet clear in some cases what they ought to be tracking,” she told the university publication Knowledge@Wharton in September. “What does success look like? And even when there is a common understanding of success, measuring whether or not it happened can be logistically tough.”

Judging a program’s effectiveness can be done, in part, by running a control group alongside the program. While this can produce superior results, it also adds to the growing project costs. Operating such a group requires a large sample to ensure accuracy, limiting SIBs to bigger projects that are larger and thus more risky. Vulnerable members of the population are often impacted by multiple social programs at once, so any adjustments made to these other programs during the assessment period make the data less reliable.

David Macdonald, a senior policy analyst at the Canadian Centre for Policy Alternatives, believes that SIBs represent a negative shift in the government’s mandate to provide social services. “These bonds change who is at the front of the line, and who we’re serving,” he says. “We need to pay a middleman mark-up to shareholders, who are now at the front of the line.”

Growing interest in SIBs from the Canadian federal and some provincial governments has led to fears of a backhanded attempt to begin privatizing some public services. NUGPE, the second largest union in Canada, announced last year that “higher costs, reduced accountability and privatization are all risks in the social impact bond funding scheme for public services.”

In a world where financial innovation is no longer viewed as the silver bullet, champions of pay-for-performance projects will have to wait for the results of the early pilots to come in before attempting any significant scaling. In the meantime, says Liebman, any policy tool that can accelerate solutions to even a subset of our most pressing social problems is an important breakthrough – one that deserves thoughtful consideration.

The post Bonds with a social mission appeared first on Corporate Knights.

But for some projects new options are emerging, including innovative social finance tools called community bonds.

Community bonds are essentially debt instruments, or small loans from a non-profit’s network of supporters, used to advance a specific project. The loans are interest bearing and the bonds can be structured to be RRSP eligible. They are different from other bonds because they can only be issued by a non-profit and are accessible to unaccredited investors. Non-profits can use them to fund infrastructure projects, including community power installations and green retrofits, where there is both collateral and a revenue stream. This makes them the ultimate impact investment.

The concept was created by Toronto’s Centre for Social Innovation (CSI) to finance the $6.8-million purchase and retrofit of its second “shared workspace” building. In a four-month flurry of activity CSI offered members the chance to secure a 4 per cent annual return over five years on a minimum $10,000 community bond purchase. The bond issue, secured against the value of the building, allowed CSI to raise $2 million.

Fast forward a year and community bonds are now being adapted by social enterprises of all stripes to get a wide range of community clean energy projects off the ground.

The ZooShare Biogas Co-operative in Ontario, for example, is awaiting approval of what could be an RRSP-eligible bond offering to finance a 500-kilowatt biogas plant at the Toronto Zoo. The biogas – from the anaerobic digestion of animal manure, such as tiger and elephant dung, mixed with local restaurant grease – will generate electricity that will be sold (at a generous rate of 16 cents per kilowatt-hour) into the Ontario grid as part of the province’s feed-in tariff program.

An added benefit is that fertilizer “by-products” from the plant will be sold in stores under the “Zoo Poo” brand, and waste heat from the process will allow year-round growing at a nearby greenhouse. If all goes as planned, investors in this $5-million project can expect an attractive 7 per cent annual return.

Another Ontario co-operative, SolarShare, is following in CSI’s footsteps with plans to use community bonds – or what they’re calling “solar bonds” – to build 600 kilowatts of solar photovoltaic capacity. Clean electricity will be generated via 18 small-scale and community-owned solar installations spread across the province. The bonds also have the potential to be RRSP-eligible.

For both ZooShare and SolarShare to proceed with their projects as initially envisioned, they still require approval from Ontario’s financial services regulator.

The payback of SolarShare bonds, like the ZooShare offering, is alluring – 5 per cent annually over five years. Given current volatility in the stock market and the low yield of government bonds and GICs, community bonds represent a secure and attractive alternative for individuals who want to see their investments have a positive social and environmental impact. Moreover, by enabling infrastructure projects like these, community bonds are creating green jobs and accelerating the transition to a low-carbon economy. Perhaps most importantly, they do this by transforming citizens of average means from volunteers or occasional donors into committed investors.

“This idea of massive public involvement in the ownership and economic benefit of these projects is what we’ve all been working towards for the past 15 years,” says Deb Doncaster, executive director of the Community Power Fund. “All it will take is for one or two of these projects to be successful and the approach will take off.”

The challenge, however, for impact investors wanting to “buy local” is that financial institutions don’t offer community bonds. At the moment, interested investors must identify individual community bond offerings and purchase a bond directly through the issuing organization or, in the case of a self-directed RRSP, bring the investment to the attention of their financial institution.

Over time, the hope is that more financial institutions looking to distinguish themselves and build up goodwill in the marketplace will see value in making community bonds more easily accessible to their customers.

The right fit?

One challenge for social enterprises lies in determining whether a community bond is the right financing tool for them and, if so, how best to structure their offering for maximum uptake.

First, only certain types of bonds can be held within an RRSP account. One such example includes a bond backed by an interest in a mortgage, as in the case of CSI’s offering. Second, non-profits can generally avoid the lengthy and expensive prospectus process when issuing debt (bonds), due to an exemption for charities and “benevolent” societies. This is the case in Ontario and with legislation in most other provinces.

There are exceptions, however, particularly when the non-profit is structured as a cooperative instead of a corporation. If so, and once again using Ontario as the example, the enterprise must comply with additional regulations under the Co-Operative Corporations Act (CCA). This is the case with both ZooShare and SolarShare cooperatives in southern Ontario. Both have adapted the concept of community bonds for community power projects and are awaiting regulatory approval of their respective offering statements.

In such cases, size clearly matters. When the debt offering is relatively large, the CCA requires that the co-operative submit an offering statement to the Financial Services Commission of Ontario, a process that can significantly delay the sale of bonds by several months or longer.

It’s not so much an issue if the co-operative’s offering is small, such as if the debt obligations don’t exceed $1,000 per member annually and total outstanding securities does not exceed $200,000. This is the case with SolarShare, which for now has been limited to selling $1,000 bonds until it receives approval – which is far from certain – of a larger offering that would permit the sale of multiple solar bonds to individual investors.

If the co-op gets that green light, it aims to eventually make those bonds RRSP-eligible. “We are working with the banks to build a process but we’re not there yet,” said SolarShare member relations coordinator Julie Leach.

Regardless of the organizational structure a social enterprise chooses, or the type of community bond it favours, the offering must ultimately be associated with business models that generate sufficient revenue to pay for the operating expenses associated with the capital project and to repay investors’ principal and interest over the course of the specified term.

Realizing the potential of community bonds for community cleantech projects and other initiatives will also require greater social finance literacy among financial institutions, particularly in the case of RRSP-eligible bonds.

The potential is too great to ignore, said Tonya Surman, founding executive director of CSI. “Just imagine a theatre company banding its audiences together to refurbish its stage, or a recreation centre using a bond to build a new skating rink with a solar panelled roof, repaying investors with income from ice-time rentals and solar power, and creating young athletes and renewable energy at the same time.”

Surman is convinced that community bonds can bring back a do-it-yourself culture to co-creating community assets in our own backyards. “They represent a newer, more humane, more collaborative kind of capitalism, one in which we pool our resources for the common good as well as shared gain,” she said.

We are still figuring out how to “scale” this innovation, and certainly there remain regulatory hurdles to overcome, but it is clear that community bonds are here to stay and poised to have a meaningful impact on the world of social finance. K

The Centre for Social Innovation will be releasing a Do-It-Yourself Guide to Community Bonds in February 2012.

The post The rise of local power appeared first on Corporate Knights.

Take the Deepwater Horizon Oil disaster. Suddenly the idea that “sunlight is the best disinfectant,” as stated by Supreme Court Justice Louis Brandeis became every investor’s personal motto when it comes to transparency, due diligence, and good governance.

What does oil have to do with responsible investing? Almost all Canadian responsible investment (RI) funds have stocks in oil sands, mining, and various other resource industries that comprise Canada’s worst greenhouse gas offenders.

“Counterintuitive, isn’t it? We hear from folks who are quite surprised to hear that socially responsible funds invest in oil sands because they don’t necessarily understand the lack of diversity in the Canadian market,” says Dermot Foley, Strategic Analyst with Vancity Investment Management.

It’s a necessary evil—for mutual funds to be as risk-free, or as financially secure as possible, all financial institutions with RI mutual funds must invest in “dirty fossil fuel production.”

Canada is a resource-heavy index. Trying to steer clear of oil is “obviously a preposterous investment strategy since oil runs the world economy,” says Doug Morrow, Senior Associate at Toronto ICF International. However, as a result of that necessary evil, “responsible” investment becomes relative, according to Foley.

Investors are more aware of how integral environmental, social, and governance (ESG) factors are to the financial bottom line—and the triple bottom line, people, planet, profits is gaining momentum, but who’s keeping tabs?

“Investors are becoming increasingly concerned about inadequate disclosure of liabilities. The recent sub-prime mortgage crisis, as well as the Enron and WorldCom scandals are all evidence of the dangers of not having thorough disclosure policies. For oil sands investors to make wise decisions and minimize uncertainties, financial reporting of assets and liabilities must be accurate and transparent,” says Toxic Liability, a report assessing oil sands reclamation by the Pembina Institute.

In Canada, companies are required to report on asset retirement obligations, such as mine closure plans, and land and water rehabilitation. But, the environmental information currently provided by companies is not necessarily complete, reliable or comparable, and it isn’t integrated into financial reporting, according to the Environmental Reporting Guidance notice issued by the Canadian Securities Administrators.

While all the major banks say they do third party due diligence in their risk analysis when assessing the ESG factors at various extractive companies, it’s difficult to compare companies and different funds when assessment styles “vary from analyst to analyst,” says Don Roberts of CIBC. Some analysts will hire third parties to review the claims made by companies, and some simply won’t.

“Are companies reclaiming land at the rate they said they would?” is a question Jason Milne, Governance Analyst at RBC Global Asset Management Inc., asks when considering various risk factors.

However, as Corporate Knights’ Responsible Investment Guide explores later, there is a $10-15 billion shortfall in the financial planning for rehabilitation of total lands used by the oil sands thus far, and this is but one extractive industry wherein RI invests. Do risk managers account for reclamation liability? According to Canada’s big five banks—RBC, BMO, CIBC, TD Bank, Scotiabank—this is risk management 101.

Part of classic investment or classic investment risk management are the 4 Ms—materials, markets, management, and money. So to the extent that reclamation liability is material, yes, it is assessed, according to Ula Ubani, Corporate Responsibility & Sustainability, BMO Financial Group.

Some financial institutions value the 4 Ms in different order, further complicating comparisons. For instance, of Canada’s 5 big banks, TD Asset Management is simultaneously the only bank that manages its own RI funds and is a signatory to the UN Principles for Responsible Investment (UNPRI), which are considered the “gold standard” for financial institutions to manage environmental and social risk. The responsible investment funds created by RBC, BMO, and Scotiabank are managed by signatory companies.

As evidenced by multiple countries, signing a UN document and implementing it are two different things.

While TD has some of the best performing funds, the management of those funds, like any fund, is weighted more heavily on the financial aspect than any other.

“Governance on the financial sector is a much more important component [for TD’s Global Sustainability fund], whereas in materials and mining, the environment is much more important relative to the other pieces,” says Thomas George, Vice President of TD Asset Management referring to the creation of a TD Sustainability Index which is helping TD define what sustainability means across each sector.

Ironically, while RI is performing relatively well as investments recover from the financial collapse, a misconception about the performance of RI funds is what’s hindering advancements in the field.

There is a fairly widespread belief that by concentrating an investment strategy on companies that meet certain non-financial criteria—like best-in-class or environmental impact—you’re going to limit your financial performance, according to Doug Morrow, Senior Associate at Toronto ICF International.

“It’s difficult for any mutual fund to outperform the market, but it’s a double standard. I know Jantzi underperformed in terms of the TSX benchmark, but that’s not unlike 90 per cent of all mutual funds,” says Morrow.

The fact of the matter is the TSX is home of the largest number of cleantech companies in the world (even though many of them still have relatively small market caps). And the launch of S&P/TSX Clean Technology Index to measure the performance of companies listed on the TSX whose core business is in the development and deployment of green technologies puts Canada in the forward-thinking category.

But, “the transition to a cleaner economy can’t happen overnight because of the need to invest in cleaner technologies,” and that is exactly what Scotiabank is doing according to Kim Brand, Director of Environmental Affairs at Scotiabank.

One thing that many agree stands in the way of the development of a cleaner economy is government.

“The lack of action in Ottawa and the gridlock in Washington D.C. prevents or restricts the capacity of governments to put a price on carbon, which is what we really need for clean technology to take off,” says Robert Walker, Vice President, ESG Services, Northwest Ethical Investments.

Do the stress test—does a carbon tax make sense? asks Don Roberts, Vice Chairman Renewable Energy and Clean Technology, CIBC.

Whether it be an assessment of “dirty fossil fuels,” signing documents, or financial performance, there’s a lot more than meets the eye when it comes to Canada’s big banks, RI, and Cleantech. The investment pool from which major banks draw is murky at best. For instance, RBC is currently the only major bank in Canada with specific policies not to invest in cluster bombs.

So what’s the moral of the long and convoluted story of “responsible” investing? It’s really still in its nascence. Nothing is fully established, regulated or standardized. When you’re thinking of investing your hard-earned dollars, do your research or you may end up funding something that could blow up in your face.

The post Putting the R in responsible appeared first on Corporate Knights.