Canada Could Be a Global Leader in Sustainable Investing

Sustainable finance in Canada stands at a crossroads. As the effects of climate change become increasingly more severe and the salience of ongoing social and governance factors becomes ever clearer, the global financial system is recognizing its duty to both fiduciaries and the planet by beginning to transition towards a sustainable future underpinned by responsible investment. Recognizing this context, we are already seeing Canadian pension funds, foundations, insurers, and other institutional investors showing their commitment to adopting best practices in sustainable investment, not only collaborating on a range of environmental, social, and governance (ESG) issues but also, critically, exploring the responsible stewardship of capital invested in some of Canada’s highest emitters. 

Canada’s Sustainable Investment Space

Canada is well-placed to become a model for investors worldwide if it can align this clear institutional interest in sustainable investing with an enabling policy environment and move us closer to our collective goals. Simply put, by working together, the industry can collectively move towards this outcome, and all the benefits it entails.  

In contrast to some jurisdictions, responsible investing in Canada has largely avoided heavy politicization. Canadian investors are acutely aware of the systemic risks posed by climate change—evidenced by recent wildfires, droughts, and flash floods that have caused operational disruptions and physical damage, affecting investment performance. Considering wildfires alone: The Fort McMurray wildfire of 2016, from which my family and friends in the McMurray area fled, precipitated $9.5 billion in direct and indirect costs. And yet since then, wildfire activity has only become more frequent, with our total area burned in 2023 surpassing the historical average by more than six times. Canadian investors understand that these systemic challenges must be addressed, simultaneously underscoring the need for a comprehensive approach to managing risks that impact the entire economy.

It’s no secret that Canada has a carbon-intensive economy. As action is taken both at the domestic and international levels to mitigate the risks of climate change and reduce carbon emissions, there is a clear impetus for investors to prioritize responsible investing. Recognizing the material risks of climate change, Canadian investors have a vested interest in supporting the decarbonization of the entire economy in keeping with their fiduciary duties to their clients and beneficiaries. Dozens of investors have been involved in meaningful collaborative dialogue with Canadian companies through initiatives like Climate Engagement Canada, supporting them in bending their emissions curve to maintain competitiveness in the net zero economy of the future. 

The realization of this future economy brings together challenges to which Canadian investors are well attuned and makes our national investor community poised to lead internationally in a just transition to net zero. Canadian investors are taking explicit action to consider the social dimensions of transition, embedding Indigenous and workers’ rights in their stewardship activities. For instance, when Climate Engagement Canada first established its Net Zero Benchmark drawing largely on the Climate Action 100+ Benchmark Framework of 2022, it set out additional just transition-related indicators to assess the potential impacts of companies’ decarbonization strategies on Indigenous peoples. 

Canada’s Leadership Potential

The growing momentum domestically to engage with responsible investment issues demonstrates the latent potential for Canada to lead the world in an effective systemic transition, particularly against the backdrop of an economy that has largely relied on fossil fuel extraction in the past. Canada has put sustainable development firmly on the agenda through the passing of ambitious laws and policies like the Canadian Net-Zero Emissions Accountability Act, the 2030 Emissions Reduction Plan, and the Federal Sustainable Development Act. Yet in the realm of sustainable finance, there are still clear opportunities to establish a leadership role on the world stage. By international standards, Canada is considered a low-regulation jurisdiction, which hampers the full potential of responsible investing. 

In 2023, the PRI released a report that made several policy recommendations to further support investors in pursuing responsible investment. Canadian investors are currently lacking several fundamental sustainable finance tools that have supported the work of global counterparts, including a national stewardship code and comprehensive and globally comparable public disclosures of sustainability-related information by public and private companies. Regulatory measures of this nature help investors understand the guidelines within which to conduct their responsible investment activity, create cohesion across the industry and ultimately pave the way for full integration of responsible investment considerations, and all the benefits that entail. In short, this regulation enables investor action, to the benefit of all. 

There are signs that Canada is on track to maturing its financial regulations so that investors can more easily identify green and transition-related economic activities. In its 2023 Fall Economic Statement, the Canadian government earmarked $1.5 million to develop a taxonomy aligned with reaching net zero by 2050, and recommendations from the Sustainable Finance Action Council (SFAC) continue to outline the critical market infrastructure needed to scale sustainable finance nationally.

The Canadian Sustainability Standards Board (CSSB) is working with the International Sustainability Standards Board (ISSB) to support the uptake of ISSB standards in Canada, whilst the Office of the Superintendent of Financial Institutions (OSFI) has already incorporated elements of the ISSB’s frameworks in its Climate Risk Management Guideline B-15.

Investing in Canada’s Future Economy

Alignment with global frameworks and collaboration with international bodies are essential in addressing urgent, system-level risks like climate change, and Canadian policymakers must not lose sight of this. When it comes to developing a comprehensive sustainable finance ecosystem, it is not necessary to reinvent the wheel. National governments around the world are launching policies to help investors align their objectives with their fiduciary duties, such as the UK’s National Stewardship Code. If Canada is to lead sustainable finance, it must build on the foundations already established and refine it with our own expertise.

This October, the PRI will be hosting its annual PRI In Person conference in Toronto. This event convenes investors, policymakers, and other responsible investment professionals to learn from and collaborate with their peers around the globe. We have seen from past events the effect these conferences have in the countries in which they are hosted. This is an opportunity to create a drumbeat in the Canadian sustainable finance sector, inviting stakeholders at all levels to engage with the challenges and issues most pertinent to Canada. The same opportunity exists for the Canadian government – to contribute to an enabling environment that allows investors operate effectively, sets the foundations for a world-leading regulatory landscape, and benefits the rest of Canada’s society and economy.