These are interesting times here in my home province of Quebec, Canada.
First, the homegrown Desjardins Group (and the largest cooperative financial group in Canada), has been making waves by declaring a moratorium on loans to pipeline projects on environmental grounds. It has said it will decide this month whether to make it permanent.
Second, the Caisse de dépôt et placement du Québec, the provincial pension fund (and one of North America’s largest pension fund
managers) has indicated that it is looking to introduce carbon budgets for its investment portfolios.
Third, the National Bank (also homegrown, and the sixth-largest commercial bank in Canada) has announced it is choosing to concentrate its oil and gas portfolio holdings in the largest cap companies and to divest from smaller companies, citing increased risk concerns related to oil prices… and environmental regulations.
Financial institutions are clearly beginning to move on the transition to a low-carbon economy. One need only think of the Royal Bank of Canada stating its desire to accompany clients in this transition, or the TD Bank’s recent up-sized billion-dollar US green bond issuance. And it’s a good thing, too, because it is estimated that the value at risk may be equivalent to a permanent reduction of 5% to 20% in banks’ portfolio values over the next ten years.
At the same time, the Canadian Securities Administrators are in the process of conducting a thorough review of issuers’ climate-related disclosures, which dovetails nicely with the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure (TCFD) recommendations.
One thing we know for sure is that things are changing! And it’s becoming increasingly clear that corporate disclosure of material environmental, social, and governance (ESG) issues is needed for capital markets to fully understand and integrate the risks and opportunities they bring.
The other thing we know for sure is that we don’t have all the answers. But we sure do need them. According to a recent study 92% of investors want companies to identify and report on the material ESG issues they believe affect financial performance*.
And while the greater focus on climate change is certainly for the better, I would caution against focusing exclusively on climate change. In fact, companies are increasingly being asked to disclose the factors that are material. But what is material? And, material to whom?
Before targeting or addressing any particular issue – be it climate change, water, supply-chain management, or social license – it’s really important for companies to first figure out what issues are material to their business – and then to own their story. That’s what their investors want to know.
*The Investing Enlightenment – How Principle and Pragmatism Can Create Sustainable Value Through ESG, R. G. Eccles and M. D. Kastrapeli, 2017