Interest in ESG (environmental, social, governance) investing is continuing to reach new heights. While a focus on ESG has been prevalent for some time now, this surge in interest has been fueled by Canada’s commitment to achieving net-zero emissions by 2050 and an increasing number of stakeholders who expect ESG considerations be integrated into their investment programs. As a result, sustainable investments among large Canadian pensions, spurred on by growing climate concerns and social and governance issues observed globally, went from $163 billion to $276 billion in one year.¹ More importantly, the awareness of the potential impact that ESG can have on sustainable risk-adjusted returns is why plan sponsors and plan members have increasingly focused their attention on ESG investing.

As the level of ESG investing has increased, the need for better, more consistent and transparent disclosure standards and regulatory frameworks has also accelerated. With that comes the necessity for higher quality data and the ability to pull together disparate data sets for investor and regulatory reporting.

Net-Zero Commitments

In response to growing concerns about climate change, the Government of Canada made a commitment to achieve net-zero emissions by 2050.² Following the government’s commitment, several pension funds accepted the challenge. In just one year, the number of funds making public net-zero portfolio emission commitments by 2050 or sooner grew from two to nine funds.³ These commitments demonstrate the increased recognition among pension funds of the importance of implementing sustainability measures.

In an effort to reach net-zero emissions, companies are turning to carbon credits. These credits are used to offset emissions and allow the owner to emit a certain amount of carbon dioxide (CO2) or greenhouse gases. The voluntary carbon-offset market is rapidly evolving and is expected to grow to around $250 billion by 2050 from only $2 billion in 2020.⁴ While these credits are intended to help companies meet their climate goals, it is imperative to ensure the quality and transparency of them in order to achieve genuine emission reductions and to avoid greenwashing. Greenwashing involves making an unsubstantiated claim to deceive consumers into believing that a company's products are environmentally friendly or have a greater positive environmental impact than they actually do.

ESG Standardization Efforts

Canada is taking meaningful steps toward increased standardization. Canada’s 2022 budget addressed the federal government moving towards mandatory reporting of climate-related financial risks based on the international Task Force on Climate-related Financial Disclosures (TCFD) framework.⁵ This will require financial institutions to publish climate disclosures that align with the TCFD framework beginning in 2024, using a phased approach. The government will also be moving forward with ESG disclosure requirements for federally regulated pension plans. In addition to these new requirements, the Taxonomy Roadmap Report was developed by the Sustainable Finance Action Council. The report contains ten recommendations that address the merits, design and implementation of a green and transition finance taxonomy for Canada.⁶ Taxonomies can provide better standardization for benchmarking economic initiatives that align with domestic and global climate goals. A sustainable taxonomy has the potential to significantly improve ESG standardization industry wide.

While the government has recently taken steps toward ESG standardization, this comes about two years after the CEOs of Canada’s eight leading pension plan managers signed a statement emphasizing the importance of a more complete and consistent disclosure on ESG practices from investors and corporations.⁷ Pension plans have been leading the effort on industry standardization and have released yet another joint statement in June 2023. This time, eleven CEOs of Canada’s largest pension fund investors issued a statement supporting the International Sustainability Standards Board’s (ISSB) new reporting standards.⁸ The statement suggests companies in which they invest and those seeking their capital should consider these standards as they will become an increasingly important factor when making investment decisions. Additionally, the Canadian Association of Pension Supervisory Authorities (CAPSA) developed their own Guideline for pensions to follow. This Guideline provides guidance around ESG considerations in pension plan management and is intended to support plan administrators who are considering ESG factors that may be financially relevant to their plan’s investments.⁹

While there is a burgeoning interest in environmental initiatives, social considerations are just as important too. The Canadian Securities Administrators (CSA) recently proposed changes to corporate governance disclosure rules that would increase transparency surrounding diversity on boards and in executive officer positions.¹⁰ The proposed changes are intended to provide investors with more detailed information, allowing them to better understand the connection between diversity and an issuer’s strategic decisions.

Clearer Vision

Implementing regulatory standards is likely the most effective way to see real change from a responsible investing standpoint. As the TCFD disclosure framework, taxonomies and CAPSA and CSA guidelines get adopted, pension funds will benefit from having a clearer vision of what securities are a fit for their portfolios and ESG goals. While the depth and scope of future ESG legislation is still to be determined, the continued discussions and emphasis on the topic, along with the growing level of investment, indicate ESG considerations are undoubtedly top of mind for regulators.

ESG and Data Automation

Consistent disclosure on ESG practices by Canadian investors and corporations is a significant improvement, but it will come with further reporting requirements for plan sponsors. Institutions will need data to support their governance and oversight objectives – for example, providing evidence of their ESG scores and exposures and supporting adherence to regulatory requirements and global standards. With no standardization of ESG data or shared industry standards for analysis and reporting, this may seem like a daunting future. Fortunately, digital innovation is transforming the investment landscape and advances in data automation will be key to managing and analyzing ESG data. Next generation analytic tools can help asset owners that manage their own portfolios to complete idea generation, research management, portfolio construction, and risk management. For example, investors can include ESG as an input factor in the decision process and simulate portfolio impact across various metrics. They can perform ESG materiality assessments over time by decomposing the relevant pillars specific to each investment’s industry.

ESG data management is both a challenge and an opportunity for pension funds. As ESG standards continue to evolve, plan sponsors will need fundamental and diligent analysis at every level, including investment processes, compliance practices, organizational design and governance and reporting. With transparency and accountability as the foundations of ESG investing, it is paramount that sponsors demonstrate that their investments are in fact green and not greenwashed. Learning how to put data to work and relying on tools like data science to enable decisions and to communicate those decisions to stakeholders will be key.

Turning to Service Partners for Data Insights

As plan sponsors establish and refine their ESG policies, they will want to seek out service partners with advanced data analytics and reporting capabilities to provide the insight needed to evaluate their portfolios. Service partners should also be able to report how closely a portfolio is complying to a firm’s ESG goals via benchmarking and scoring.

As pension plans continue to drive ESG investing and as the regulatory framework becomes standardized, they will want to be sure to have access to data that meets their needs and the tools to help them maximize their information. Evaluating the right resources and partners to support their investment decisions will help them as the future evolves.

¹ Canadian-Pensions-Dashboard-for-Responsible-Investing-2nd-Edition.pdf (corporateknights.com)
² Net-Zero Emissions by 2050 - Canada.ca
³ Canadian-Pensions-Dashboard-for-Responsible-Investing-2nd-Edition.pdf (corporateknights.com)
⁴ Carbon Offset Market Trends and Growth: 2050 | Morgan Stanley
⁵ budget-2022-en.pdf
⁶ Taxonomy Roadmap Report: Advice and Recommendations (publications.gc.ca)
⁷ Top Canada Pension Funds Ask for Better ESG Disclosure - Bloomberg
⁸ Factiva Newsletter
⁹ 1914 (capsa-acor.org)
¹⁰ Canadian securities regulators propose changes to corporate governance disclosure practices and guidelines - Canadian Securities Administrators (securities-administrators.ca)