Following consultations with some 200 representatives from the private and public sector and civil society across Canada, the National Round Table on the Environment and the Economy (NRTEE) launched its “Capital Markets and Sustainability” report at the Toronto Stock Exchange (TSX) on February 12. The government-appointed body concluded that, by linking sustainability factors with investment decisions, capital markets are key to addressing environmental issues such as climate change and ensuring Canada’s long-term economic competitiveness. Given recent polls showing the environment rising to the top of the public agenda, the report’s recommendations about how to overcome barriers to integrating environmental, social and governance (ESG) factors in investment decisions, is particularly timely.
The report states that Canada’s collective future depends on the extent to which we are able to leverage our advantages in human capital and natural resources to serve present and future generations. If we ignore the global trend of including so-called “non-financial” risk factors related to the environment and human rights in pension fund investment decisions, for example, we do so at our peril.
The Task Force found that, while companies and pension funds are beginning to listen to the marketplace, when it comes to integrating sustainability factors into strategic decisions there remain significant market barriers. This is crucial given that, as drivers of the economy and trustees for hundreds of billions of dollars in assets under management, they must meet the long-term interests of their shareholders and beneficiaries respectively.
The Task Force also noted that the efficiency of our capital markets and our long-term economic prosperity is at stake and capital markets need to be better equipped with information and analytical tools, as well as incentives, to invest in our sustainable future.
Among the report’s key findings were three key reasons why sustainability factors are not taken into consideration in investment decisions to the extent required.
First, the Task Force discovered that there were long held views among pension fund trustees that the consideration of such “non-financial” factors was in general conflict with fiduciary duty. Recent research has revealed, in fact, that a failure to take ESG factors into consideration in investment decision-making is actually a breach of fiduciary duty.
Second, the Task Force revealed that a lack of clarity over the definition of materiality and its inconsistent application and disclosure constituted an important market barrier as well. This is particularly problematic given the highly material nature of many ESG issues, including diminishing ecological services, natural resources and often related social unrest.
Finally, it became clear that, because many ESG factors may only become material over long time horizons, an obsession with short-term performance goes against long-term sustainability — both in terms of not mitigating potential negative impacts but also in lost opportunities.
The report presents a set of recommendations for overcoming barriers related to fiduciary duty, materiality, and “short-termism” to promote economic competitiveness and environmental sustainability. The Task Force believes that these solutions will encourage Canadian capital markets to not only catch up with our European counterparts in integrating ESG factors into investment decisions, but also gain a sustainable competitive advantage.
For a synopsis of the Capital Markets and Sustainability Report’s recommendations, please consult the attached Fact Sheet or view the complete report at:
About the NRTEE
The National Round Table on the Environment and the Economy (NRTEE), an independent federal agency, is dedicated to exploring new opportunities to integrate environmental conservation and economic development, in order to sustain Canada’s prosperity and secure its future.
Capital Markets and Sustainability Task Force
With the Capital Markets and Sustainability Task Force, the NRTEE has explored the relationship between capital markets, financial performance and sustainability in Canada. By facilitating a strong, neutral and independent multi-stakeholder debate on responsible investment and corporate responsibility, the program has explored the links between sustainability (comprising environmental, social and governance issues) and financial performance in Canada.
For more information, contact:
NATIONAL Public Relations
NATIONAL Public Relations
Acting Communications Advisor, NRTEE
SYNOPSIS OF KEY NRTEE RECOMMENDATIONS
Capital Markets and Sustainability Report
(relevant numbered recommendation(s) are cited in brackets for each below)
1. Federal, provincial, and territorial governments should adopt regulations that require pension plans to disclose the extent to which environmental, social and governance (ESG) factors are taken into account in investment decisions, as well as in proxy voting and governance engagement activities. (Recs 1.1 & 1.1 b)
2. All fiduciaries should adopt voluntary disclosure practices on ESG considerations and investment policy and should also be encouraged to sign on to the UN-sponsored Principles for Responsible Investment. (Recs: 1.2a & 1.2b)
3. Federal, provincial, and territorial governments or regulators should enact guidelines which clarify that fiduciary obligations of the trustee include consideration of ESG issues.. (Rec 2)
4. The federal government should lead by example by integrating ESG factors in the funding of grants and projects related to capital markets and federal pension plans. (Rec 3)
5. ESG issues should be integrated into the education requirements of academic and professional institutions and programs, including MBA and CFA accreditation as well as director and trustee courses. (Rec 4)
6. The Canadian Institute of Chartered Accountants (CICA) and the Canadian Securities Administrators (CSA), along with the federal and provincial governments, should establish an outreach and education program for capital issuers so that they can better understand material ESG issues to be disclosed. (Rec 5.1)
7. Capital providers and trustees should engage companies on the potential materiality of ESG issues, adopt policies, and encourage standardized ESG reporting. (Rec 5.2)
8. The CSA should encourage the disclosure of financially material ESG issues through publication of a guidance or an interpretation statement and encourage Canadian firms to be guided by reporting frameworks such as the Global Reporting Initiative (GRI). (Rec 5.3)
9. Securities regulators should support and enforce existing MD&A disclosure requirements related to ESG considerations. (Rec 5.4)
10. Federal and provincial laws and regulations as well as professional standards should be assessed for their impact on sustainability and be amended as required. (Rec. 6)
11. Institutional investors should evaluate the impact of their investment policies on sustainability and on the alignment of fund manager compensation with long-term performance. (Rec. 7)