In our previous post, we highlighted a number of global goals and campaigns aimed at addressing climate change. In this post, we examine climate change-oriented policies and initiatives that are being adopted by many institutional investors and banks. As banks and investors increase their emphasis on climate change as a part of their business strategies, it is important for businesses to adapt their own operations and policies accordingly. By not doing so, businesses risk reduced access to the capital needed to operate, grow, and conduct transactions.
The following initiatives are being considered, adopted and accepted by many investors, banks and other key financial actors in Canada and elsewhere.
Global: The UN Principles of Responsible Investing (PRI) and Climate Action 100+ (CA 100+)
The PRI is a United Nations-supported international conglomerate of investors working together to implement a set of principles that will help investors invest in a way that promotes a more sustainable global financial system. They do this by implementing an investment strategy in accordance with the following principles (the "Principles"):
- Incorporate environmental, social, and governance (ESG) issues into investment analysis and decision-making processes.
- Be active owners and incorporate ESG issues into ownership policies and practices.
- Seek appropriate disclosure on ESG issues by portfolio entities.
- Promote acceptance and implementation of the Principles within the investment industry.
- Work collaboratively to enhance our effectiveness in implementing the Principles.
- Report on activities and progress towards implementing the Principles.
Climate change is the highest priority ESG issue for PRI investors. Signatories are required to report to the PRI on several indicators regarding their management of risks and opportunities related to climate change. These indicators are modeled on the disclosure framework of the Financial Stability Board's Task Force on Climate-Related Financial Disclosures (TCFD), which sets best practices for effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions. Additionally, signatories must disclose strategies used by the signatory to mitigate climate change risks, such as reducing holdings in fossil fuels and using emissions data to inform investment-making decisions.
As of 2021, the PRI had over 3,500 signatories, representing over $120 trillion in total assets under management.
CA 100+ is an investor-led initiative working to ensure the world's largest corporate greenhouse gas emitters take necessary action on climate change. More than 615 investors across the entire investment value chain, responsible for over $60 trillion in assets under management, are signed on to the CA 100+ initiative. CA 100+ participants are currently engaging with 167 companies across the globe which account for approximately 80% of global emissions.
CA 100+ has established a common high-level agenda for company engagement to achieve clear commitments to cut emissions, improve governance and strengthen climate-related financial disclosures. They have three (3) primary asks of companies: (1) Governance which articulates accountability and oversight of climate related matters; (2) Actions to reduce emissions consistent with the Paris Agreement trajectory; and (3) Climate disclosure aligned with the TCFD requirements and the Global Investor Coalition on Climate Change (GIC) Investor Expectations on Climate Change guidelines (where applicable), to enable investors to assess the robustness of companies' business plans against a range of climate scenarios and improve investment decision-making.
Europe: IIGCC Investor Expectations of Companies on Physical Climate Risks and Opportunities
The Institutional Investors Group on Climate Change (IIGCC) is a European membership body which provides investors with a platform to encourage public policies, investment practices, and corporate behavior to address long-term risks and opportunities associated with climate change. The IIGCC's mission is to enable the investment community to be a major player in achieving "net zero". Capital allocation decisions and investment practices by IIGCC's members are important elements of reaching this goal.
IIGCC's Investor Practices Program was developed around the recommendations of the TCFD. Its activities include developing guidance on how to incorporate climate-related issues into board level processes, assisting investors in assessing and managing climate risks and opportunities, and providing guidance on how to report key climate related outcomes in accordance with the TCFD recommendations.
As of 2021, the IIGCC had 360 members, representing over €50 trillion in total assets under management.
Canada: OSFI and the International Network for Greening the Financial System
On November 30, 2021 the Office of the Superintendent of Financial Institutions (OSFI) announced its membership in the international Network for Greening the Financial System (NGFS). The purpose of the NGFS is to help strengthen the global response required to meet the goals of the Paris Agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development. To this end, the NGFS defines and promotes best practices to be implemented within and outside of the Membership of the NGFS and conducts or commissions analytical work on green finance.
OSFI's membership in the NGFS signifies the Canadian financial sector's increased commitment to climate change management. In January 2021, the OSFI produced, and welcomed comments on, a discussion paper addressing strategies for building resilience to climate change, which we discussed in a previous post. Shortly thereafter, the OSFI committed to developing best practices in climate risk evaluation which will be informed by the Bank of Canada and OSFI pilot project, which uses climate-change scenarios to better understand the risks to the financial system related to a transition to a low-carbon economy.
OSFI has made numerous other climate related commitments in recent months including, but not limited to, participation in the Basel Committee on Banking Supervision's Task Force on Climate-related Financial Risks, which addresses best practices around climate change.
Both locally and abroad, there is a developing consensus among certain institutional investors and financial institutions that businesses' climate change posture is relevant to their investment decisions. In light of this evolving environment, businesses will need to be mindful of investors' climate-related expectations and the potential impact on their business strategies.
Key Takeaways and Action Items on Climate Change (Part III)
In the next post we will examine the development of accounting standards and frameworks around climate change including new and enhanced performance metrics.
The author would like to acknowledge the support and assistance of Ben Buckler , articling student at law.
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