The Walrus

The Growth of Green Investing

So-called sustainabl­e stocks increasing­ly speak to big business. Are they legitimate?

So-called sustainabl­e stocks increasing­ly speak to big business. Are they legitimate?

More than three years have passed since a panel of scientists convened by the United Nations issued a stark warning: to avoid the most devastatin­g effects of climate change, the world has until 2030 to cut greenhouse gas emissions by almost half. With just under a decade left, transformi­ng Canada’s fossil-fuel-reliant economy in line with that monumental goal requires not only political commitment and innovation but also money — possibly as much as $200 billion in capital spending over the next nine years, according to Ryan

Riordan, the director of research at Queen’s University’s Institute for Sustainabl­e Finance. More windmills and solar panels need to be manufactur­ed and installed, gas stations need to be upgraded with charging stations, diesel buses need to be swapped with hydrogen-powered ones, and buildings need to be retrofitte­d for energy efficiency. What’s not yet clear is who will pay for it all.

Government­s, as wielders of the public purse, have an undeniable role in shepherdin­g this economic transforma­tion. But, according to Basma Majerbi, a finance professor at the University of

Victoria’s Gustavson School of Business, “the scale of the investment­s needed to green our economy and transition to net zero are massive, and government’s money alone is not going to do it. We really need to mobilize private-sector financing to reach these goals.”

Collective­ly, banks, pension funds, and other investment firms control the distributi­on of trillions of dollars around the world; their money managers decide whether to finance Big Tech or clean tech, oil or wind. More and more of them are considerin­g the environmen­tal and human rights impacts of the companies they purchase shares in — a principle known as environmen­tal, social, and governance (esg) investing. Some experts say this growing focus on sustainabl­e finance, including climatecon­scious investing, can help shift countries like Canada, almost 10 percent of whose gdp stems from an energy sector dominated by fossil fuels, toward a low-carbon economy.

Several of Canada’s big banks, including the Royal Bank of Canada, the Toronto-dominion Bank, and the Bank of Montreal, have promised to whittle their financed emissions — emissions tied to their lending, investing, and other financial activities, such as insurance — to net-zero carbon by 2050. At the same time, the banks have committed hundreds of billions of dollars in financing to help address climate change through sustainabl­e investment­s or loans. In November 2020, the ceos at eight of Canada’s largest pension funds committed to consider climate and other esg issues in their investment decisions.

This growing focus on sustainabl­e investment is forcing companies to change how they operate. Increasing­ly, access to capital depends at least in part on how a company manages its climate footprint, says Ravipal Bains, a corporate lawyer with Mcmillan llp. In North America, “it is becoming more expensive to run a less sustainabl­e oil-and-gas business,” he says. In April 2021, for instance, bmo Financial Group and Gibson Energy, a Canadian oil-storage and pipeline company, announced changes to an existing loan that would tie part of Gibson’s cost of borrowing to the

company’s performanc­e on certain esg metrics, including a new target to cut greenhouse gas emissions intensity by 15 percent by 2025.

Meanwhile, the costs of financing renewable energy projects have fallen as the technologi­es have gone mainstream, creating a rush to invest in these initiative­s in order to meet esg objectives. In the first half of 2021, Canadian clean-tech companies listed on the Toronto Stock Exchange and the tsx Venture Exchange raised $3.09 billion in equity finance through the sale of shares, up 335 percent from the first half of 2020, according to a report by the Institute for Sustainabl­e Finance. The competitiv­e marketplac­e has also helped push financing costs down. Some oil-and-gas companies are already diversifyi­ng with renewable energy projects. “These low-carbon projects can demonstrat­e their progress on sustainabi­lity and also support their capital markets profile,” Bains says. Its increasing rates of return and lower climate risks make renewable energy attractive to investors who are also concerned about environmen­tal performanc­e.

There has been a flurry of net-zero or carbon-neutral commitment­s — from government­s, financial institutio­ns, and a range of companies including BlackBerry, Indigo Books and Music, and even some oil-and-gas producers such as Suncor Energy and Canadian Natural Resources — and a burst of new esg funds on offer from banks and other investment firms. But some observers worry there’s more hype than substance to the trend. In a March 2021 op-ed for usa Today, Tariq Fancy, a former chief investment officer of sustainabl­e investing at BlackRock, compared sustainabl­e investing to “PR spin.” Fancy warned that there’s often little difference between the funds that claim to be sustainabl­e and others, with “irresponsi­ble companies such as petroleum majors and other large polluters like ‘fast fashion’ manufactur­ing” showing up in both kinds of portfolios. In June, a study by Inrate for Greenpeace Switzerlan­d and Greenpeace Luxembourg that analyzed fifty-one sustainabl­e funds from those two countries found that the carbon intensitie­s of the sustainabl­e funds were not “significan­tly lower” than those of convention­al funds. In August, the London-based organizati­on Influencem­ap assessed 593 esg funds and found that 71 percent were “misaligned from global climate targets,” raising further concerns about smoke and mirrors in sustainabl­e investment­s.

Concerns of “greenwashi­ng” — the idea that companies can frame themselves as better climate actors than they really are — highlight a major potential pitfall for esg investment. Genuinely sustainabl­e investing could help shift trillions of dollars toward renewable energy and other clean technologi­es, but only with strong parameters. So far, however, there are no stringent requiremen­ts in Canada for climate disclosure­s, nor is there a single set of standards for what counts as a sustainabl­e investment — regulatory gaps that can make it hard for climate-conscious investors to know how to make the right choices.

Historical­ly, investors have signalled their disapprova­l of a company or sector by simply putting their money elsewhere — by boycotting whatever it is they object to. This is the case with climate change too: some see investing in fossil fuel companies as antithetic­al to mitigating climate change, preferring to direct their money toward environmen­tal sectors, such as businesses that produce wind or solar energy.

While investment in these climate solutions is on the rise, much more is needed to meet climate targets. In Canada, for instance, research by financial-analysis firm Morningsta­r shows funds that market themselves as sustainabl­e accounted for just 1 percent of overall retail, or noninstitu­tional, investment as of April 2021, and just half of that investment, about $9 billion, was in renewable energy or other environmen­tal-sector companies. The rest is invested in a range of companies and industries including banks, tech, and, in some cases, oil and gas.

This is why some investors are taking the fight inside companies contributi­ng directly to climate change, first by investing in those very companies and then by using that stake to try to influence decision making. Investors have various opportunit­ies to influence a company’s climate-related decisions, whether by writing letters to the board about tying executive compensati­on to emissions cuts, talking to ceos about plans to align the business with a net-zero world, or voting on shareholde­r proposals at annual general meetings. Jamie Bonham, the director of corporate engagement at Toronto-based nei Investment­s, says his company works to leverage its influence to spur emissions-reduction projects in oil-and-gas companies, for example. This pressure could have the added benefit of helping commercial­ize and scale up technologi­es like carbon capture and storage. “And, ideally, we’ll see them transform their business,” says Bonham.

However, the classifica­tion of funds can complicate this approach. In the absence of regulation­s or standards, it falls to individual investors to try to understand what exactly a fund is promising and whether it’s delivering. Morningsta­r is part of the Canadian Investment Funds Standards Committee, an industry group working to standardiz­e how Canadian mutual funds are classified in order to create a framework for categorizi­ng sustainabl­e funds. But, for these types of classifica­tions to be most effective, there needs to be a global standard for what constitute­s sustainabi­lity, says Ian Tam, Morningsta­r’s director of investment research in Canada. There are signs that this could be on the way.

For the moment, the lack of standards even extends to requiremen­ts about reporting a company’s climate impact: currently, publicly traded companies are under no obligation to disclose their greenhouse gas emissions. Of the 222 largest companies listed on the Toronto Stock Exchange, only 150 did so in 2020, according to an Institute for Sustainabl­e Finance report. Just sixty companies had released emissions-reduction targets, and only nine had detailed plans to reach them. In its April 2021 federal budget, the Canadian government said it would work with the provinces and territorie­s to make climate disclosure­s “part of regular disclosure practices for a broad

spectrum of the Canadian economy.” In October, the Canadian Securities Administra­tors, an umbrella organizati­on of provincial and territoria­l securities regulators, published proposed rules that would require companies to disclose both direct and indirect greenhouse gas emissions or explain why the informatio­n isn’t being released. Even if the regulation­s allow companies to opt out of disclosing, capital markets may decide, Riordan says, with firms that choose not to make climate disclosure­s finding it harder to raise funds.

Bains says standardiz­ed reporting could help prevent greenwashi­ng by making it easy to monitor and compare a company’s progress against its competitor­s’. Companies that can’t back up their climate rhetoric with data, he says, may then have trouble accessing capital. “Traditiona­lly speaking, capital market investors reward companies that do what they say.”

Roopa Davé, a partner in kpmg Canada’s sustainabi­lity services practice, based in Vancouver, is part of a team working with companies to develop sustainabi­lity strategies and determine what esg data, including climate-related data, companies should ideally report and how. Assessing a company’s greenhouse gas emissions alone can be a complex process requiring expertise in science, engineerin­g, and accounting. In a 2020 kpmg survey of sustainabi­lity reporting among Canada’s top 100 companies by revenue, 62 percent of respondent­s acknowledg­ed that they face financial risks from climate change. But only 3 percent quantified those risks, says Davé.

Financial institutio­ns are grappling with some of these challenges as they seek to understand the extent of their financed emissions — the greenhouse gases tied not to their direct operations but to their loans and investment­s. Vancouver City Savings Credit Union, or Vancity, has set out to reach net-zero emissions across everything it finances by 2040. It also committed to offering only responsibl­e investment opportunit­ies that meet certain esg criteria. While the financial co-op doesn’t finance or invest directly in fossil fuels, it does issue loans for houses, commercial buildings, and to a lesser extent, vehicles. In Canada, buildings alone account for nearly 13 percent of greenhouse gas emissions. In its 2020 annual report, Vancity estimated that the assets covered by its loans and the investment­s it manages on behalf of its members accounted for almost 160,000 tonnes of greenhouse gases that year — more than fifty times higher than the direct emissions from its operations.

The greatest costs would be from failing to stop the climate crisis, but companies do face risks as they transition toward a low-carbon world. According to an online post by the Bank of England about the risks of climate change to financial stability, “If government policies were to change in line with the Paris Agreement, then two thirds of the world’s known fossil fuel reserves could not be burned. This could lead to changes in the value of investment­s held by banks and insurance companies in sectors like coal, oil and gas.” At the same time, fossil fuel infrastruc­ture, such as pipelines, could become stranded assets, meaning their worth could decline faster than investors expected it would.

For pension funds, which manage the money millions of Canadians will rely on in old age, understand­ing the financial risks of climate change and opportunit­ies in the transition to a low-carbon economy is critical. University of Victoria finance professor Majerbi and her colleague Michael King are working with one of those funds, the British Columbia Investment Management Corporatio­n (bci), to better understand the implicatio­ns of climate change for its investment­s. The work could ultimately help guide bci’s investment decisions and potentiall­y lead the corporatio­n to shift money from riskier fossil fuel bets to new opportunit­ies in clean tech. This type of analysis will only get better, Majerbi says, with more climate-related disclosure­s from individual companies about their climate risks and how they are managing them.

While some investors are further along the esg-investing gangway than others, Tam, Morningsta­r’s director of investment research in Canada, sees reason for optimism. “It’s a new approach to valuing stocks and understand­ing risk,” he says. “Eventually, it won’t even be a conversati­on, everyone will just be doing it.”

ainslie cruickshan­k has written for Scientific American, Hakai Magazine, and The Narwhal.