Using the same framework and standards would benefit not just investors but the businesses themselves.

By Ed McCarthy

In September 2018, the Sun Life ESG Research Study surveyed 50 Canadian institutional pension plans about their focus on ESG. Fifty-two percent of the respondents had no formal ESG policy and 54% had no assets invested in ESG.

Two years later the level of interest had increased dramatically. In November 2020, managers of the eight largest Canadian pension funds, which represented $1.6 trillion of assets at the time, publicly asked Canadian companies to improve and standardize their ESG reporting.

Per the plans’ joint statement: “We ask that companies measure and disclose their performance on material, industry-relevant ESG factors by leveraging the Sustainability Accounting Standards Board (SASB) standards and the Task Force on Climate-related Financial Disclosures (TCFD) framework to further standardize ESG-related reporting.”

Why It Matters

This would be a valuable outcome for all Canadian pension plans, says Eugene Lundrigan, president, SLC Management Canada. His firm is an active investment manager that conducts its ESG-focused research in-house, but he acknowledges there are challenges because the underlying data to use existing analytic tools is often unavailable and lacks standardization. Having companies adopt the SASB and TCFD frameworks would improve that situation.

“I think they’re both excellent frameworks to help us all make apples-to-apples comparisons on different companies and different industries in a way that I think will make all of our lives a little bit easier in terms of a starting point,” says Lundrigan. “I think we’d still do our own homework regardless, but I think that starting point is important.”

Adopting the standards could also influence the reporting companies’ behavior, he adds. Companies will be able to see the metrics for their industry and competitors. Corporate shortcomings on ESG metrics could have a negative impact on how institutional investors view a company’s investment prospects. “I think for companies now you have to be worried that if over time you’re not adhering to some reasonable standard around ESG-risk and climate-risk that you get excluded from some of these institutional portfolios,” he says. “Clearly, it’s going to have a material impact on your business.”

Implementing the Frameworks

The TCFD did not respond to requests for information, but Amanda Medress, director of global communications for SASB, reported that of the 616 companies that disclose SASB metrics, 77 are based in Canada, including Cenovus Energy, Royal Bank of Canada and Canadian National Railway.

SASB standards identify the subset of environmental, social, and governance (ESG) factors that impact financial performance in each of 77 industries. The standards are designed to provide investors with comparable, reliable and consistent data on financially material sustainability information. When more companies in the pension plan portfolio disclose using SASB standards, the investment manager will be able to better compare how companies within an industry are managing the sustainability issues that are material to enterprise value creation, she explained.

Any company can download the SASB standards for their industries on the SASB website, Medress noted. A company determines for itself which SASB standard or standards are relevant to its operations, which disclosure topics are financially material to its business and which associated metrics to report. When a company determines that a sustainability topic is financially material to its business, SASB’s voluntary standards offer a way to standardize disclosure on that topic, for the benefit of both companies and investors. She explained that as a standard-setting organization, SASB does not offer any type of compliance evaluation or certification for reporting companies.

As of early February no information was available on which or how many Canadian companies had responded to the plans’ request.

To learn more about ESG and Canadian pensions, register now for the Feb. 25 CAiP Virtual Forum on ESG & Sustainable Investments. 

Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”