In a silver lining to a challenging 2020, environmental, social and governance (ESG) factors continued to gain momentum, driven by the systemic risks revealed by the COVID-19 pandemic, social justice issues amplified by the Black Lives Matter movement, and continuing focus on climate change. Companies, asset managers, asset owners, governments, and policymakers recognize that ESG factors are financially material. What ESG-related advancements occurred in 2020, and what do these advancements mean for ESG momentum in 2021?

Global ESG Momentum

Over the past year, the volume of social bonds issued increased eight-fold, the number of signatories to the Principles for Responsible Investment (PRI) rose to 3,300, now representing over $103.4 trillion, and the International Capital Market Association (ICMA) released its long-awaited Climate Transition Finance Handbook. Adding to the momentum, Larry Fink, CEO of Blackrock, released his now-famous letter to corporate CEOs stating that “climate risk is investment risk”  and underscoring the significance of “E” factors. However, this year has also shown that the “S” component of ESG should not be overlooked. For instance, after urging action against racial injustice on social media, Adidas faced widespread criticism from its employees, who claimed that the company does not do enough to ensure equal opportunities in its own workforce. The pressure, both from its employees and the public, led to organizational changes and the Chief Human Resources Officer’s resignation.

The findings in recent investor surveys tell a similar story. These reports, including BlackRock’s Global Sustainable Investing Survey, RBC Global Asset Management’s Responsible Investment Survey, and KPMG’s Survey of Sustainability Reporting, document an increasing focus on ESG performance as part of investment strategies worldwide. In short, ESG has gained prominence in global capital markets over the past year and shows no signs of slowing down in 2021.

Governments and policymakers have likewise taken note of the importance of ESG factors. What once were seen as vague promises are now being executed through policy. For example, the European Union’s Taxonomy Regulation was adopted and entered into force, representing a significant milestone for sustainable finance globally. New Zealand became the first country to mandate climate risk reporting aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The UK followed suit shortly after by announcing that climate risk reporting would become mandatory for large companies and financial institutions. Australia demonstrated its leadership in climate action by announcing its national roadmap to net-zero emissions. At this year’s United Nations General Assembly, China announced its commitment to achieving carbon neutrality by 2060.

Progress was also made on improving the consistency of ESG disclosure standards:

  • The Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), the Climate Disclosure Standards Board (CDSB), the CDP, and the Global Reporting Initiative (GRI) announced a shared vision of comprehensive sustainability reporting through a joint statement.
  • The World Economic Forum’s International Business Council, in collaboration with large public accounting firms – Deloitte, PwC, EY, and KPMG – released additional guidance on ESG-related reporting.
  • The inception of the Value Reporting Foundation, born out of a merger between SASB and the IIRC, was announced with hopes of expediting sustainability disclosure harmonization.
  • The International Financial Reporting Standards (IFRS) Foundation released a Consultation Paper to assess the demand for global sustainability standards and the extent to which the Foundation should contribute to their development.

The election of a democratic President is also likely to accelerate momentum for ESG in the United States. President-elect Biden has pledged to re-join the Paris Climate Agreement and is proposing to spend $2 trillion over the next four years with the objective of reaching net-zero emissions by 2050.

ESG in Canadian Policy

Canadian policymakers and government have also responded to the growing economic threats of climate change. In May 2020, the Bank of Canada announced the appointment of Tiff Macklem, Chair of Canada’s Expert Panel on Sustainable Finance, as Governor of the Bank of Canada. Subsequently, a coalition of Canadian banks and insurance companies announced a project to work with the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) to pilot climate scenarios.

The Federal Government has used policy to move the ESG agenda forward:

  • The Canadian Net-Zero Emissions Accountability Act enshrines Canada’s commitment to achieve net-zero emissions by 2050 and is accompanied by a climate action plan, A Healthy Environment and a Healthy Economy.
  • Environment and Climate Change Canada released its Strategic Assessment of Climate Change (SACC), which provides guidance on the assessment of climate-related impacts for projects subject to federal impact assessment and reinforces Canada’s ambitions to be net-zero by 2050.
  • The Large Employer Emergency Financing Facility (LEEFF), which supports companies impacted by COVID-19, includes a requirement for recipient companies to publish an annual climate-related financial disclosure report.
  • The Canada Infrastructure Bank’s (CIB’s) three-year growth plan includes a commitment to invest in five major initiatives that will facilitate a low carbon transition that is inclusive and equitable.

ESG Developments in Canadian Capital Markets

In Canada, ESG has rapidly become integrated into the investment process of institutional investors. In 2019, there was $3.2 trillion in responsible investment assets under management (AUM) in Canada, an increase of 48% over two years. This represents 61.8% of Canada’s investment industry. Net inflows into Canadian ESG-focused ETFs surged to $740M by Q2 2020, more than quadrupling 2019 figures. This was accompanied by equally impressive performance, with a significant number of Canadian ESG funds outperforming their non-ESG counterparts.

Institutional investors are also working together to encourage companies to improve their ESG disclosure. With a combined $1.6 trillion AUM, a group of eight leading Canadian pension funds called on corporations to improve and standardize ESG disclosures in line with SASB and TCFD.

The Institute for Sustainable Finance (ISF) released The Capital Mobilization Plan for a Low-Carbon Economy, which suggested that a net-zero transition for Canada might not be as costly as previously thought.  A coalition of Canadian banks, including TD, Scotiabank, CIBC, BMO, and RBC put $5 million behind the ISF to support research, education, and advocacy for sustainable finance in Canada. In other sustainable finance news, TD issued its inaugural sustainability bond and recently announced a commitment to achieve carbon neutrality in its financing portfolio by 2050.

Key Takeaways

  • 2020 has been a year of unprecedented economic and social disruption. Against this backdrop, there has been transformative global momentum in the integration of ESG factors into investment decision-making, corporate disclosure, and government policy.
  • Canadian ESG developments in 2020 reflect this momentum with investors, corporate leaders, governments, policymakers, and society-at-large driving ESG forward.
  • In 2020, we have seen unprecedented disruptions in the way people work, learn, and live. The fact that ESG momentum has only increased during these times of enormous uncertainty suggests that the momentum is likely to continue in 2021 and beyond.

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This document is for general information purposes only and is not intended to provide legal, accounting, investment, financial or other advice.