Environmental, social and corporate governance – or ESG, as it is most commonly referred to – has become a central theme in the Canadian and global business landscape over the past few years.
While the importance of all three aspects of ESG has never been in question, what has been a considerable sticking point for many is how investing time, efforts and money in these areas will translate to a healthier bottom line for businesses. That lack of clarity has led many businesses to delay prioritizing ESG efforts in favour of day-to-day operational concerns.
So why do Canadians businesses of all sizes need to pay attention right now? Because the decisions they make surrounding ESG today will have a noticeable impact on their business once the market fully recovers.
Climate change poses material risk to investments
At the Globe and Mail’s recent Sustainable Finance Summit, James Leech, Chancellor of Queen’s University and Chair of the Advisory Board for the Institute of Sustainable Finance, said that companies are now placing a greater emphasis on environmental factors as sustainable finance goes mainstream. “We’ve reached a point where the imperative to comply with regulators to attract shareholder interest and capital and to do right by employees and consumers are all lining up.”
Leech also points to the Canadian Pension Plan Investment Board’s groundbreaking decision to call on all companies to disclose their ESG efforts as a prime example of this and if companies don’t get on board with sustainable finance and ESG efforts, they risk losing out on investment.
Looking through a political lens, debates about whether climate change is real are over, and all federal parties have adopted carbon-pricing policies of some form or another, which economists recognize as the most efficient way to reduce carbon emissions economy-wide. Like many countries and an increasing number of companies, Canada has a goal to reach net zero emissions by 2050. The only way high carbon industries will succeed and create jobs is if investments are made to facilitate their low-carbon shift — and disclosing these ESG efforts is important to demonstrate progress, not just words.
The role capital markets play in advancing ESG and sustainable finance
When it comes to investment and lending decisions, the financial sector widely agrees that ESG factors must be considered when allocating capital. Thanks to pension funds and banks moving the needle forward on the widespread adoption of ESG, capital markets have stepped into line and sustainable finance has now permeated throughout the broader financial services sector.
Canada’s carbon-intensive economy is a challenge. Jennifer Reynolds, President and CEO of Toronto Finance international, says while the energy sector has improved their efforts, the message isn't resonating beyond the sector — and that’s having an impact on efforts to attract green investment beyond Canada’s borders. “A lot of great things are happening within the energy sector, in terms of carbon capture, green technology, but that’s not being recognized internationally as it should.” says Reynolds.
The Canadian government is putting a strong emphasis on cleaner energy overall and has recently announced accelerated depreciation for qualifying equipment . This includes investments like electrical vehicle charging stations to active solar heating, geothermal and ground source heat systems for swimming pools and equipment used to produce solid and liquid fuels from specific waste materials of carbon dioxide. In order to qualify, companies need to get coded for tax purposes.
As ESG gains traction within capital markets, trends are starting to emerge in terms of how organizations are reacting, particularly on the communications front.
Ravi Bains, Associate, Capital Markets and Securities at McMillan LLP, says companies recognize they must demonstrate action on ESG to attract investment. In order to do this, organizations are developing ESG-specific strategies, including training management teams and boards to bring them up to speed, along with disclosing their efforts. On top of that, there’s a growing need for companies to do a better job at communicating this to stakeholders and engaging them in constructive conversations.
The importance of engaging stakeholders on green objectives
Companies must also invest significantly in ESG resources and training to be effective, especially since more and more employees are vocally clamouring for action from their employers.
The Vancouver Airport Authority, for example, has a 2030 net zero target and is working with several business partners to reach that goal. Among its initiatives is finding efficiencies at the airport and making taxiways shorter to reduce emissions and help airlines reduce fuel costs.
“When we’re looking at our own strategic plan and decision-making,” says Diana Vuong, Vice President, Finance and CFO of the Vancouver Airport Authority, “it’s about looking for those opportunities where we can support our business partners but also create value for our organization.”
Climate finance from a global perspective
As companies around the world put greater emphasis on their carbon reduction strategies to achieve their net zero targets, the question of how the global finance industry will support this is critically important.
“Clearly, in terms of solving the climate problem as a whole, it’s about investing in renewables, getting emissions down by electrifying as much as we can and building up that renewable capacity,” says Zoe Knight, Group Head of HSBC’s Centre of Sustainable Finance. “On top of that, we need to look at hard to abate sectors that are going to implement climate plans to source the financing needs to support that.”
One key metric demonstrating greater global acceptance around sustainable finance is the growing demand for green, social, sustainable and sustainability-linked bonds. In 2020, issuance of these instruments was around $490 billion, or about 5% of the market. Half of 2020’s total was achieved in the first quarter of 2021 alone, signaling that significant acceleration of issuance.
The significant steps global industry has taken in implementing their climate goals is incredibly encouraging, but Knight believes it'll be up to them to work closer together to solve some of the outstanding challenges they face towards achieving net-zero. “Clearly, industries know best how to make products less carbon-intensive and more suitable for a sustainable life cycle. We need to collaborate to understand what’s going to be a sensible movement going forward towards a net-zero outcome versus one that’s a good-for-the-next-five-minutes plan.”
External demands mean the time for action is now
We’ve reached the point where ESG can no longer be an oft-considered yet oft-overlooked part of a business. Customers, employers, regulators and investors are making their voices heard, and are expecting businesses take note. And those expectations will soon turn into demands, with very real implications on a business’ bottom line if their efforts in ESG don’t match market expectations. Business leaders need to look beyond the short-term time horizon and recognize that investing in ESG efforts today is an investment in their business success in the future.
Contact HSBC to discuss how you can make ESG a productive part of your operations.