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More than three years have passed since a panel of scientists convened by the United Nations issued a stark warning: to avoid the most devastating effects of climate change, the world has until 2030 to cut greenhouse gas emissions by almost half. With just under a decade left, transforming Canada’s fossil-fuel-reliant economy in line with that monumental goal requires not only political commitment and innovation but also money—possibly as much as $200 billion in capital spending over the next nine years, according to Ryan Riordan, the director of research at Queen’s University’s Institute for Sustainable Finance. More windmills and solar panels need to be manufactured and installed, gas stations need to be upgraded with charging stations, diesel buses need to be swapped with hydrogen-powered ones, and buildings need to be retrofitted for energy efficiency. What’s not yet clear is who will pay for it all.
Governments, as wielders of the public purse, have an undeniable role in shepherding this economic transformation. But, according to Basma Majerbi, a finance professor at the University of Victoria’s Gustavson School of Business, “the scale of the investments needed to green our economy and transition to net zero are massive, and government’s money alone is not going to do it. We really need to mobilize private-sector financing to reach these goals.”
Collectively, banks, pension funds, and other investment firms control the distribution of trillions of dollars around the world; their money managers decide whether to finance Big Tech or clean tech, oil or wind. More and more of them are considering the environmental and human rights impacts of the companies they purchase shares in—a principle known as environmental, social, and governance (ESG) investing. Some experts say this growing focus on sustainable finance, including climate-conscious investing, can help shift countries like Canada, almost 10 percent of whose GDP stems from an energy sector dominated by fossil fuels, toward a low-carbon economy.
Several of Canada’s big banks, including the Royal Bank of Canada, the Toronto-Dominion Bank, and the Bank of Montreal, have promised to whittle their financed emissions—emissions tied to their lending, investing, and other financial activities, such as insurance—to net-zero carbon by 2050. At the same time, the banks have committed hundreds of billions of dollars in financing to help address climate change through sustainable investments or loans. In November 2020, the CEOs at eight of Canada’s largest pension funds committed to consider climate and other ESG issues in their investment decisions.
This growing focus on sustainable investment is forcing companies to change how they operate. Increasingly, access to capital depends at least in part on how a company manages its climate footprint, says Ravipal Bains, a corporate lawyer with McMillan LLP. In North America, “it is becoming more expensive to run a less sustainable oil-and-gas business,” he says. In April 2021, for instance, BMO Financial Group and Gibson Energy, a Canadian oil-storage and pipeline company, announced changes to an existing loan that would tie part of Gibson’s cost of borrowing to the company’s performance on certain ESG metrics, including a new target to cut greenhouse gas emissions intensity by 15 percent by 2025.
Meanwhile, the costs of financing renewable energy projects have fallen as the technologies have gone mainstream, creating a rush to invest in these initiatives in order to meet ESG objectives. In the first half of 2021, Canadian clean-tech companies listed on the Toronto Stock Exchange and the TSX Venture Exchange raised $3.09 billion in equity finance through the sale of shares, up 335 percent from the first half of 2020, according to a report by the Institute for Sustainable Finance. The competitive marketplace has also helped push financing costs down. Some oil-and-gas companies are already diversifying with renewable energy projects. “These low-carbon projects can demonstrate their progress on sustainability and also support their capital markets profile,” Bains says. Its increasing rates of return and lower climate risks make renewable energy attractive to investors who are also concerned about environmental performance.
There has been a flurry of net-zero or carbon-neutral commitments—from governments, financial institutions, and a range of companies including BlackBerry, Indigo Books and Music, and even some oil-and-gas producers such as Suncor Energy and Canadian Natural Resources—and a burst of new ESG funds on offer from banks and other investment firms. But some observers worry there’s more hype than substance to the trend. In a March 2021 op-ed for USA Today, Tariq Fancy, a former chief investment officer of sustainable investing at BlackRock, compared sustainable investing to “PR spin.” Fancy warned that there’s often little difference between the funds that claim to be sustainable and others, with “irresponsible companies such as petroleum majors and other large polluters like ‘fast fashion’ manufacturing” showing up in both kinds of portfolios. In June, a study by Inrate for Greenpeace Switzerland and Greenpeace Luxembourg that analyzed fifty-one sustainable funds from those two countries found that the carbon intensities of the sustainable funds were not “significantly lower” than those of conventional funds. In August, the London-based organization InfluenceMap assessed 593 ESG funds and found that 71 percent were “misaligned from global climate targets,” raising further concerns about smoke and mirrors in sustainable investments.
Concerns of “greenwashing”—the idea that companies can frame themselves as better climate actors than they really are—highlight a major potential pitfall for ESG investment. Genuinely sustainable investing could help shift trillions of dollars toward renewable energy and other clean technologies, but only with strong parameters. So far, however, there are no stringent requirements in Canada for climate disclosures, nor is there a single set of standards for what counts as a sustainable investment—regulatory gaps that can make it hard for climate-conscious investors to know how to make the right choices.
Historically, investors have signalled their disapproval of a company or sector by simply putting their money elsewhere—by boycotting whatever it is they object to. This is the case with climate change too: some see investing in fossil fuel companies as antithetical to mitigating climate change, preferring to direct their money toward environmental sectors, such as businesses that produce wind or solar energy.
While investment in these climate solutions is on the rise, much more is needed to meet climate targets. In Canada, for instance, research by financial-analysis firm Morningstar shows funds that market themselves as sustainable accounted for just 1 percent of overall retail, or noninstitutional, investment as of April 2021, and just half of that investment, about $9 billion, was in renewable energy or other environmental-sector companies. The rest is invested in a range of companies and industries including banks, tech, and in some cases, oil and gas.
This is why some investors are taking the fight inside companies contributing directly to climate change, first by investing in those very companies and then by using that stake to try to influence decision making. Investors have various opportunities to influence a company’s climate-related decisions, whether by writing letters to the board about tying executive compensation to emissions cuts, talking to CEOs about plans to align the business with a net-zero world, or voting on shareholder proposals at annual general meetings. Jamie Bonham, the director of corporate engagement at Toronto-based NEI Investments, says his company works to leverage its influence to spur emissions-reduction projects in oil-and-gas companies, for example. This pressure could have the added benefit of helping commercialize and scale up technologies like carbon capture and storage. “And, ideally, we’ll see them transform their business,” says Bonham.
However, the classification of funds can complicate this approach. In the absence of regulations or standards, it falls to individual investors to try to understand what exactly a fund is promising and whether it’s delivering. Morningstar is part of the Canadian Investment Funds Standards Committee, an industry group working to standardize how Canadian mutual funds are classified in order to create a framework for categorizing sustainable funds. But, for these types of classifications to be most effective, there needs to be a global standard for what constitutes sustainability, says Ian Tam, Morningstar’s director of investment research in Canada. There are signs that this could be on the way.
For the moment, the lack of standards even extends to requirements about reporting a company’s climate impact: currently, publicly traded companies are under no obligation to disclose their greenhouse gas emissions. Of the 222 largest companies listed on the Toronto Stock Exchange, only 150 did so in 2020, according to an Institute for Sustainable Finance report. Just sixty companies had released emissions-reduction targets, and only nine had detailed plans to reach them. In its April 2021 federal budget, the Canadian government said it would work with the provinces and territories to make climate disclosures “part of regular disclosure practices for a broad spectrum of the Canadian economy.” In October, the Canadian Securities Administrators, an umbrella organization of provincial and territorial securities regulators, published proposed rules that would require companies to disclose both direct and indirect greenhouse gas emissions or explain why the information isn’t being released. Even if the regulations allow companies to opt out of disclosing, capital markets may decide, Riordan says, with firms that choose not to make climate disclosures finding it harder to raise funds.
Bains says standardized reporting could help prevent greenwashing by making it easy to monitor and compare a company’s progress against its competitors’. Companies that can’t back up their climate rhetoric with data, he says, may then have trouble accessing capital. “Traditionally speaking, capital market investors reward companies that do what they say.”
Roopa Davé, a partner in KPMG Canada’s sustainability services practice, based in Vancouver, is part of a team working with companies to develop sustainability strategies and determine what ESG data, including climate-related data, companies should ideally report and how. Assessing a company’s greenhouse gas emissions alone can be a complex process requiring expertise in science, engineering, and accounting. In a 2020 KPMG survey of sustainability reporting among Canada’s top 100 companies by revenue, 62 percent of respondents acknowledged that they face financial risks from climate change. But only 3 percent quantified those risks, says Davé.
Financial institutions are grappling with some of these challenges as they seek to understand the extent of their financed emissions—the greenhouse gases tied not to their direct operations but to their loans and investments. Vancouver City Savings Credit Union, or Vancity, has set out to reach net-zero emissions across everything it finances by 2040. It also committed to offering only responsible investment opportunities that meet certain ESG criteria. While the financial co-op doesn’t finance or invest directly in fossil fuels, it does issue loans for houses, commercial buildings, and to a lesser extent, vehicles. In Canada, buildings alone account for nearly 13 percent of greenhouse gas emissions. In its 2020 annual report, Vancity estimated that the assets covered by its loans and the investments it manages on behalf of its members accounted for almost 160,000 tonnes of greenhouse gases that year—more than fifty times higher than the direct emissions from its operations.
The greatest costs would be from failing to stop the climate crisis, but companies do face risks as they transition toward a low-carbon world. According to an online post by the Bank of England about the risks of climate change to financial stability, “If government policies were to change in line with the Paris Agreement, then two thirds of the world’s known fossil fuel reserves could not be burned. This could lead to changes in the value of investments held by banks and insurance companies in sectors like coal, oil and gas.” At the same time, fossil fuel infrastructure, such as pipelines, could become stranded assets, meaning their worth could decline faster than investors expected it would.
For pension funds, which manage the money millions of Canadians will rely on in old age, understanding the financial risks of climate change and opportunities in the transition to a low-carbon economy is critical. University of Victoria finance professor Majerbi and her colleague Michael King are working with one of those funds, the British Columbia Investment Management Corporation (BCI), to better understand the implications of climate change for its investments. The work could ultimately help guide BCI’s investment decisions and potentially lead the corporation to shift money from riskier fossil fuel bets to new opportunities in clean tech. This type of analysis will only get better, Majerbi says, with more climate-related disclosures from individual companies about their climate risks and how they are managing them.
While some investors are further along the ESG-investing gangway than others, Tam, Morningstar’s director of investment research in Canada, sees reason for optimism. “It’s a new approach to valuing stocks and understanding risk,” he says. “Eventually, it won’t even be a conversation, everyone will just be doing it.”