BlackRock Inc. told CEOs their companies had better have solid plans to thrive in a low-carbon economy lest they face proxy votes against management or even divestment.CARLO ALLEGRI/Reuters
It was a year of talk in sustainable finance in 2021. Now comes the action.
From corporate net-zero emissions promises to regulatory changes that will make climate-related disclosure practices mandatory for companies, the stage is set for some key environmental, social and governance milestones.
In 2022, new measures will be put into play that will give investors and the general public a clearer indication of how committed the financial world is to living up to its grand green pronouncements.
How 2021 became the year of ESG investing
ESG methods and disclosure have inched closer to financial results in importance, especially after BlackRock Inc., the world’s largest asset manager, started 2021 by telling CEOs their companies had better have solid plans to thrive in a low-carbon economy lest they face proxy votes against management or even divestment.
Then, at the November United Nations climate conference in Scotland, financial institutions, investment funds and insurers agreed to align their US$130-billion worth of assets to achieve emissions goals set out in the Paris Agreement. That is, getting to net zero by 2050, with interim targets along the way and oversight as members of the Glasgow Financial Alliance for Net Zero, or GFANZ.
All of this was against the backdrop of natural disasters that scientists say were made worse by the changing climate – from deadly heat waves to wildfires to flooding. The business risks were on full display as the costs tallied in the hundreds of billions of dollars. The catastrophes made environmental activists and the public skeptical that the ESG-related machinations of the business world could have real impact.
At the same time, there is growing criticism in some quarters that the shift to cleaner energy is moving too quickly, that the move from fossil fuels to renewables is leading to shortages. Underinvestment by the oil and gas industry as the pandemic crushed petroleum prices in 2020 is the bigger culprit in soaring energy costs, but it makes the energy transition argument a tougher sell to financially pinched home and business owners.
With all that in mind, here are some developments to watch in ESG.
Canada’s major pension funds have been early in making climate a consideration in investing as beneficiaries demand their money be secure and, at the same time, that it has a positive environmental impact. The Caisse de dépôt et placement du Québec and Ontario Teachers’ Pension Plan Board have set net-zero goals with strategies for getting their portfolios in line to meet the target.
The Caisse has said it aims to sell the remainder of its oil-producing holdings by the end of 2022, and has set up a $10-billion transition fund to help companies such as cement producers and steel makers reduce their carbon intensity. Teachers said it will ramp up clean-energy investments and push companies in its $228-billion portfolio to set paths to net zero.
Expect other big retirement plans to join the net-zero club this year. There are expectations that Canada Pension Plan Investment Board, which manages $542-billion on behalf of Canadians, will make its position on the matter clear. In December, it said it is shifting its strategy by concentrating on helping high-carbon companies cut their emissions and seeking out new technology for doing so.
On the regulatory front, the umbrella group representing Canada’s provincial and territorial securities commissions is moving toward making corporate reporting on climate risks mandatory, and public comments on the plan are due in January. The Canadian Securities Administrators has said it wants companies to adopt the framework set by the international Task Force on Climate-Related Financial Disclosures, which is becoming the accepted standard for climate reporting.
It is not without controversy, as the CSA has recommended a light-handed approach to emissions reporting. Under one option, companies would be required to disclose scope 1 emissions, or those from sources owned or controlled by the company; scope 2, or indirect emissions from the purchase of power, heat or steam; as well as scope 3, or indirect emissions created, for example, when consumers use a product. The latter are the most difficult to quantify.
Companies could be exempted from disclosing their emissions for any of the three categories if they provide an explanation. Under a second option, only scope 1 would have to be disclosed. Despite the overall step forward on disclosure, there will be pushback from green groups, and even some sustainable finance experts, who demand the full menu of emissions be included.
Finally, Canada’s banks, which enjoyed a year-end tear on the stock market, will be busy in 2022 tallying their own scope 3, or financed, emissions as signatories to a global group called the Partnership for Carbon Accounting Financials.
This is timely, as the big banks will face more stringent climate-risk reporting requirements in 2022 and beyond. Peter Routledge, the new head of the Office of the Superintendent of Financial Institutions, the industry’s regulator, has said such obligations will “expand materially” in his seven-year tenure.
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Jeffrey Jones