New ESG obligations loom large for Canadian finance

This article was written by Jeffrey Jones and originally published in The Globe and Mail on January 5, 2022.

BlackRock Inc told CEOs that their companies had concrete plans to thrive in a low-carbon economy lest they face a proxy vote against management or disinvestment.

It was the year of discussion in sustainable finance in 2021. Now comes the action.

From corporate net-zero emissions to regulatory changes that will make climate-related disclosure practices mandatory for companies, the stage is set for some major environmental, social and governance milestones.

In 2022, new measures will be implemented that will give investors and the general public a clear indication of how committed the financial world is to living up to its grand green announcements.

How 2021 turned out to be the year of ESG investing

ESG’s methods and disclosures have moved significantly closer to financial results, especially after BlackRock Inc., the world’s largest asset manager, began 2021 by telling CEOs that their companies have better opportunities to live in a low-carbon economy. There are concrete plans to flourish, lest they face a proxy vote. Against management or disinvestment.

Then, at the UN climate conference in Scotland in November, financial institutions, investment funds and insurers agreed to align their US$130-billion worth of assets to achieve emissions targets set out in the Paris Agreement. Namely, achieving net zero by 2050 with interim goals as members of the Glasgow Financial Alliance for Net Zero, or GFANZ.

This was all against a backdrop of natural disasters, which scientists say were made worse by a changing climate – from deadly heat waves to wildfires to flooding. Business risks were on full display as costs ran into the hundreds of billions of dollars. The devastation caused environmental activists and the public to suspect that the ESG-related conspiracies of the business world might have a real effect.

At the same time, there is growing criticism in some circles that the shift to clean energy is too rapid, that the transition from fossil fuels to renewable energy is looming. Lower investment by the oil and gas industry is the big culprit in rising energy costs as the pandemic crushed petroleum prices in 2020, but it makes the energy transition argument a tough sell for financially pinched home and business owners.

With all that in mind, here are some developments to watch for at ESG.

Canada’s major pension funds have been quick to make climate a consideration in investing as beneficiaries seek to keep their money safe and, at the same time, have a positive environmental impact. The Caisse de dépôt et Placement du Québec and the Ontario Teachers’ Pension Plan Board have set net-zero targets with strategies to line up their portfolios to meet the target.

CAS has said it aims to sell off its remaining oil-producing holdings by the end of 2022, and has set up a $10 billion transition fund to help companies such as cement producers and steelmakers reduce their carbon intensity . Educators said it would accelerate clean-energy investment and prompt companies to set paths to net zero in their $228 billion portfolio.

Expect other big retirement plans to join the net-zero club this year. There are hopes that the Canada Pension Plan Investment Board, which manages $542 billion on behalf of Canadians, will clarify its position on the matter. In December, it said it was changing its strategy by focusing on helping high-carbon companies cut their emissions and looking for new technology to do so.

On the regulatory front, the umbrella group representing Canada’s provincial and territorial securities commissions is moving toward mandating corporate reporting on climate risks, and public comments on the plan are due in January. The Canadian securities administrator has said it wants companies to adopt the framework set by the International Task Force on Climate-Related Financial Disclosure, which is becoming the accepted standard for climate reporting.

This is not without controversy, as the CSA recommends a light-hearted approach to emissions reporting. Under an option, companies must disclose Scope 1 emissions, or emissions from sources owned or controlled by the company; Scope 2, or indirect emissions from the purchase of electricity, heat or steam; As well as Scope 3, or indirect emissions, for example, when consumers use a product. The latter is the most difficult to measure.

Companies may be exempted from disclosing their emissions for any of the three categories, if they clarify. Under the second option, only Scope 1 has to be disclosed. Despite the overall move on disclosure, there will be pushback from green groups, and even the inclusion of some sustainable finance experts, who call for a full menu of emissions.

Finally, the Bank of Canada, which saw the stock market tear down the year-end, in 2022 its own Scope 3, or funded, emissions as a signatory to a global group called the Partnership for Carbon Accounting Financials.

This is timely, as large banks will face more stringent climate-risk reporting requirements in 2022 and beyond. The new head of the industry’s regulator, the Office of the Superintendent of Financial Institutions, Peter Routledge, has said such obligations will “materially expand” over his seven-year term.

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