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ESG Investing: Understanding the Importance of Universal Standards & Reporting

Learn more about ESG investing and why investors are calling for universal ESG standards and regulation.

Today, more Canadian investors are focusing on the importance of environmental, social, and governance (ESG) factors when making investing decisions. There is sentiment among investors that publicly traded companies that prioritize and execute well on ESG factors:

  • are more socially and environmentally responsible;
  • tend to support the communities they work in and serve; and
  • might reduce investment risk and deliver better shareholder value in the long-term.

As interest in ESG investing grows, there’s broad agreement that having unified reporting standards and consistent disclosure is important to support investors looking to apply an ESG lens to their investment analysis. ESG frameworks can include metrics and targets, exposure to ESG risks, and integration of ESG factors into the overall company strategy.

Check out our article on socially responsible investing to learn more about ESG integration and the basics of ESG investing.

Consistent ESG Reporting Standards Are Key

Institutional investors have publicly called for more consistent and complete disclosure of ESG information to strengthen investment decision making and to better manage ESG risk exposure in their portfolios. Consistent reporting frameworks are not just important for investors – many publicly traded companies and asset managers look to them for guidance as they seek to be transparent in their own reporting.

Clear, consistent ESG standards and regulation are expected to:

  • help investors make better informed decisions by exposing ESG-related risk;
  • facilitate an equal playing field for public issuers;
  • enhance trust in publicly traded companies and the investment markets; and
  • reduce the potential for greenwashing.

As  the need for consistent and comparable information is being addressed, a consensus is emerging on how to measure, disclose and regulate ESG performance in Canada and around the world.

Did you know: Greenwashing is when companies advertise themselves as being environmentally conscious, but in reality they fail to make any meaningful or actionable commitment to green initiatives.

Global Developments: Convergence on the Horizon?

Given the lack of mandatory, consistent requirements around ESG-related issues, several international organizations developed and advanced their own guidelines and standards for ESG investment disclosure. Among the commonly used and recognized ESG reporting frameworks are the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-Related Financial Disclosures (TFCD). Despite being helpful tools, these voluntary frameworks have resulted in a patchwork of standards, and confusion among asset managers, public issuers, and investors.

Recent developments on climate-related disclosures indicate movement toward mandatory requirements. The International Sustainability Standards Board (ISSB) published for comment a draft standard for climate-related disclosures in March 2022. Both the Securities and Exchange Commission (SEC) in the United States and EFRAG in the European Union published proposed models within days of the ISSB publication. These proposed standards broadly align with the TCFD recommendations, which has emerged as the leading framework for climate-related disclosures.

The ESG Policy Context in Canada

Under Canada’s current legislation, issuers must disclose information that is material to investor decision making, including material environmental issues. Although this disclosure may include ESG-related risks, these risks and their financial impacts – in particular climate-related risks – can be difficult to assess and quantify as they may be subject to greater uncertainty and longer time horizons. This has resulted in uneven disclosure of ESG-related risks among issuers.

In addition to corporate obligations to disclose relevant and material ESG information, a number of initiatives have moved ESG policymaking and standardization forward in Canada in recent years. They include:

  • The Canadian Securities Administrators (CSA) published guidance to help public companies identify material climate change-related risks and improve disclosure.
  • The CSA published guidance for investment funds on their ESG-related disclosure practices, particularly for funds whose investment objectives reference ESG factors or use ESG strategies. This guidance is also intended to ensure that sales communications are not misleading.
  • The CSA sought comment in late 2021 on proposed mandatory climate-related disclosure requirements designed to address the need for more comparable, consistent information to help investors make informed decisions. The requirements contemplate disclosure consistent with the TCFD recommendations.  The CSA received 131 submissions that largely supported alignment of Canadian securities law disclosure requirements with the TCFD framework. The CSA is currently reviewing comment letters and considering recent international developments.
  • Recently, Canadian accounting and auditing bodies approved the formation of the Canadian Sustainability Standards Board (CSSB). It will work with the ISSB to develop and support the adoption of IFRS sustainability disclosure standards, and ensure that Canadian standards are “relevant, responsive and fit” for Canada. The CSSB is expected to be operational by April 2023.

Voluntary ESG Disclosure

As Canadian regulators, public companies and the investment industry work toward standardized and mandatory ESG disclosure, many Canadian public companies voluntarily provide ESG disclosure on their websites or in published sustainability reports.

These sustainability reports can provide valuable information to stakeholders including consumers, the communities where they operate, and investors. As many Canadian public companies are in the natural resources sector (mining or oil and gas), voluntary disclosure often focuses on environmental impacts such as greenhouse gas emissions, water use, and pollution.

Investors can also find ESG-related information, both mandatory and voluntary, in company documents such as management discussion and analysis (MD&A) and annual reports. Such documents can be found on company websites and SEDAR (the CSA’s national electronic filing system for disclosure by public companies and mutual funds).

A number of ESG-focused mutual funds are available for do-it-yourself investors and from financial institutions, and investment dealers. If you’re considering an ESG investment strategy or purchasing an ESG-focused investment, do your own research on the investment first or speak to your registered investment advisor.

Greenwashing Remains a Concern

When reviewing ESG information and company disclosure, look for information supported by global sustainability standards. Many Canadian companies reference these frameworks in their reporting.

Many companies and funds provide useful ESG information, but some may use ESG as a marketing opportunity without taking substantial action. This is known as “greenwashing.” It’s important to research claims being made by a company or fund, and talk to a registered investment advisor.

Momentum Builds for Regulation and Enhanced Disclosure

The momentum behind regulated and standardized ESG reporting is significant and growing in Canada and around the world. In recent years, large institutional investors, proxy advisory firms, global business organizations and Canada’s largest pension funds have called for enhanced ESG disclosure to improve investment decision making. Retail investors stand to benefit from these efforts, as more transparency and consistency in ESG reporting can assist investors in making more informed investment decisions.

Report a Concern

If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using the BCSC’s online complaint form.

InvestRight.org is the British Columbia Securities Commission’s investor education website. Subscribe to receive email updates from BCSC InvestRight.

 

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