Here’s an interesting disconnect: According to the RIA Canada investor opinion survey (2023), most investors (roughly 79%) are either “somewhat” or “very” interested in investing sustainably, meanwhile the sum of retail assets managed by sustainable investment funds in Canada is still under 2% according to Morningstar’s data.
Contrast the situation with how Canada’s largest pension plans invest, with the majority of assets in this space managed with sustainability in mind. So, why aren’t retail investors acting with it comes to sustainability? RIA’s survey pointed to a few things including lack of knowledge amongst advisors, as well as the perceived potential for greenwashing.
On the latter point, things might just get a bit clearer in the coming year for Canadian investors.
Addressing the Canadian Sustainability Information Gap
Just recently, new sustainability reporting standards have been proposed in Canada that will impact companies you may invest in either directly or via an investment fund. The Canadian Sustainability Standards Board (CSSB) has released draft standards called the Canadian Sustainability Disclosure Standards (CSDS). These adopt the framework created by the International Sustainability Standards Board (ISSB), signalling a move towards mandatory climate-related financial disclosures for public companies in Canada.
The standards are currently voluntary but are expected to eventually become required. There are two main standards - CSDS 1 covers general sustainability disclosures while CSDS 2 focuses specifically on climate-related risks and opportunities. The standards outline what sustainability information companies should report to investors, such as greenhouse gas emissions, diversity data, water usage, etc.
Some key issues in the draft standards are around scope 3 emissions and climate scenario analysis. Scope 3 covers indirect emissions across a company's value chain. While scope 3 can be difficult to measure, Canada is advocating for disclosure given the importance of understanding full lifecycle emissions. Climate scenario analysis involves modelling different future climate scenarios and their financial impacts. This helps investors understand risks but can be challenging for companies to conduct.
New Sustainability Standards Expected This Year
The next 6 months will see significant debate during the public consultation period. Investors and companies will discuss challenges around feasible scope 3 emissions reporting. More countries are looking to adopt these standards, so they are emerging as a global norm. By 2024, the CSSB plans to finalize the standards. They will likely become mandatory down the road as Canadian securities regulators monitor adoption.
What Does This Mean for Canadian Investors?
As an investor, these standards will provide more comparable and consistent sustainability data across companies, and in turn, you’ll see more robust data coming from firms like Morningstar Sustainalytics and others. This enables better analysis of climate risks in your portfolio. However, scope 3 emissions and climate scenario reporting raise practical implementation questions that impact costs and benefits. The consultation feedback will help shape the final standards to balance meaningful disclosure and feasibility.
This article does not constitute financial advice. Investors are urged to conduct their own independent analysis and research before buying or selling any securities.
Trevor David, CFA is Director of Client Solutions at Morningstar Sustainalytics.
Ian Tam, CFA is Director of Investment Research at Morningstar Canada.
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