Canadian investors cannot possibly have missed the increased focus on sustainability in recent times. In fact, Morningstar’s Q3 report on the Sustainable fund landscape in Canada saw continued flows into mutual funds and exchange traded funds (ETFs) that have a sustainability focus. Authored by Morningstar Canada’s Director of Investment Research Ian Tam, the report finds that by assets under management, sustainable funds and ETFs topped $28.2 billion, representing a quarter-over-quarter growth rate of 7% and a year-over-year growth rate of 143%. Estimated Net Flows into Sustainable funds and ETFs in Q3 were similar to the prior quarter, at around $2.2 billion. You can find the whole report here.
While fund investors might be making hay while the sun shines on ESG (environmental, social and governance)-themed products, stock investors, especially in Canada, have had a harder time finding sustainable picks. This is on two counts: First, our economy skews heavily towards energy and materials. The two sectors account for about 25% of both the Morningstar Canada Index and the S&P/TSX Composite Index. This makes it difficult for Canadians to disengage from the oil and gas sector, both in our personal lives (including our pensions), and our portfolios. Second, thus far, there have been no coordinated Canadian investor initiatives.
The Importance of Investor Coalitions
In 2019, Canada’s Expert Panel on Sustainable Finance made a series of recommendations to align Canada’s financial system with a low carbon future. One of the recommendations was to establish a national engagement program to drive a broader and more consistent dialogue with Canadian issuers around climate risks and opportunities. An example of this could be investor coalitions.
Globally, investor coalitions aim to engage with management to engineer change, and when that fails, shareholder resolutions have been used successfully to raise concerns. The leading coalition is the Climate Action 100+ Coalition, launched in December 2017 at the inaugural One Planet Summit. The CA100+ is the largest-ever coalition of investors, representing $55 trillion in assets under management. Members include many of the world’s largest public pension funds, like Japan’s Government Investment Pension Fund, the Dutch ABP, AustralianSuper, and California Public Employees' Retirement System, as well as a broad base of global asset managers, including the largest, BlackRock, and others like State Street and JPMorgan. At its launch, it embarked on a five-year engagement strategy to improve climate governance, reduce emissions, and advance climate risk disclosures at the world’s systemically important emitters of greenhouse gasses.
The CA100+ coalition does not file shareholder resolutions but collectively engages. Engagements are led by individual members, there's high visibility and meticulous tracking of the progress that's made in engagement led by individual members on behalf of the collective.
Growing investor frustration with the slow pace of economic decarbonization and with oil and gas companies’ foot-dragging was on display in the results of the battle at Exxon over board seats this past May. Against the recommendation of Exxon’s board, three incumbents were replaced by shareholders with candidates pledging they will push the company away from a business model focused on climate-damaging fossil fuel, and toward a greater focus on renewable energy. The victory seems to show the way the wind is blowing. Here in Canada, a majority of shareholders, discounting the votes controlled by its parent, Exxon, supported a resolution at Imperial Oil to set emission reduction targets.
Outcomes such as these put Canadian companies on notice. And now, a Canadian investor coalition exists.
Climate Engagement Canada, the Canadian version of CA100+
On October 14th, a coalition of Canadian investor associations announced the launch of Climate Engagement Canada (CEC) – a finance-led initiative that aims to drive dialogue between the financial community and Canadian corporations to promote a just transition to a net-zero economy.
The initiative is coordinated by several investor networks including the Responsible Investment Association (RIA), Shareholder Association for Research and Education (SHARE), and Ceres. The UN-backed Principles for Responsible Investment (PRI) is also supporting the program. It launched with 27 investors as Founding Participants, who collectively manage more than $3 trillion in assets, according to a press release.
“Globally, investor collaboration on systemic ESG risks is becoming more common and more formalized. On a practical level, it promises greater impact. A clear advantage for smaller investors is that they often do not have the access that the larger investors have. Being able to pool the voice of the smaller and larger investors into focused collaborative engagements amplifies investor influence,” points out Jackie Cook, Morningstar’s Director of Investment Stewardship Research.
CEC investor participants will identify approximately 40 of the country’s highest greenhouse gas-emitting corporations and will work collaboratively to engage with these companies to encourage leading practices concerning climate change risks and opportunities.
Unity is Strength in Proxy Battles
Currently, shareholder resolutions on corporate proxy ballots in Canada are filed by various parties. However, very few address climate risks by, for example, asking companies to set emissions reduction targets (such as the one brought at Imperial Oil earlier this year).
“Without the broad representation that a coalition brings to bear in engagements, it's easy for a company to ignore or reject an individual shareholder resolution by arguing that the issue being raised does not represent the concerns of the broader shareholder base. As we’ve seen with the global CA100+ initiative, well-positioned shareholder resolutions filed by coalition members can create momentum for impactful engagement,” Cook explains.
Additionally, this could potentially add a level of visibility on the vote outcomes, to see how well these are supported by asset managers and public pension funds and potentially addresses conflicts.
Cook feels that Canadian investor mobilization is long overdue. “If anything, Canadian investors have, up to now, shielded Canadian energy companies from some of the heat that European and U.S. counterparts are feeling – investing in pipelines and oil extraction where international investors have pulled back. We hope that this coalition will fill that void - collectively and publicly stepping up the pressure on heavy emitters and calling out greenwashing where industry net zero claims fall short of science-based net zero alignment.”
