Six sustainable finance trends to watch in 2021

The council will be tasked with developing a well-functioning sustainable finance market, making recommendations “to attract and scale sustainable finance in Canada, including enhancing climate disclosures, ensuring access to useful data on sustainability and climate risks, and developing standards for investments to be identified as sustainable.” The action council will be launched in early 2021, ushering in a new era of federal support for sustainable finance.

ESG fund disclosure standards will arrive

The CFA Institute is developing environmental, social and governance (ESG) standards for investment funds and other products. The Institute aims to “provide greater product transparency and comparability for investors by enabling asset managers to clearly communicate the ESG-related features of their investment products.” The standards will provide a common language for investment firms while helping investors make comparisons when choosing responsible or sustainable investments.

A draft of the standards is scheduled for publication in May. Given the strong credibility of the CFA Institute, we can expect to see wide market adoption globally. We can also expect that any standards considered by the Sustainable Finance Action Council and the federal government would leverage and build upon the CFA Institute’s work, rather than conflict with it.

Environmental and social issues will dominate proxy season

Environmental and social issues will dominate the coming proxy season, with climate change and diversity at the top of the agenda. In November, eight of Canada’s largest pension funds called on corporations to improve their climate-related financial disclosures. Earlier in 2020, fifteen Canadian universities signed the Investing to Address Climate Change Charter, which includes a commitment to engage with companies in their investment portfolios to reduce their carbon emissions. These pledges are part of a groundswell of growing investor support for improved corporate disclosures related to climate change, which will translate into investor action this proxy season.

In late 2020, investors managing over $4 trillion in assets signed the Canadian Investor Statement on Diversity & Inclusion, a pledge to promote diversity & inclusion in their organizations and in their portfolios. The signatories state that they expect Canadian companies to adopt policies, targets and timelines to improve diversity on boards and in senior management. Very few companies currently meet these expectations, which means we can expect to see a flurry of activity on diversity during proxy season.

Banking authorities ramp up climate risk assessment

In the spring of 2020, the Bank of Canada published a report warning of significant economic risks from climate change and the transition to a low-carbon economy. The central bank noted that delayed action would increase the risk of an abrupt repricing of assets, while early action would allow more time for the market to adapt.

As a result, the bank will ramp up its work on climate change in 2021 as it convenes a pilot project with the Office of the Superintendent of Financial Institutions (OSFI). The two supervisory bodies will work with a group of financial sector stakeholders to assess the financial system’s exposure to risks from the transition to a low-carbon economy. The project will strengthen the authorities’ understanding of financial institutions’ governance and risk-management practices related to climate change.

A report on this work is scheduled for publication at the end of 2021. Relatedly, OSFI plans to launch a discussion paper on building financial resilience to climate risks earlier in the year.

The COP26 private finance agenda will drive major climate commitments

The United Nations’ next climate conference, known as COP26, is scheduled for November 2021. It will be accompanied by the COP26 Private Finance Agenda, a global initiative endorsed by former central banker Mark Carney, who is currently the UN’s special envoy for climate action and finance. The initiative’s goal is for every professional financial decision to take climate change into account, particularly by incorporating climate risk management and creating a pathway toward net zero greenhouse emissions by 2050.

This initiative is being coordinated through various networks globally, with the Responsible Investment Association as the convening organization in the Canadian market. We can expect to see major climate commitments from investors and financial institutions leading up to November.

We will see the rise of “transition finance”

“Transition finance” refers to financing that helps high-carbon companies transition to lower-carbon business models, bridging the gap between traditional and sustainable finance. This concept is important for the Canadian market, which is heavily reliant on extractive industries such as energy and mining. These industries need to transform their business models to succeed in a low-carbon world, but they cannot access “green” or sustainable financing due to their high emissions profiles. Transition financing tools, such as bonds with interest rates linked to meeting reduced emissions targets, will help them make the shift.

The CSA Group, a Canadian standards-setting body, is developing a Transition Finance Taxonomy — a classification system to identify business activities that qualify for transition financing. This framework is expected to become available to industry participants in 2021, unlocking a new market for transitioning the Canadian economy toward net zero emissions. The Responsible Investment Association will host Transition Finance Week from October 18^th to 22^nd to convene industry dialogues around this subject.