There’s growing acceptance globally that putting a price on carbon emissions is essential if we wish to avoid the worst impacts of climate change. The World Bank reports that almost 40 countries and more than 20 cities, states and provinces have carbon pricing mechanisms either planned or implemented. With 85% of Canada’s population living in a jurisdiction that has some form of carbon pricing, many investors are asking their financial advisors whether their investments are part of the solution or a part of the problem.
The evolution toward carbon pricing in Canada has been spurred on by a growing international coalition of investors actively pursuing shareholder engagement programs around environmental, social and governance (ESG) issues. In Canada, several responsible investment managers are engaging with companies worldwide to disclose and ultimately manage climate change issues to create and sustain long-term shareholder value.
Toronto-based NEI Investments Inc., for example, has engaged with more than 30 companies in the first half of this year alone, discussing its concerns and advocating for positive change relating to a company’s greenhouse gas emissions, climate policy or carbon disclosure. The companies on which NEI Investments has focused its engagement on this year range from Canada’s largest financial services institutions and energy giants, such as Encana Corp. and Suncor Energy Inc., to consumer-focused companies such as Rogers Communications Inc., Lululemon Athletica Inc. and Loblaw Cos. Ltd.
In the same period, Vancouver-based OceanRock Investments Inc., engaged with almost 20 companies to address the climate risks associated with their business operations and advocated for responsible resource development. Its engagement included companies operating in the Alberta oilsands as well as the country’s largest railways and financial services institutions.
In order to reduce risks from carbon pricing, particularly in the heavy oil sector, the subadvisor for IA Clarington Investment Inc.’s Inhance SRI funds, Vancity Investment Management Ltd. (VCIM), implemented an investment strategy focused on divestment, decarbonization, reinvestment and engagement. VCIM engaged with three major banks and one insurance company on the need to manage risks from stranded assets as carbon pricing becomes a reality. VCIM also engaged with five companies on the need to increase their carbon disclosure.
This type of shareholder engagement is having an impact on some of the world’s largest corporations. According to the Carbon Disclosure Project, 30 or so of the world’s largest companies — including Dow Chemical Co., Exxon Mobil Corp. and Bank of America Corp. — have now incorporated a carbon price into their business planning and risk-management strategies.
Responsible investors are making their voices heard on the policy front as well. In early September, NEI Investments and the Shareholder Association for Research and Education (SHARE), along with other Canadian institutions representing more than $4.6 trillion in assets under management, sent a letter to Alberta Premier Rachel Notley calling for the province to fulfil its promise to update and strengthen its climate policy.
“We believe that a robust and credible climate policy will be critical to the future success of Alberta-based companies, in particular the energy sector, and that it will provide necessary assurance to investors,” the letter said. “While reducing climate change-related risks should be a central tenet of Alberta’s climate policy, the Government of Alberta should also be focused on opportunities. Effective climate policy can stimulate innovation and bolster diversification of the Alberta economy. There is a significant and growing investor appetite for opportunities in areas such as renewable energy, energy efficiency, and sustainable land use. Well-designed policies will encourage scaling up of these investments.”
Advisors who incorporate RI mandates have a wealth of experience and several analytical tools available to them to help investors identify the investment risks and opportunities that carbon pricing creates. In many cases, this expertise has come from the pioneering work they have been involved in during the past 25 to 30 years to build momentum around the importance of integrating ESG factors into the selection and management of investments, particularly as they relate to climate change.
The UN Climate Change Conference (COP21) that will be held in Paris at the end of the year may prove to be a milestone event to chart the future of climate change mitigation and global carbon pricing. But whether a new international agreement aimed at keeping global warming below 2°C will be signed or not, investment professionals with RI mandates are well positioned to recognize the investment risks and opportunities and contribute to the above-average returns that RI funds have continued to show in both bull and bear markets.