But ESG standards, measurement, and regulation need to catch up
By Emily Holbrook
Institutional investors have become more receptive to environmental, social and governance (ESG) information and investments over the past few years. While initially investors were using it as a defensive tool to boost their risk mitigation efforts, things have changed. Recently, many have opened up to a more proactive approach, targeting assets, investments and projects that promise to make a positive impact on the world around them, Canadian pensions included.
Good for the World, Good for the Portfolio
There is now heightened expectation among stakeholders and society alike, which is making the business case for ESG investing among institutional investors. This was witnessed in November 2020 when CEOs of the eight largest Canadian pension funds, representing $1.6 trillion in assets under management signed an open letter stating: “We are committed to creating more sustainable and inclusive growth by integrating environmental, social and governance (ESG) factors into our strategies and investment decisions. It is not only the right thing to do, it is an integral part of our duty to contributors and beneficiaries. Doing this will unlock opportunities and mitigate risks, supporting our mandates to deliver long-term risk-adjusted returns.”
With Canadian pension funds moving toward fossil fuel-free portfolios, ESG investments have come to the forefront as a favored choice.
Alistair Almeida
“Responsible investing has taken its place as the predominant investment approach among Canadian institutional investors,” said Alistair Almeida, executive director of business development at CIBC Mellon. “Leading Canadian pension plans and other institutional investors are increasingly at the forefront of the ESG conversation, seeking to push the industry and their providers forward as they face rising demand from their members to do more.”
Reporting Standards, or Lack Thereof
The CEOs of the letter calling for more sustainability in investing also threw their weight behind global efforts to improve corporate sustainability reporting, urging companies and their investment partners to report ESG data in a standardized way. They demanded increased transparency from companies on ESG factors, asking them to use the Sustainability Accounting Standards Board (SASB) standards and the Task Force on Climate-Related Financial Disclosures (TCFD) framework to create such standardization.
BlackRock, the world’s largest asset manager, in October 2021 called for harmonized sustainability accounting rules and standards globally. Around the same time, the International Financial Reporting Standards (IFRS) Foundation said it was looking into standardization and comparability of reporting on sustainability and climate-change issues.
Matt Orsagh
“From all we hear the [International Sustainability Standards Board] ISSB is looking to set a global ESG disclosure baseline (starting with climate disclosures) that can then be complimented by local regulation and disclosure requirements,” said Matt Orsagh, CFA Institute’s Director of Capital Markets Policy. “This would be a welcome development, so that investors all around the world can depend on a global baseline of disclosure requirements, with local standards filling gaps or ‘gold plating’ disclosure requirements as necessary.”
The industry continues to see demand from institutional investors looking not only to bring in unstructured data, but also connect multiple sources of it and derive their own scores similar to creating their own benchmark to evaluate the impact of ESG on their investment decisions.
The consensus is that this demand will only fuel the momentum for more stringent ESG reporting measures and continue to drive the standardization of ESG metrics. This applies to both private and public markets.
“There is much effort ahead, but we see very positive progress, for example the placement of the International Sustainability Standards Board office in Montreal,” said Almeida. “This new organization will set sustainability disclosure standards for companies worldwide, further reinforcing the key role and opportunity for Canada and its institutional investors to be global leaders in this space.”
Almeida said many in the institutional investing space are seeing positive and accelerating progress around the challenges associated with clear, compatible and reliable ESG data.
“Investors’ rapidly evolving attitudes and explorations of ESG have set their influence on a macro level,” he said. “It is driving change not only in the way organizations go about their business, but also in the way it defines itself and thinks about its own role in the world.”
Looking Ahead
There is general consensus among investment professionals, institutional or not, that companies demonstrating ESG-astute practices and disclosure will outperform over the long term. The remainder of 2022 may see increased ESG investment and — as many hope — regulation and standardization.
“With new disclosure standards likely put forth by ISSB, the SEC and others, and with EU ESG regulation marching forward, I expect there to be more discipline from investors about what they will accept as ‘ESG’ products,” said Orsagh. “I expect a shakeout in the ESG products space, and if not in 2022, in the near future — more stringent standards about what can and cannot be called an ESG investment.”
CIBC Mellon’s Almeida added that investors should watch for further announcements, especially as the Canada’s Office of the Superintendent of Financial Institutions announced in an industry letter that it will issue draft guidance on climate risk management for federally regulated financial institutions later this year.
Emily Holbrook serves as owner and head content creator at Red Label Writing LLC, a content studio that collaborates primarily with the insurance and financial services sectors.
