Building ESG and Sustainable Finance Industries in Canada

  • National Newswatch

Modern investors believe companies that prioritize environmental, social and corporate governance (ESG)-related investments represent better long-term returns. The result – organizations worldwide are integrating ESG principles into their operations to reduce their risk profiles and make themselves more attractive to institutional investors.

This presents a significant opportunity for Canada.

Global investment funds applying ESG criteria have nearly doubled over the past four years—accounting for $40.5 trillion USD worth of assets. By 2025, Bloomberg Intelligence predicts total ESG-related investment capital will surpass $50 trillion.

In a time where the pool of ESG-backed capital seems to be ever deepening, the question facing Canada is whether Ottawa will take the lead on ESG and commit to increasing policy supports that incentivize private sector organizations to incorporate ESG principles throughout their operations.

The ESG-era in Canadian Investing

Within Canada, a growing number of pension and private capital funds are applying an ESG lens to their portfolios. Often used interchangeably with other terms like “sustainable finance”, “impact investing” and “sustainable investing”, ESG funds use environmental (i.e. greenhouse gas emissions), social (i.e. human rights) and governance (i.e. employee compensation) factors to guide investment decision-making,

An example of ESG investing can be seen in the Ontario's Teachers' Pension Plan Board, which recently announced that its $242-billion fund will be purchasing greater controlling stakes in their portfolio to engage with corporations to monitor ESG performance.

Another Canadian example is the Toronto-based Brookfield Asset Management, which recently announced an expected $15 billion USD closing for their Global Transition Fund.

At the national level, the Business Development Bank of Canada (BDC) has launched its second fund in November 2022, “Climate Tech Fund II”, allocating $400 million CAD to finance clean-tech across the country—bringing BDC's total clean-tech fund investments to a total of $1 billion since 2017.

What does all this mean for Canadian businesses?

It means that even during a period of slow economic growth, there exists a potential gold rush in the sustainable finance landscape that will see firms with superior ESG performance attract more capital.

The Government of Canada Is Paying Attention

To support ESG investment attraction, the Government of Canada has made several important moves.

Earlier this year, the federal government outlined its plan to begin mandating federally regulated financial institutions to report on climate-related risks in alignment with the Task Force on Climate-related Financial Disclosures framework. As a result, Canada will gradually phase-in reporting requirements beginning in 2024.

In May 2021, the Government of Canada launched its Sustainable Finance Action Council (SFAC). Tasked with the goal of attracting and scaling sustainable finance, the work of SFAC will provide enhanced climate risk and disclosure protocols that help accelerate the movement of private capital in support of both Canada's enhanced 2030 and 2050 net-zero targets.

While SFAC will work closely with Canada's Net-Zero Advisory Body to enhance climate-related financial disclosure, Canada lags well behind other jurisdictions such as the European Union.

Building Private Sector Leadership

To entice ESG investments, Ottawa should consider three key requirements.

First, the Government of Canada must support the expansion of net zero-commitments from Canadian business, rather than dictate sector-specific decarbonization pathways. While fundamental transformation is required of all major Canadian sectors, a multi-sectored approach that coordinates net-zero commitments with credible actions is needed to reach our net-zero targets by 2050.

The Glasgow Financial Alliance for Net-Zero (GFANZ) is one example. Under the shared purpose of increasing the breadth of net-zero commitments from financial institutions, GFANZ represents the type of multi-sectored model that Canadian governments can draw from to help enhance ESG planning across private sector actors.

Second, the Government of Canada must leverage the Montreal-based International Sustainability Standards Board (ISSB) office and its mandate to standardize sustainability reporting standards. Doing so will help Ottawa ensure climate considerations are taken into financial decision-making. This will help clarify ESG-related risks and opportunities to both companies and investors, and in turn, drive private capital investments into sustainable finance mechanisms (e.g. green bonds, contingent grants, concessional loans).

Third, the federal government must coordinate with Canada's provinces and territories to deepen policy supports that enable sufficient ESG data accessibility and reporting in small and medium-sized enterprises (SMEs). While the largest emitting companies in Canada are publicly held, over 98% of privately held companies are defined as SMEs, which employ 70% of the Canadian private sector workforce and represent approximately 30% of national emissions, per the Smart Prosperity Institute. SMEs often lack the capacity to sufficiently report on climate-related risks. Unless supports are created, ESG will serve as a detriment to the growth of private enterprise rather than a source of economic potential.

To capitalize on the wealth of private capital available through sustainable financing, Ottawa must enact new policies that helps incentivize ESG performance and ambition. In doing so, they will help Canada's private sector build investor confidence and attract the type of financial capital that propels Canada towards a more sustainable and competitive economy.

David Billedeau, Senior Director of Natural Resources, Environment and Sustainability, Canadian Chamber of Commerce and Nicholas Palaschuk, Economic Researcher, Canadian Chamber of Commerce