The new Ontario government have brought much uncertainty to the fate of the provincial climate policies implemented by the Liberal government over their last term. The newly elected Progressive Conservatives announced their intention to dismantle the cap-and-trade system, which generated $2.8 billion in revenue for the province and were earmarked to be invested in initiatives aimed at reducing greenhouse gas emissions within the province (some of the slated spending included retrofits for homes and university campuses to lower energy use). The system was linked to the Western Climate Initiative that has since closed its market to Ontario amid concerns above the stability of the market now that Ontario has announced it’s intention to withdraw. Climate-related regulatory risk has taken a new meaning for organizations that took part in Ontario’s cap-and-trade and have to now balance uncertainty around provincial and federal climate approaches. Later this year, the federal government will be imposing a carbon price on all Canadian jurisdictions that do not have carbon pricing programs in place.
However, despite the potential climate-related regulatory set back in Ontario, market forces, coupled with regulatory developments in other regions, are continuing to advance a transition to a low carbon and resilient economy. This was evident at the Responsible Investor Europe conference held early June in London, UK. The conference brought together close to 700 delegates from 336 companies and organizations. The attendees included asset owners and managers, financial sector regulators, Environment, Social and Governance (ESG) investment professionals, credit rating professionals, consultants and data providers. Mantle was represented at the conference by Olena Kholodova and Laura Zizzo.
Recent developments in climate-related disclosure and sustainable finance in Europe, including those related to the Task Force on Climate-related Financial Disclosures (TCFD) and the European Commission’s Action Plan on Financing Sustainable Growth, made the conference highly anticipated. Indeed, it showed the growing acknowledgment that sustainability / ESG factors, including climate, are crucial for the efficient performance of global markets. The development of approaches to incorporate such criteria in business and investment decision-making is already underway with best practices emerging. It is only a matter of time before it is a mandatory pillar of everyday business for analyst and investors. In fact, a recent article in Barron’s outlines what Blackrock thinks about ESG factors as integral to sound investment strategy. Similar sentiments were found in an article discussing the impact of big-name investors pushing Canadian companies on climate change in the Globe and Mail’s Report on Business Magazine.
Investment practitioners shared their perspective on the progress of responsible investment practice and recent regulatory developments in the EU and UK, noting that although public policy can jumpstart action, public policy is not a necessary precondition to considering climate-related issues in investments. The discussions at the conference were underpinned by two main themes:
- Mainstreaming ESG analysis in investment practice, climate leading
- ESG adds value to mainstream financial analysis. There was much discussion around the prominence of ESG analysis and its ability to uncover “blind spots” of traditional investment decision process. Robust ESG analysis that takes a forward-looking approach can provide an important insight into the financial performance of organizations and to understand their future trajectory. In fact, ESG practitioners reminded the audience of the infamous Volkswagen emission scandal that was foreseen by ESG analysts.
- ESG-related opportunities. In addition to risk mitigation, solutions that relate to issues around ESG hold significant investment opportunities for asset owners and managers. Amongst examples of financial products discussed and are already available on the markets were: (1) thematic investments focused on climate solutions such as electrification, renewables, energy efficiency consumer agricultural solutions with anecdotal evidence for double digits annual growth; (2) innovation in sustainable indices themes; and (3) climate focused debt products such as green mortgages and green bonds
- Quantifying ESG analysis. There was a mixed feedback on disclosure and specifically, the data availability relative to ESG. Some stated there are shortages of relevant data but those working directly with ESG models confirmed that the information is there but needs to evolve into knowledge. This means that the financial services sector has to invest resources into the development of knowledge and practice in ESG space in order to uncover hidden risks and take advantages of new investment opportunities early on. In addition, new technology such as blockchain, big data, machine learning, AI, IoT, etc. and innovation in Fintech present tremendous opportunities for the financial services space. These technologies have the ability to access new data on businesses’ ESG performance, in more efficient ways, at lower costs with a potential for improving information integrity, transparency and organizational accountability.
Climate change emerged as a distinct, important topic in most discussions which investment practitioners were focused on and deemed extremely significant across all ESG topics. In fact, some stated climate was an issue that was prioritized in their analysis as most important and practice to understand and apply climate in business and investment decision context appeared to be advanced further than other ESG areas.
- The road to Sustainable Finance
The much-anticipated developments around sustainable finance regulations by the European Commission was the topic of many discussions for RI Europe delegates at the conference. The sustainable finance related legislation, if passed, promises to help channel capital more sustainably, by taking into account environmental, social and economic considerations with a view of maintaining stability and prosperity of the European financial system. The private sector in the EU is actively contributing to these developments. Once the measures are adopted, the European financial sector will have to further develop and enhance the practice of integrating sustainability / ESG related considerations in their analysis and decision-making processes. This is likely to stimulate innovation in sustainability-focused finance solutions and products, further adding to market forces that will continue advancing the transition to a low carbon, resilient and responsible economy.
Developments Being Led by the EU, Coming to North America Soon
The developments on sustainable finance in the EU are happening at a fast pace. The European Commission is looking to align its financial system with the landmark international agreements including the Paris Agreement, UN 2030 Agenda and Sustainable Development Goals. Following the recommendations produced in January 2018 by the independent High-Level Expert Group with experts from civil society, the finance sector, academia and observers from the European and international institutions, the EU Commission adopted a strategy know as action plan on sustainable finance in March 2018. In May 2018, the EU Commission submitted three legislative proposals on (1) the definition of environmentally sustainable economic activity (taxonomy), (2) investor duties around sustainability considerations and (3) transparency on sustainability benchmarks. By the end of May 2018, the European Parliament had adopted a resolution on sustainable finance which is very similar to the Commission’s action plan.
The UK has its own Green Finance Taskforce that has recently produced a set of recommendations for the UK government including a formation of new Green Finance Institute that was confirmed last week. France is leading with its international center for green and sustainable finance that has been active for a year. It aims to “to move behaviour of the industry” and has been working on the development of financial centers on sustainable finance. Following the success of Article 173 of the French Energy Transition Law that mandates carbon reporting for institutional investors, further regulatory incentives to inform the energy transition in France are expected in the coming months. Our Canadian clients are starting to be asked more advanced questions on climate-related issues by EU-based investors and we expect that trend to continue (and spread to non-EU-based investors as well) as time goes on.
We’ve said it before, we’ll say it again – the momentum is unstoppable
Despite the regulatory uncertainty in Ontario, it is clear that incorporating climate into business and investment decision enhances traditional approaches to business. Regulatory action and policy directions are important, however, it is also critical to consider all aspects of the transitional risk as defined by TCFD. In addition to regulatory risks, TCFD recommends organizations consider technological, market, reputation and litigation risks politically. These will continue to drive the transition to a lower-carbon economy here in Ontario, along with regulatory support in other jurisdictions. Additionally, the physical impacts that will continue manifesting in the form of more frequent and intense extreme weather events (among other impacts) cannot be avoided and will need to be considered in investments and business strategy going forward.
The Canadian federal government is set to continue implementing its climate agenda. In addition to requiring implementation of carbon pricing across all provinces and territories, Canada has recently formed its own Expert Panel on Sustainable Finance that will explore climate-related implications for operational and financial outlooks on Canada’s business and financial sectors. The relationship with countries that are sustainability conscious must be also considered as Canada seeks to do more business with the EU and China.
Despite political turbulence on climate issues, trends are consistently (and more quickly than ever) bending in the direction to support a move to a more sustainable, lower-carbon economy that is crucial to preventing unmanageable climate change and adapting to inevitable impacts. If well prepared, there is much to be gained by the business community and wider society, unlocking new markets, products, jobs and sustained prosperity.