The year 2019 was a big one for responsible investors who incorporate environmental, social and governance (ESG) factors into investment decisions. Issues such as environmental sustainability, human capital management, diversity and inclusion have become corporate imperatives while CEOs are now rejecting the old shareholder primacy model of capitalism.
The momentum will continue in 2020. Here are five ESG trends for Canadian investors to watch in the year ahead.
Corporate ESG disclosures will begin to catch up with investor expectations
Back in 2017, Canadian securities regulators found that investors were unsatisfied with companies’ ESG disclosure practices. But there are signs that this gap will start to close in 2020.
At a recent business conference, Maureen Jensen, chair and chief executive of the Ontario Securities Commission, told an audience that “not disclosing climate information is actually disclosing that it doesn’t matter to your company, which may in fact be higher risk.” In addition, a 2019 survey from the Canadian Investor Relations Institute found that 87 per cent of companies view ESG factors as important to their company’s long-term success, and 81 per cent of respondents said their board or a committee oversees ESG issues. This should transmit into improved corporate disclosures.
The corporate diversity conversation will move beyond gender
Women are egregiously underrepresented in corporate leadership, and often earn less than their male counterparts. Thus, the increasing focus on gender parity is well warranted, and the business community must continue to step up its efforts to correct the gender imbalance.
But of course, “diversity” encompasses more than gender. While gender disclosure requirements have contributed to an increase of women on corporate boards, to date there have been no such disclosure requirements for diversity indicators beyond gender. But that is about to change.
As of Jan. 1, publicly traded companies governed by the Canada Business Corporations Act are required to disclose their policies and practices related to diversity on their boards of directors and within senior management, including the proportions of women, Indigenous peoples, people with disabilities and members of visible minorities. This will provide investors with data to identify corporate leaders and laggards on a broader range of diversity metrics.
The market will move toward standardized frameworks
Historically, there has been no standardized framework for corporate ESG reporting, or for defining sustainable business activities. As a result, investors have lacked comparable data from companies while terminology has been a source of confusion. But the market is now moving toward standardization on both fronts.
Europe is in the process of adopting a classification system for investors to identify environmentally sustainable economic activities. This system, which will be ratified by European regulators in 2020, will create a common language for European companies and investors – and it will most likely be used outside Europe.
However, many Canadian institutional investors view the European model as unsuitable for a natural-resource-driven economy. As a result, CSA Group, the Canadian standards body, is convening a committee of market participants to develop a transition-focused framework that is more suitable for Canada and other resource-driven economies.
As for corporate ESG disclosures, the CFA Institute is working on ESG standards similar to its Global Investment Performance Standards. It is now convening a working group to define the scope and nature of these standards, including screening criteria, scoring models and benchmarks.
Companies and investors have already begun to coalesce around two key reporting frameworks: the Sustainability Accounting Standards Board and the recommendations of the Task Force on Climate-related Financial Disclosures.
The Canadian market will enter a maturity phase
In Canada, the institutional market has been driven primarily by a small number of large asset owners, mainly pension funds, and a handful of leading asset management firms. But there are many small to medium-sized asset owners, such as corporate plan sponsors and foundations, who have not yet moved on ESG or impact investing. This will begin to change in 2020 as latecomers face pressure from their stakeholders to play catch-up.
On the retail side, there are now more than 100 products in the Canadian market that follow a responsible investment strategy. More than 700 financial professionals – mostly retail advisers – have earned a designation from the Responsible Investment Association and this figure is on track to double by 2021.
More attention will be paid to the quality and effects of ESG strategies
As a result of market maturation, taking ESG factors into account is no longer a differentiator for asset management firms; it is table stakes. For the asset management community, the question has shifted from “Should we do ESG?” to “How do we do ESG?” to “How do we do ESG well?”
As a result, the bar will be raised and there will be more focus on the quality of ESG strategies. In a more competitive market, investors will be able to seek out managers who are doing it better. Thus we can expect to see more sophisticated and nuanced ESG strategies, including more emphasis on stewardship and investments with quantifiable positive impacts.
Furthermore, Queen’s University has recently launched the Institute for Sustainable Finance. The ISF will develop executive expertise and deliver independent research to support the development of sustainable finance in Canada. The Canadian market is thus set to become more sophisticated on all fronts in 2020.
Dustyn Lanz is chief executive of the Responsible Investment Association.