It’s a very good time to be in the planet-saving business. Decades back, when the nascent “socially responsible investment” sector was just getting started, SRI was a boutique product.
It had scored some conspicuous victories — having played a key role in pressuring South Africa’s business community to publicly repudiate apartheid, for example – but it was still a niche market, a way for conscientious investors to sacrifice a few points of profit to their ethics. Nobody really expected SRI products to keep pace with the market. But then they did — and then some.
Genus’s Fossil-Free CanGlobe Equity Fund, which excludes oil companies and high-carbon emitters, has increased in value 102 per cent since it started in 2013. A comparable benchmark fund composed of large-cap Canadian and international stocks grew by roughly 81 per cent over the same period. The Jantzi Social Index, which tracks large-cap Canadian firms that meet a high standard of social and environmental responsibility, has seen those firms rise in value more than 41 per cent since 2006; the S&P/TSX 60 trailed at least two points behind.
These days, SRI isn’t a hair shirt for virtue-signalling investors – it’s a profitable approach to investment. In fact, even if you don’t care about polluted rivers or a warming planet, SRI makes sense — since the companies that don’t make it into SRI portfolios can sometimes be the ones facing more stringent government regulation down the road, as the world struggles to cope with the threat of runaway climate change.
“Sustainability is good business,” says Donald MacDonald, Senior Vice-President and General Counsel at IGM Financial. “Sustainability is good management, and well-managed firms tend to offer better returns. SRI often involves leading-edge technologies, which makes it an attractive long-term investment.”
Evaluating the ethical value of a company that makes handguns is easy. Measuring how much a company contributes to climate change is harder. A shareholders’ movement to get publicly-traded firms to disclose the degree to which climate change — and the regulations governments impose to fight it — might affect their value has been growing in strength for years. Cautionary tales about the perils of keeping information from shareholders are piling up: just last month, Massachusetts’ top court rejected Exxon Mobil Corp.’s bid to block the state’s attorney general from getting at its records — part of a probe into whether the company concealed for decades what it knew about the role fossil fuels play in climate change.
Under Canadian securities law, publicly traded companies are required to disclose to shareholders any risks to share value posed by climate change.
“Some countries, like the U.K. and Australia, impose specific, mandatory climate change requirements,” says securities lawyer Barbara Hendrickson. “It’s required in Canada in cases where it’s material, but it’s up to the companies themselves to decide what’s material.”
Canadian Securities Administrators, an umbrella group representing securities regulators from every province and territory, ran a survey last year to find out how thorough publicly traded Canadian companies were in disclosing climate risk. Just 56 per cent of the issuing companies surveyed by the CSA provided shareholders with specific climate-change related disclosure; the rest offered what the CSA in its report called “boilerplate” disclosure, or none at all. Of the Annual Information Forms filed by companies that disclosed climate risk, 41 per cent failed to estimate the financial impact of that risk.
Are shareholders being told everything they need to know to understand a company’s climate exposure? Canadian law shares with the U.S. the “materiality” benchmark, which suggests any tightening of the disclosure rules here could put some Canadian companies at a competitive disadvantage. The CSA report points out that the “breadth and quality of disclosure” tends to increase with a company’s market capitalization, and oil and gas companies tend to be more likely to disclose that risk than other firms — two facts that seem to suggest Canadian firms are aware of the risks involved in keeping important information away from shareholders.
Still, a great many of those shareholders want to know more. “There’s pressure out there to improve climate-risk reporting,” says Hendrickson, who describes that 56 per cent figure as “too low.”
“Investors want it. I think a lot of institutional investors really do want to have a positive impact on the environment by holding companies to account for their activities. And of course, investors are very concerned about anything that might affect profits.”
The CSA report concurs, saying that while the companies issuing AIFs “indicated a strong preference for the current disclosure requirements,” those using the disclosures — investors themselves — “expressed general dissatisfaction with the current state of climate change-related disclosure.” Some of those investors also told the CSA that they couldn’t tell from an AIF whether a company that chose not to report climate risk did so on the basis of rigorous analysis, or because it didn’t do the work.
Meanwhile, some of the companies issuing AIFs balk at more stringent disclosure rules because they believe those demanding them aren’t always focused on the bottom line. Some investors, they told the CSA, are pursuing an “agenda” that has little to do with share value, and more to do with pursuing “litigation, resulting in negative impacts on the reputations of issuers or in furtherance of mass divestment campaigns directed at carbon-intensive industries.”
Hendrickson suggests Canada could raise the bar for publicly traded firms by requiring “negative assurance disclosure” — essentially compelling companies that believe they don’t face climate-related value risks to say so in their AIFs, and say why.
MacDonald has doubts about the idea. “Public disclosure is a tricky thing,” he says. “If a company’s disclosure turns out to be wrong, it could face substantial liability.
“I think you’re going to see more disclosure happen down the road. I think that will happen regardless of whether there’s a change in the rules. I think the current rules on disclosure are appropriate. A negative disclosure rule could also be a reasonable approach, but if that discussion occurs, it’s important that the views of all sides be considered.”
The debate continues. Hendrickson, MacDonald and other experts in the green finance field will be taking part in a Canadian Bar Association panel discussion on green finance June 1 in Winnipeg. Visit the website for registration information.
Doug Beazley is a frequent contributor to PracticeLink.