The Case for Carbon Screens in ESG Portfolios and Funds

In the responsible investment lexicon, the concept of the carbon footprint is widely accepted as an important metric for analyzing an organization’s activities as expressed as a weight of carbon dioxide (CO2) emissions.

You might be surprised to learn that part of its origin is a Made-in-Canada story. In 1996, Canadian academic Dr. William Rees published Our Ecological Footprint alongside his then-student Mathis Wackernagel. The book and the concept of “ecological footprints” laid the foundations for the development of quantitative tools to measure human impact on the environment.

However, the popularization of the term “carbon footprint” has a stranger genesis: a PR campaign in the early 2000s by British Petroleum (BP) called Beyond Petroleum. During this time, critics say in publications like The Guardian, BP shifted the onus to consumers rather than large-scale companies that could effect real change. During this time, BP unveiled a “carbon footprint calculator” so consumers could assess how their routines could be responsible for global warming.

Today, measuring carbon footprint has become an effective way for ESG analysts to benchmark and compare companies and industries. It has also become an increasingly popular screening tool within responsible investment funds.

For performance- and perception-based reasons described below, I believe that carbon-based screening should be more frequently adopted by fund providers and sought after by investors when choosing responsible investment funds.

Low carbon screens and performance

On a one-year basis, strategies that screen for low-carbon emissions appear to have generally done better than “vanilla” strategies that do not screen for carbon footprint. The below example is a category screen of Canadian-listed global equity ETFs, where I have removed those with thematic and environmental, social and governance (“ESG”) and/or responsible investing (“RI”) mandates using Morningstar Direct data. I then compare them to the Canadian global equity universe that consists of ESG/RI strategies, and finally, the green bar represents the subset of ESG/RI strategies that use a carbon-screen.

Performance by Screen

3-Month 6-Month YTD 1-year
Global Ex- ESG/Thematic/Low-Carbon 9.03 14.26 7.8 7.8
ESG + Low-Carbon 8.27 16.81 16.54 16.54
Low-Carbon 9.82 19.3 21.62 21.62
Source: Morningstar Direct, as at December 31, 2020
The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETFs or returns on investment in the products.

The low-carbon screen added to an existing ESG mandate further amplified returns (low carbon alone seems to have outperformed ESG+Low-Carbon). My assumption is the complete elimination of fossil fuel production companies resulted in eliminating a key sector of performance drag in 2020. Of course, with a nascent rally in fossil fuel stocks — most notably energy stocks in the latter end of 2020 — I see some cyclical bounce-back in the non-ESG/RI category of equity mandates in Canada.

Beyond the recent performance data, there are transformative societal shifts that are taking place that will likely amplify this trend. Growing international cooperation and government policy initiatives including carbon taxing, increased scrutiny and disinvestment from fossil fuel extractors, as well as the continued market dominance of the comparatively less carbon-intensive technology sector are all important factors that have favored low-carbon companies.

Key considerations for funds

Even amidst the current COVID-19 pandemic, Canadians have highlighted that climate change continues to be viewed as an “extremely serious” issue that we face. As it relates to investing, according to the Responsible Investment Association’s 2020 Investor Opinion Survey, 72% of Canadian investors are interested in responsible investing, which incorporates social, environmental and governance factors.

I believe carbon footprint screens are a necessary and objective measurement for a truly environmentally responsible portfolio, as it provides consumers with the full context of how their holdings positively or negatively affect the environment.

Currently, there are multiple ESG-labelled funds available that include high-carbon-footprint companies, including within the oil and gas industry. While some may be pursuing initiatives to lessen impact, it is my view that fossil fuel extractors are not environmentally-aligned companies – especially when the top 20 companies that have contributed to carbon dioxide emissions from 1965 to 2017 – 480 billion tonnes worth – are all fossil fuel extractive companies.

As part of a carbon- and emissions-intensive industry, I believe these companies are not likely to be found represented within a fund that utilizes low-carbon methodologies and screening. I also believe it unlikely that an investor, concerned about the environmental impact of their portfolio, would choose a fund identified as environmentally conscious that includes major polluters.


It is important to note there isn’t a one-size-fits-all approach to carbon screening. For instance, in addition to other screening methodologies, including a prohibition on fossil fuel producers, companies held within the Horizons Global Sustainability Leaders Index ETF (ETHI) must have a carbon efficiency that puts them within the top one-third of companies in their respective industry. ETHI is not alone with this screen. Other carbon-based screens, including those with a capped emissions threshold, might not hold some of the companies held within ETHI, deeming the global giants it holds, like Apple, to have too high of a carbon footprint for its criteria.

Ultimately, I see carbon screens as an effective tool that has not only contributed to evidenced recent outperformance compared to non-carbon screened funds,[1] but also heightens the legitimacy and perception of environmentally-aligned investment methodologies. I encourage fund providers to consider a wider adoption of carbon-based screening in their responsible investment portfolios and for investors that are concerned about the environmental impact of their portfolios to actively seek funds that do include them.

Commissions, management fees and expenses all may be associated with an investment in the Horizons Global Sustainability Leaders Index ETF (the “ETF”) managed by Horizons ETFs Management (Canada) Inc. The ETF is not guaranteed, its values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETF. Please read the prospectus before investing.


[1] Morningstar Direct, as at December 31, 2020

Contributor Disclaimer
Any information offered in this report is believed to be accurate but is not guaranteed. All of the views expressed herein are those of the author and are not necessarily the views of Horizons ETFs Management (Canada) Inc. Comments, opinions and views expressed are of a general nature and should not be considered advice to purchase or to sell mentioned securities.
RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

How ESG is Driving Investor Expectations in a Post-Pandemic World

An increasing array of institutional and individual investors are mobilizing around the business case behind considering environmental, social and governance (ESG) factors in investment decisions. According to the 2020 Canadian RI Trends Report, there are currently $3.2 trillion in responsible investment assets under management (AUM) in Canada with a 48 per cent growth over a two-year period. This represents 61.8 per cent of Canada’s investment industry. Canadian investors have become more particular about how they deploy their capital and seek to deliver returns with ESG factors as a key consideration.

Amidst ongoing global uncertainty, institutional investors continue to seek investments that shelter their capital from risks while also generating strong returns. Even before the global crisis caused by the COVID-19 pandemic exposed the importance of public health policies to investments, there were reasons to think about ESG issues when making investment decisions.

Changing Investor Considerations

Some investors believe that healthy markets require stronger economies and stable societies: for them, investing is about ‘doing well’ while also ‘doing good’. This may be particularly relevant in values-driven organizations, for example faith-based organizations or mission-driven foundations who seek to generate investment returns to support the long-term goals of a values-driven organization. Similarly, an increasing array of responsible investment funds are seeing growing popularity – particularly among millennial investors. The implications for pension plan sponsors and pension investors may vary significantly based on their underlying plan member audiences as well as the individual expectations and requirements of their Boards and Trustees.

Just as purpose varies among organizations, the ways in which asset owners, sovereign wealth funds, investment management firms and corporations manifest ESG in their investment habits also varies. One organization might put more emphasis on the “E” as in climate change, while another might be more interested in the “S” such as issues surrounding healthcare or social justice. Others may expressly defer these assessments to their asset managers. The diversity of thinking remains a key hallmark – both for those seeking to make a difference as well as for those awaiting greater clarity, more data or greater standardization.

Across the spectrum, a few consistent themes nonetheless emerge. Notably, institutional investors are demanding transparency on ESG issues and are looking for additional investment options that may lead to positive ESG outcomes. A recent study that BNY Mellon conducted with the Official Monetary and Financial Institutions Forum (OMFIF) showed that three-quarters of the central banks, sovereign wealth funds and public pension funds surveyed consider ESG factors in their investment process. Some investors are pursuing impact investing as a way to drive innovation in alternative technologies that may reduce the environmental impact of more traditional solutions. In addition, as millennials continue to accumulate wealth, financial services firms may see opportunities to shift strategies and create values-based investment options and products.

ESG Investing Challenges and Opportunities

Today’s complex market challenges include the growing need for both greater consistency in, and increased access to, the best practices of ESG investment. Among these best practices is the need for customization to reflect individual preferences, standards to support the ESG investment process, and demonstrability of ESG representation in sustainable investments. Just as asset owners are facing rising demands from Boards and Trustees, asset managers and issuers alike can similarly expect demands for greater transparency around ESG investing in portfolios from internal and external stakeholders.

According to forthcoming research from CIBC Mellon regarding how Canadian pension funds are preparing for a post-Covid-19 environment, 80 per cent of pension funds intend to be more vocal about investment strategies over the next 12 months. CIBC Mellon commissioned a survey of 50 leading Canadian pension managers, half of whom had between $600m and $1.2B under management, and half with more than $1.2B under management. As pension funds work with, allocate to and collaborate with external managers, many intend to be more hands-on than in the past. This not only relates to performance, but to broader issues such as governance and the consideration of nonfinancial or values- driven factors such as ESG. While investors cited areas like transparency and fee reduction as their top priorities for the year ahead, 44 per cent of respondents indicated they plan to focus more on fund managers that take ESG issues into account.

As organizations think about their investment allocations, investment management, performance/compliance monitoring and operational efforts in the years ahead, the opportunity to align their purpose with what they do and how they do it will likely continue to rise – as will pressure from data that increasingly correlates value and values around the incorporation of ESG factors. Investors’ rapidly evolving attitudes and explorations of ESG have set their influence on a macro level. It is driving change not only in the way organizations go about their business, but also in the way it defines itself and thinks about its own role in the world.

While this paradigm shift continues to evolve and investment industry stakeholders reassess their approaches, these trends will likely be a defining challenge not just for the current generation but for generations to come. That significance will drive what stakeholders are expecting of their providers, whether it is citizens wanting more from their sovereign wealth funds; pensioners and retirees setting higher expectations for pension funds; or sovereigns and pensions expecting more of their investment managers.

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Four Ways to Boost Climate Resiliency Without Government Spending

As we flip the calendar on 2020, a year forever marked in our collective memory due to the global health pandemic, many of us are now asking: “how do we build back, and create a better future?”

With federal and provincial governments having already spent hundreds of billions so far on helping Canadians and businesses survive the economic devastation caused by the pandemic, and many more years of record government debt and deficits to come, will there be anything left in the vault for the next global crisis? How can our governments prepare for the inevitable climate crisis to come, without adding to the record mountain of debt and deficits?

Interestingly, some clear and pragmatic solutions were proposed in 2019 by an expert panel in sustainable finance. This expert panel, chaired by Tiff Macklem, now the Governor of the Bank of Canada, and consisting of some of the top finance minds in Canada, made certain recommendations to the federal government on how to mobilize private capital, spur sustainable growth and address climate change.

While this report, Mobilizing Finance for Sustainable Growth, is a thoughtful and comprehensive roadmap connecting the dots between Canada’s climate objectives, economic ambitions and investment imperatives, four recommendations within the report addressed solutions on how to mobilize capital from the private sector to build a sustainable and resilient economy for the future. These recommendations focused on utilizing tax and investment incentives within the tax code to catalyze private capital to invest in the green economy, specifically the (1) expansion of registered savings plans for climate conscious products, (2) use of tax credits for investors, (3) tax exemptions for green bond investors and (4) increased interest deductibility for green bond issuers.

Before diving into these recommendations, the use of targeted tax and investment incentives historically have shown to be very successful in catalyzing, building and supporting various industries in Canada. For example, the principal residence tax exemption and first time homebuyer incentive are essential in encouraging home ownership formation. The scientific research and experimental development tax credit and various provincial venture capital tax credits provide critical investment incentives for technology and biotechnology investors. Flow-through programs mobilize risk capital for the mining and oil and gas sectors. Accelerated depreciation tax credits motivate manufacturing companies to invest in new equipment. Even registered plans such as RRSPs and TFSAs encourage individuals to save for their retirement and provide a way to supplement their CPP. These targeted incentives do not require direct government funding and is a smart way of directing needed capital into creating employment and building industries.

1. Expansion of registered savings plans

Recommendation 2.1 of report encouraged government to “create a financial incentive for Canadians to invest in accredited climate-conscious products through their registered savings plans.” Specifically, the panel recommended the program provide: (i) taxable income deductions greater than 100% on eligible contributions combined with (ii) an extended fixed-dollar contribution limit accredited climate conscious investments.

2. Use of tax credits for investors

Recommendation 9.2 (b) of the report also further encouraged the use of tax credits, whereby bond investors would receive tax credits in place of interest payments so that issuers do not have to pay a full market interest rate on their green bonds.

3. Tax exemption for green bond investors

The report also recommended the consideration for tax exemptions to green bond investors, where investors would not pay income tax on interest from the green bonds that they hold.

4. Increased deductibility for issuers

The report also suggest providing green bond issuers with increased interest deductibility whereby issuers would receive a multiplier on the interest deductibility of their green bond issuances.

The report further encourages to “work with financial sector leaders to accelerate Canada’s supply of liquid green and transition-linked fixed income products” through a range of temporary issuance based incentives.

Adoption of these recommendations would incentivize Canadian investors to invest in Canadian businesses that contribute to a sustainable and environmentally resilient future, while also helping improve their competitiveness. For example, RE Royalties Green Bonds or CoPower Green Bonds will be used to finance investments made in renewable energy generation, energy efficiency management and sustainable infrastructure.

It would in turn provide innovative companies with the necessary capital to bring their products and solutions to market, create high quality employment, enrich communities, and build sustainable ecosystems. This flow of capital will supplement government efforts in ensuring we meet our climate goals on time and will not require direct government funding into the sustainable economy.

As we approach the one-and-a-half-year mark of the expert panel’s report on sustainable finance, it is important that the recommendations made not be lost or further delayed within the internal bureaucracy of governments. The climate crisis is already here and will get increasingly more devastating with each passing year. Further studies to be actioned later will only exacerbate what is already an urgent situation.

As 2020 has shown us, global life altering events like a pandemic or climate change, have a way of redefining economies and societies. While sustainable finance is not a panacea to the climate crisis, it is a vaccine to protect us from the devastating effects of climate change.

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Effective Climate Governance: A New Guide to Assist Corporate Boards, Investors and Asset Managers

Climate-related financial risk, along with other environmental, social and governance (ESG) factors, are increasingly top of mind for Canadian investors.

In November 2020, the Chief Executive Officers of eight of the largest pension fund investment managers in Canada, representing $1.6 trillion in assets, issued a statement recognizing the need for a post-COVID-19 recovery that puts sustainability at the centre of the effort; seeking standardized ESG disclosure from portfolio companies, aligned with the Taskforce on Climate-related Financial Disclosure (TCFD) framework. The federal government has just announced that it is encouraging its crown corporations to disclose progress on emissions reductions using TCFD and it is currently conducting public consultations as to whether it should require federally-regulated pension funds to disclose ESG in their statement of investment policies and procedures.

In order to seriously scale up sustainable investing and effective climate governance, corporate and pension boards need the tools that can support their efforts. One such tool is the new Audit Committees and Effective Climate Governance, A Guide for Boards of Directors developed by the Canada Climate Law Initiative (CCLI). Whether you are an asset manager, asset owner or advisor, this comprehensive guide offers insights as to what you can expect from investee companies and their management of climate-related risks and opportunities. While the board of directors has responsibility for oversight of the company’s strategic planning, risk management and business plan, its audit committee is commonly delegated responsibility to undertake detailed scrutiny and oversight of financial reporting processes. It has a pivotal role in disclosing climate risks and opportunities in the financial statements, increasingly essential for investor confidence in the company’s financials.

Given the increasing financial impacts of climate change, directors have a duty to ensure that they are managing and disclosing climate-related risks and opportunities. Investors are increasingly committed to responsible investing, incorporating ESG factors into decisions on investments, managing risk, and enhancing financial returns. The 2018 Global Sustainable Investment Review reported that sustainable investing assets have grown to US $30.7 trillion globally. The 2020 Canadian Responsible Investment Trends Report observes that in Canada, there are $3.2 trillion in responsible investment assets under management, a 48% growth over a two-year period. It reports that responsible investing now represents 61.8% of Canada’s investment industry. That amount is poised to grow substantially, given investor interest and clear signals from the federal government that Canada’s future relies on sustainable and responsible investment.

In seeking to attract capital, the board relies on the audit committee to assess the quality and accuracy of climate-related financial disclosures, and the new Guide offers practical, detailed questions that audit committees should be asking their managers and internal auditors. Key factors for accurate assessment of the company’s financials include assessment of both acute and chronic physical risks, economic transition, and litigation risks; changing consumer, debt and equity investor expectations; regulatory requirements; and best practice guidance. As the audit committee’s leadership role evolves, its comprehensive valuation of financial risks and opportunities will support the rapidly growing responsible investment market.

Canadian securities regulators have been clear that climate change is now a mainstream business issue and that companies must disclose material climate risks and how they are addressing them. They have cautioned that boilerplate disclosure of climate-related financial risks is no longer acceptable. The Audit Committees and Effective Climate Governance guide offers practical tips and insights as to regulator and investor expectations. Audit committees have a central role in ensuring the company’s financial reporting is comprehensive and accountable. This guide draws together current legal and best practice guidance for audit committees, to assist them in taking a leadership role in effective climate governance.

The guide also helpfully tracks how the different frameworks, such as the Sustainability Accounting Standards (SASB) and the TCFD, fit together in the Canadian context. It sets out expectations by Canadian securities regulators of company disclosure, situates Canadian accounting standards requirements in recent developments in International Financial Accounting Standards and the World Economic Forum’s core set of ‘Stakeholder Capitalism Metrics’, and discusses how disclosures can be used by boards to align their mainstream reporting on performance against ESG indicators, including climate change.

External auditors are increasingly integrating climate issues into external audits, and it is only a matter of time before they will raise climate issues as a ‘key audit matter’ for some entities, so the audit committee must be prepared. The guide offers a series of questions that the audit committee can ask, in terms of assuring itself that financial reporting accurately reflects the company’s governance, strategy, risk management, and metrics and targets relating to climate change. It offers practical tips on what investors are looking for in financial statement and management discussion and analysis (MD&A) disclosure. Climate risk and opportunities, along with other ESG factors and financial metrics, are important to assessing investee companies’ value.

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

The PRI’s Reporting Redesign & Insights on Canadian Data

The UN-supported PRI aims to bring responsible investors together to work towards sustainable markets that contribute to a more prosperous world for all. Signatories sign on to the six principles and to annual mandatory reporting to the PRI on their responsible investment activities. As a result, the evolving Reporting Framework houses a unique and incredibly powerful database of standardized (i.e. comparable) responsible investment data. This data has been directly reported since 2012 by thousands of investors around the globe covering every asset class. In analysing this data, we are able to identify market trends, best practices and pain points, and we can cut this data in a number of ways to gain powerful insights into various factors. In an effort to enhance transparency in sustainable markets, the PRI shares these insights via an incredibly data-rich set of dynamic “snapshot reports” which are publicly available:

Overview: Map of AUM Distribution by Asset Class

*See links to more snapshot report below

Redesigning the Reporting Framework

To mark the PRI’s 10-year anniversary in 2016, we undertook a series of initiatives to review progress and create an ambitious and achievable vision for how the PRI and the wider responsible investment community should progress over the next 10 years. These activities culminated in the launch of “A Blueprint For Responsible Investment” (“the Blueprint”) in 2017, setting the direction of our work for the 10 years ahead. The overarching aim in the Blueprint is to bring responsible investors together to work towards sustainable markets that contribute to a more prosperous world for all. This aim is underpinned by 9 priority areas, one of them being “Driving Meaningful Data”. One of the deliverables of Driving Meaningful Data was around the redesign of our reporting framework to include Sustainable Development Goal (SDG) Outcomes.

The 2020 Reporting Framework, while comprehensive, focuses primarily on the processes in place to implement responsible investment policies and activities. The PRI’s long-term goal is to develop the Reporting Framework to allow us to better measure the contribution that responsible investment has to tangible ESG improvements. We decided it was time to overhaul and redesign the entire framework. The aim of the redesign was both to ensure PRI’s reporting and assessment has clear objectives of how it will contribute to driving change in the investment industry and to ensure that it remains relevant to evolving responsible investment practices.

An example of a significant changes is the introduction of the ‘core’ and ‘plus’ model. It clarifies and builds on the previous Reporting Framework of having mandatory and voluntary indicators, grouped into two main components:

Additional improvements to the Reporting Framework included making it shorter and more concise. For example, many indicators that repeated within asset class modules were pulled out and added to the overarching modules. We have also made the new framework more detailed. Signatories will be asked not simply about what their policies and activities are, but also about the breadth of the assets under management coverage and the depth of their activities. For example, how ESG information is used in investment making decisions, monitoring and escalation is much more of a focus. To learn more about the redesign click here or to have a look at the new detailed reporting questions click here.

An Example of Canadian Reporting Data Insights

Upon analysing some of the Canadian signatory data, the signatory relations team has identified fixed income as an area of opportunity for 2021. Fixed income is the most commonly reported on module among Canadian signatories yet it scores the most poorly on average. Responsible investing policies and procedures specific to fixed income are not commonplace in Canada and many other markets, though there is a clear trend towards addressing this and though the scores are low they are improving. For example, in 2020 Canadian signatory reporting, 14% of direct fixed income (internally managed) reporting modules received a score of zero (or a grade of E).**

For context, globally 13% of direct fixed income modules received a score of zero and in the UK alone that figure was halved at 6.5%. These scores are from 2020, the new Reporting Framework which is open now for the 2021 reporting season, is more in depth. For example, previously signatories were asked if they incorporated ESG into their fixed income investment activities whereas in the new Reporting Framework, they will have to disclose the breadth of assets under management covered by these activities as well as the extent to which they are implemented.

Percentage of ‘E’ Scoring Directly Managed Modules

Percentage of ‘E’ Scoring Externally Managed Modules

In an effort to accelerate progress within the Canadian investment industry, the PRI hosted (and recorded) a webinar to review some of the great work our own fixed income team has been doing, review best practices and leadership within the Canadian PRI signatory base and discuss what fixed income reporting looks like in the new Reporting Framework. We look forward to continuing our collaborative efforts as ESG remains an increasingly central issue to Canadian investors.

Snapshot Report – Assessment scores analysis (2014-2019)
Snapshot report 2020 – Climate change
Snapshot Report 2020 – Publicly available responsible investment policies
PRI Direct Fixed Income Snapshot

General assessment methodology

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Managing Climate Risk in Institutional Investment Portfolios: Case Studies

As the climate crisis with its physical impacts accelerates, along with the transition to a net-zero emissions economy, Canadian investors increasingly recognize the material and financial risks to their portfolios posed by climate risk. Increasingly large institutional investors know they must assess and manage climate-related risks if they are to meet their fiduciary duties to clients and beneficiaries.

In steps that align with The Investor Agenda, an initiative to accelerate and scale up the actions that are critical to keeping global warming to no more than 1.5 degrees Celsius, some Canadian pension plans have developed climate action plans involving low-carbon investment strategies, corporate engagement, disclosure and policy advocacy. This article explores how three Canadian pension plans, the Caisse des Depots et Placement du Quebec (CDPQ), OP Trust; and the Ontario Teachers’ Pension Plan (OTPP) are addressing climate risk in their investment portfolios.

Each of these Plans has developed a range of approaches to assess and manage two fundamental climate change risks: physical risk (e.g., the impacts of heat waves, droughts, wildfires, sea level rise, floods and stronger storms) and transition risk (e.g., the impacts of government climate policies like carbon pricing and the technology transition to renewable energy, electric vehicles, and energy and resource-efficient technologies). One strategy is to “decarbonize” portfolios by reducing the carbon intensity of entire portfolios or of particular asset classes. Another common strategy is to align their portfolios with the “well-below 2 degrees Celsius” Paris Agreement goal. Some have set time-bound targets for emission reductions. Others have set quantitative goals to scale up their low carbon, climate positive investments, and are reporting their strategies and progress in line with the Task Force for Climate-Related Financial Disclosure (TCFD) framework.


CDPQ adopted its Climate Action Plan in 2017 with four pillars: integrating climate risks and opportunities into all investment decisions, reducing the portfolio’s carbon intensity, increasing low carbon investments, engaging companies, and participating in industry leadership initiatives. It aims to reduce the carbon intensity of its portfolio by 25% by 2025 via carbon budgets for each asset class. CDPQ also plans to increase its low carbon investments across asset classes by 80% to USD $32 billion by the end of 2020.[1] If a climate-related risk is deemed material to a particular investment, CDPQ performs a rigorous qualitative analysis of the risk and its impact, employing specialized consultants as necessary. The fund prefers engagement to exclusion, but will reduce its exposure where engagement does not produce satisfactory results. They align their investment staff compensation with achieving these carbon reduction goals.

CDPQ’s Climate Plan is based on four principles: (1) achievable targets, (2) measurable performance, (3) transparent disclosure of process and results, and (4) collaboration. The Plan is ahead of schedule, with CDPQ having added $16 billion in low carbon assets for a total of $34 billion by year-end 2019 and reduced its portfolio carbon intensity of its portfolio by 21% in this same period.[2]


Similarly, OPTrust published its Climate Action Plan in 2018 with eight pillars designed to enhance the Fund’s resilience to climate change. OPTrust undertook several studies as part of its climate change analysis. The first, in 2017, was with Mercer Consulting who conducted a climate change scenario analysis of the total fund to evaluate the likely resiliency of its portfolio to a 2degree Celsius world, the goal of the Paris Climate Agreement. The second, in partnership with Ortec Finance, was an asset liability management/strategic asset allocation project that integrated physical and transition risks and opportunities associated with climate change into several multi-horizon time scenarios. A third, currently underway, is a bottom-up study to establish a baseline assessment of climate-related risks to the total fund, including carbon footprint, stranded assets and energy transition analyses.

The fund conducted a survey to identify their external managers’ considerations of ESG and climate in their investment processes. Subsequently, the OPTrust team created a clear set of expectations for integrating ESG and climate factors into the investment process for use in its manager meetings. Because the global scale of climate-related risks requires collective action, OPTrust is collaborating with organizations including Ceres’ Investor Network, CDP, and the Investor Leadership Network, and is a participant in the Climate Action 100+ initiative to engage the highest emitters of greenhouse gas emissions.

OPTrust is currently in discussion with data providers to help devise bottom-up climate change risk metrics for physical risk and transition risk for all asset classes. It also continues to look for risk models that provide actionable information on such key issues as carbon value at risk that will allow the portfolio managers to confidently and fully integrate climate change into portfolio construction and the investment process.


Ontario Teachers’ Pension Plan (OTPP) fully integrates climate risk in the organization’s investment processes and across all its investment professionals. The Plan’s overall approach is to integrate climate change consideration in its investments, engage with companies, industry, regulators and policymakers to effect positive change, and to seek the investment opportunities that arise. In 2017 OTPP developed its Low Carbon Economy Transition (LCE) Framework. The LCE Framework identified and monitors twelve signposts that are indicators of the direction and pace of change of the economy towards a low carbon future, which helps the organization to assess the long-term merits and resiliency of investments.

OTPP systematically integrates the risks and opportunities associated with climate change across asset classes and throughout all levels of the organization. The Fund is also active externally with companies, industry, and others to manage risks and invest in opportunities. Ontario Teachers’ starting premise is that we are transitioning to a low carbon economy; however, how smooth or disruptive that path is uncertain. The Low Carbon Economy Transition Framework identifies three different scenarios or pathways that require the organization’s ongoing attention: 1) an orderly transition to a low carbon economy; 2) a transition consistent with current policies and practices; and 3) a period of sustained dependence on fossil fuels that ultimately leads to drastic and disruptive actions to curb further warming.

An important element of Ontario Teachers’ climate strategy is to exercise its influence as a major pension fund investor and to collaborate with peer organizations. In addition to representation on boards of companies in the portfolio, Ontario Teachers’ is a signatory to and participant in Climate Action 100+, the global investor initiative to engage companies having high carbon emissions; a founding member of the Investor Leadership Network, comprising fourteen global asset owners (six of them Canadian pension funds) advocating for stronger climate change disclosure; and a member of SASB’s Investor Advisory Group. OTPP also sits on the board of the Global Real Estate Sustainability Benchmark (GRESB), and helped found GRESB’s Infrastructure Assessment. As part of the Canadian financial ecosystem Ontario Teachers’ is a member of the Canadian Coalition for Good Governance and the Accounting for Sustainability CFO Leadership Network.

OTPP has not formally catalogued all its investments that support the transition to a low carbon economy, but its $30 billion real estate portfolio meets either LEED or BOMA BEST standards and its airports are all carbon neutral or working toward carbon neutral. The Fund also has direct investments in: renewables, climate-related technologies, sustainable agriculture and forestry, and water-related infrastructure. In November of 2020 OTPP launched a € 750 million Green Bond to advance its sustainable investing program.

Ontario Teachers’ Pension Plan is developing a sector specific ESG Maturity Framework that draws upon SASB’s standard setting work for 77 industries and uses data from Bloomberg and MSCI along with our proprietary assessment of the companies’ governance, policies and practices around the material sustainability factors. The framework enables OTPP to categorize companies’ ESG management as baseline, advanced or exceptional, and track company progress concerning such things as risk management practices, intensity of carbon emissions, and disclosure of climate risk consistent with the TCFD recommendations.

These three large Canadian pension plans are leaders in recognizing and managing climate-risk in their investment portfolios. Each has taken concrete and measurable steps to address the challenges posed by climate change. They have set timetables for their own organizational goals. They have drawn on internal and external expertise in developing their objectives. In addition to their internal structures, they also work within broader climate-related coalitions and frameworks. While each of the three have their own policies and procedures for managing climate-risk across their portfolios, they all recognize the economic materiality of climate change as investment risks, and have become early movers in taking comprehensive action to identify, evaluate and manage climate-related risks in their portfolios.

This article is drawn from “Portfolio Climate Risk Management: Case Studies on Evolving Best Practices” a Ceres report published in July 2020.


[1] CDPQ (2020), accessed Jan. 13, 2021.

[2] Ibid.

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

3 Trends That Will Shape Canada’s Sustainable Finance Landscape in 2021

The coming year is set to be a watershed for sustainable finance in Canada as the federal government and financial industry stakeholders double down on climate-conscious policies and practices. Here are three key trends that will shape Canada’s sustainable finance landscape in 2021.

The Federal Government Will Launch a Sustainable Finance Action Council

In 2019, Canada’s Expert Panel on Sustainable Finance made a series of recommendations for the federal government to align Canada’s financial system with a climate-smart future, and advised the government to establish a Sustainable Finance Action Council to help implement its recommendations. The government recently responded in its Fall Economic Statement by allocating $7.3 million over three years to create the Action Council, which will function as a coordination mechanism between the government and the financial sector.

The Action Council will be tasked with developing a well-functioning sustainable finance market, making recommendations “to attract and scale sustainable finance in Canada, including enhancing climate disclosures, ensuring access to useful data on sustainability and climate risks, and developing standards for investments to be identified as sustainable.” The Action Council will be launched in early 2021, ushering in a new era of federal support for sustainable finance.

Banking Authorities Ramp Up Climate Risk Assessment

In the spring of 2020, the Bank of Canada published a report warning of significant economic risks from climate change and the transition to a low-carbon economy. The Bank noted that delayed action would increase the risk of an abrupt repricing of assets, while earlier action would allow more time for the market to adapt.

As a result, the Bank will ramp up its work on climate change in 2021 as it convenes a pilot project with the Office of the Superintendent of Financial Institutions (OSFI). The two supervisory bodies will work with a group of financial sector stakeholders to assess the financial system’s exposure to risks from the transition to a low-carbon economy. The project will strengthen the authorities’ understanding of financial institutions’ governance and risk-management practices related to climate change.

A report on this work is scheduled for publication at the end of 2021. Relatedly, OSFI plans to launch a discussion paper on building financial resilience to climate risks earlier in the year.

We Will See the Rise of ‘Transition Finance’

‘Transition finance’ refers to financing that helps high-carbon companies transition to lower-carbon business models, bridging the gap between traditional and sustainable finance. This concept is important for the Canadian market, which is heavily reliant on extractive industries such as energy and mining. These industries need to transform their business models to succeed in a low-carbon world, but they cannot access “green” or sustainable financing due to their high emissions profiles. Transition financing tools, such as bonds with interest rates linked to meeting reduced emissions targets, will help them make the shift.

The CSA Group, a Canadian standards-setting body, is developing a Transition Finance Taxonomy – a classification system to identify business activities that qualify for transition financing. This framework is expected to become available to industry participants in 2021, unlocking a new market for transitioning the Canadian economy towards net zero emissions. The Responsible Investment Association will host Transition Finance Week from October 18th to 22nd to convene industry dialogues around this subject.

This article is an excerpt from a column published in Investment Executive. Read the full article here.

The Critical Role of Transparency & Partnerships in Big Pharma

The pharmaceutical industry has always borne its fair share of scrutiny. However, in 2020, COVID-19 has shone a light on the sector like never before. As the first wave of COVID-19 vaccines rolls out, there can be no doubt about the pivotal role played by pharmaceutical companies in fostering global public health and a resilient future economy.

So what is pharma’s role in a resilient future? Clearly it involves partnerships. The response to the pandemic has demonstrated that global access to the benefits of pharmaceutical products can be furthered when companies collaborate – both within the industry and with public, private and multinational organizations. There is before us now an opportunity for pharma players to leverage relationships in a transparent way to address societal needs. For investors looking to advance global access to medicine and pharmaceutical products, the utility of partnerships must become an important topic for future corporate engagements in the sector.

It’s no longer far fetched for industry players to work together

That collaborative future may have already arrived. Throughout the pandemic, many pharma companies embraced working collaboratively to manage manufacturing constraints on the road to COVID-19 treatments and vaccines. In fact, in a move that went unchallenged by the US Department of Justice, a number of companies such as Eli Lilly, AbCellera Biologics, Amgen, AstraZeneca, Genentech, and GlaxoSmithKline sought approval to share information with their competitors to expedite the production of safe and effective monoclonal antibody treatments for COVID-19. Players like AstraZeneca have also taken a global approach to distribution, working with other manufacturers around the world such as the Serum Institute of India. Another example includes an initiative launched by the Bill and Melinda Gates Foundation with Eli Lilly, as part of the COVID-19 Therapeutics Accelerator, where the company’s collaborators – Abcellera, Shanghai Junshi Biosciences Co., Ltd. and Columbia University – all agreed to waive their royalties on Eli Lilly therapeutics distributed in low and middle income countries.

The idea of sharing intellectual property, knowledge and information has long been a focus of pharmaceutical industry engagements by investors who believe in access to medicine as necessary in a fair and sustainable economy. Perhaps there is an opportunity to broach this issue with a greater likelihood of success given the receptiveness to partnerships displayed by companies during this pandemic. Given the undeniable benefits of collaborating to rapidly scale up manufacturing and distribution capabilities to address our recent global health concerns, it seems reasonable to expect that post-pandemic conversations on sharing knowledge and facilities would gain more traction.

Partnerships with non-industry players can further the access agenda

In particular, public-private relationships in the pharmaceutical sector have received significant attention during this pandemic. Many pharma companies received government funding for research and development to help spur the rapid development of COVID-19 vaccines and therapeutics; and through the establishment of national level advance purchase agreements. If these partnerships are fairly and equitably implemented, pharma firms should, in recognition of the public’s financial contribution, consider pricing their products in a way that facilitates accessibility and affordability.

Yet even as these relationships funnel resources towards specific public health needs, national level partnerships can create tensions around the need for global access to pharmaceutical products. Investors with an eye to furthering sustainable economies globally may consider pushing for greater insights from companies on how they plan to manage potentially competing national and global priorities. Agreements with multinational entities like COVAX (the global entity coordinating equitable distribution of COVID-19 vaccines) can help mitigate potential conflicts. Investors may wish to leverage the example of COVAX in post-pandemic engagements to encourage companies to consider the inherent limitations of national level partnerships.

Partnerships must be complemented by transparency

The pandemic has opened the door for investors to dialogue with companies on how a collaborative approach to the development, manufacture and distribution of pharmaceutical products can play an important part in facilitating access to medicine and pharmaceutical products. Engagements should seek to better understand the nature of agreements with government, multinational organizations, foundations, as well as between industry players. As responsible investors look towards a resilient economy, it will be important to seek appropriate disclosure on public-private agreements, to ensure that the public’s contribution is adequately recognized by the company, especially in light of the tensions that can exist among partners in pursuit of various commercial, national and global interests.

Expectations on transparency are shifting. Within the context of this ongoing need for enhanced transparency, the Global Health Innovation Alliance Accelerator has launched the Master Alliance Provisions Guide (MAPGuide) – a database of actual and template contractual provisions from global health alliance agreements “that addresses key principles on which partnerships are built”. It is likely that investor expectations of industry players will continue to move towards enhanced disclosure so investors can better understand these relationships and verify their intended impact on society.

Health is everyone’s business. For the benefits of these relationships to be fully maximized, stakeholders, including investors, must be able to hold companies accountable. The currently limited transparency on the workings of the pharmaceutical industry has been questioned by the public and investors during the pandemic, and should be considered even more pointedly in the post-COVID-19 world. In ongoing engagements with pharmaceutical companies, this is a timely opportunity for responsible investors to encourage companies to not only collaborate for social betterment, but to do so with maximum transparency.

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Committing to a Green Economy – Is Enough Being Done in Canada?

The earth is on course for an average temperature increase of 3–4°C by 2100 unless CO2 emissions are reduced. Global warming of this magnitude will result in substantial human migration, regional conflicts over increasingly scarce resources, and extreme weather events, causing devastating physical damages and economic costs. While the sense of urgency to address global warming is apparent, the question remains, is enough being done in Canada?

The 2015 Paris Agreement set goals for nations to reduce their greenhouse gas (GHG) emissions significantly by 2030, with the goal of reaching “net zero” emissions by 2050. To meet the objective of the Paris Agreement, the Intergovernmental Panel on Climate Change suggests that, in order to transition to a global low carbon economy, capital investment of between USD 1.6 and 3.8 trillion annually would be required for the new energy systems alone.[1]

In Canada, the federal government committed to reducing greenhouse gas (GHG) emissions by 30% below 2005 levels by 2030, while aiming to become carbon neutral by 2050. As a first step towards implementing the commitments, on December 9, 2016, Canada’s First Ministers introduced a Pan-Canadian Framework on Clean Growth and Climate Change. Under this framework, there has been an acceleration of initiatives put in place by federal, provincial and municipal governments to reinforce their commitment to carbon neutrality. These include legislation like the Greenhouse Gas Pollution Pricing Act which aims to set a price on carbon emissions and a CAD $2 billion Low Carbon Economy Fund to support projects that are reducing GHG emissions; a program that the City of Toronto is taking advantage of to reduce emissions from ambulances and emergency paramedic response units.

The federal government’s long-term infrastructure plan also committed to CAD $55 billion over the next decade on green infrastructure and public transit projects. More recently, in November 2020, the Minister of Environment and Climate Change, the Honourable Jonathan Wilkinson, delivered a commitment to legislate the Canadian Net-Zero Emissions Accountability Act with a current intention to increase disclosure and transparency of the government’s progress on delivering to net zero.

These initiatives are bringing Canada closer to the 2030 commitment with a gap of 77 Mega tonnes of carbon dioxide equivalent left to account for.

Contributions to emissions reductions by 2030 [2]

Source: Government of Canada, Environment and Climate Change: Progress Towards Canada’s Greenhouse Gas Emissions, 2019

In addition, over the last two decades, Canada has made progress in “decoupling” its GDP growth from its CO2 emissions – a necessary development in order to achieve targets without adversely impacting the economy.

Change in per capita – CO2 emissions and GDP, Canada


With encouraging progress in Canada and globally, there are several challenges that still need to be addressed by governments. For one, a meaningful investment and consideration is required for the millions of jobs that are employed by the energy sector (globally 58 million, with about half in fossil fuel industries). A reskilling or upskilling is critical to ensuring the existing workforce is not disadvantaged by the transition. Secondly, Canada’s contribution to change is limited to its 2% contribution of global CO2 emissions. The leading countries that can make a significant contribution to climate change are China, contributing about 28%, and the US, contributing about 15%. A more concentrated focus is required in high emitting countries to meet the Paris Agreement. Thirdly, and perhaps the most critical part of this journey is ensuring governments remain on course and aligned to the targets, regardless of the political party or faction that is in power. Perhaps the most dramatic turn was witnessed more recently in the US when President Trump took office only to withdraw the US from the Paris Agreement; and in Canada this misalignment is evident between the federal and provincial governments as they push varying agendas with different degrees of urgency. Some segments of the population either do not feel the urgency of global warming or perhaps are too economically dependent on traditional energy sources to see the urgency of accelerating their transition.

While there is much focus on governmental commitments, investors and corporations have a critical role to meeting the Paris Agreement. In 2019, a group of 33 of the world’s largest asset owners formed the UN-convened Net-Zero Asset Owner Alliance committed to reducing carbon emissions in their portfolios, worth over US $5.1 trillion, to net-zero by 2050. A year later, the Net-Zero Asset Manager Alliance launched with 30 founding signatories and about US $9 trillion in assets. Alliances and investor networks are important to aligning and uniting the priorities of the investment industry and have a tremendous impact in moving all sectors, both public and private.

One of the benefits of such investor networks is promoting and requiring standardized disclosures, such as aligning to the Taskforce for Climate-related Financial Disclosures, which is foundational to enabling investment managers to assess and integrate the risk of climate change across their holdings and portfolios. As more asset owners and managers join such alliances to enhance their assessment of climate risks, it could have a meaningful impact on the cost of capital for companies which will serve as a motivation to align to the Paris Agreement. With such a broad reach, the investment management industry needs to work closely with governments to lead this change.

As UN Secretary-General António Guterres said at an action event, “We are dealing with scientific facts, not politics. And the facts are clear. Climate change is a direct threat in itself, and a multiplier of many other threats.” This is a global problem, and while challenges will be faced through this transition, it nevertheless must be a priority for every government, corporation and individual. For now, Canada and the Canadian investment industry are making meaningful progress on the journey towards a greener economy but there is a long road ahead.


[1] IPCC, 2018: Global Warming of 1.5°C.An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty [Masson-Delmotte, V., P. Zhai, H.-O. Pörtner, D. Roberts, J. Skea, P.R. Shukla, A. Pirani, W. Moufouma-Okia, C. Péan, R. Pidcock, S. Connors, J.B.R. Matthews, Y. Chen, X. Zhou, M.I. Gomis, E. Lonnoy, T. Maycock, M. Tignor, and T. Waterfield (eds.)]. In Press.

[2] Government of Canada, Environment and Climate Change: Progress Towards Canada’s Greenhouse Gas Emissions, 2019

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Biodiversity: The Next Frontier of Sustainable Finance

What comes to mind when you think of biodiversity loss? A continuous stream of news will often highlight tragedies such as coral bleaching or forest fires in the Amazon but for many, the tangible impacts of biodiversity loss may have only been felt recently with Covid-19.

The biodiversity crisis is considered a major factor in the emergence of zoonotic diseases such as Covid-19, SARS and Ebola (meaning diseases that are transferred from animals to humans). The World Economic Forum has estimated the cost of Covid-19 to be potentially over USD $20 trillion, and according to the OECD protecting biodiversity will be vital to avoid the next pandemic. However, the impact of biodiversity loss is much greater than pandemics alone. Biodiversity provides economic and social value such as food, building materials, clean air, and fresh water with the World Wildlife Fund (WWF) estimating the monetary value of biodiversity around USD $125 trillion a year.

Humans both depend on and impact biodiversity

We rely on biodiversity in three different ways[1]:

First, biodiversity provides ecosystem services such as climate regulation, carbon sequestration, water purification, pollination, and habitat provision. For example, 75% of global food crops rely on animal pollination[2] and an estimated USD $235-$577 billion of annual value of global crop output is at risk due to pollinator loss. Furthermore, marine and terrestrial ecosystems are carbon sinks for anthropogenic emissions with global gross sequestration around 5.6 gig tons of carbon per year (equivalent to 60% of global anthropogenic emissions).[2] Mangrove forests are also a natural defense for flooding and protecting mangroves can provide over $US 65 billion in benefits per year. Coral reefs as well protect coastlines form storm damage and erosion.

Second, we rely on material benefits such as food, energy, and medicines. For example, in addition to food, 70% of drugs used for cancer are natural or synthetic products inspired by nature and over 2 billion people rely on wood fuel to meet their primary energy needs.[2]

Finally, biodiversity provides non-material benefits. It can improve a person’s quality of life, aid in physical and psychological wellbeing, and is often integral to cultural identity.

However, biodiversity is in a state of rapid decline due to human activities. A growing human population and increased human activities such as urban development, farming, overfishing, logging, and mining are altering the natural world at an unprecedented rate.[2] The WWF reported that the population sizes of species have dropped on average 68% since 1970. Around 25% of species assessed are threatened which indicates that over 1 million species may face extinction within decade.[2]

Biodiversity Presents both Risks and Opportunities for Corporates

Biodiversity loss is a risk that can no longer be ignored. According to the World Economic Forum’s 2020 annual survey, biodiversity loss has now been cited as one of the top 5 global risks for the next ten years along with other environmental risks such as extreme weather and climate action failure.

Biodiversity risks can be broken into three categories:

  1. Systemic Risks or risks with widespread impacts that can indiscriminately affect global stability such as threats to food security, health, or socioeconomic development. Pandemics such as Covid-19 and systemic crop failures like the Irish potato famine can be classified as a systemic risks.
  2. Physical Risks relate to the direct impact of biodiversity loss. Many sectors can face physical risks, which can disrupt normal business operations including the availability of certain commodities, stable operational conditions or the value of the business such as real estate prices in areas prone to forest fires.
  3. Transition Risks are related to the transition to a nature positive economy, which can include increased regulation, litigation, reputational risks as well as shifts in consumer preferences. For example, changes in consumer habits towards plant-based milk products constitute a risk to dairy farmers.

Biodiversity can also present a major opportunity for corporates (greater than USD $10 trillion a year by 2030 according to the World Economic Forum) as business and society embark on the transition towards a nature positive economy. Transition opportunities relate for instance to the circular economy and regenerative agriculture. For example, while customers switching to more plant based diets is a risk for meat and dairy production, it can also present an opportunity to create more plant-based products for customers. However, to capture these opportunities, corporates will have to understand what is at stake for biodiversity and to dedicate capital towards this new economy.

Biodiversity Considerations are essential for Investors but Measuring Biodiversity is Complex

Understanding how to effectively account for biodiversity in terms of risk and opportunities is difficult due to the complexity of the issue. With biodiversity, there is no one-size-fits-all metric (such as CO2 equivalent emissions for climate change) or long-term scenario analysis. Furthermore, a wide variety of corporate actions impact biodiversity loss. Finally, the implications of biodiversity loss are not uniform, with certain geographies and species being particularly more vulnerable.

The Five Pillar Framework

To simplify biodiversity, biodiversity loss can be broken into 5 primary direct drivers based on the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES, 2019 classification).

  1. Climate Change is closely linked to the biodiversity crisis. Extreme weather conditions exacerbate climate change and alter natural ecosystems including droughts, higher temperatures, and wildfires. In turn, a loss of biodiversity can adversely impact climate change creating a vicious and perpetual cycle (i.e. loss of forest cover reduces carbon sinks).
  2. Land Degradation and Habitat Destruction is defined as the deterioration or loss of productive capacity of soils and land. There are many causes of this including over cultivation of land leaching nutrients from the soil, deforestation for agricultural production or urbanization. Extreme weather events can cause erosion and degrade soil.
  3. Unsustainable Resource Exploitation means harvesting resources at a rate that cannot be naturally replenished. This can include deforestation, intensive water consumption, overfishing, and illegal wildlife trade. Over exploitation of one species can threaten food stability in an ecosystem and impact other species.[3] Furthermore, resource exploitation such as intensive logging can also impact land quality and local habitats.
  4. Pollution is a significant contributor to biodiversity loss. This includes physical pollution such as plastic and micro-plastics, agricultural pollutants including pesticides, hazardous and toxic waste from both industrial processes as well as chemical leaching from medicines and consumer products. Many of these toxins end up in waterways and can accumulate overtime, causing harm to humans, plants, and animals alike.
  5. Invasive Species are non-native species that are introduced to new environments. They often do not have natural predators and can cause significant damage to local species and habitats. These introductions can be intentional for commercial or recreational purposes such as the Burmese python in Florida or unintentional through shipping.

This framework will help categorize the exposure, impacts, risks, and opportunities for corporates and sectors related to biodiversity.

Biodiversity is Complex but there are Actionable Steps Investors Can Take

Biodiversity is complex as the five direct drivers of biodiversity loss are often interconnected. In addition, corporate disclosure is limited with only a handful of companies demonstrating efforts on robust biodiversity disclosure. While there are some initiatives to boost nature related disclosures such as CDP forests, we are a long way off from a clear investment framework on biodiversity reporting.

However, we have to start somewhere. There are opportunities for investors to strengthen commitments and solutions. Biodiversity dedicated solutions can include negative screening, impact investing as well as funds and bonds with biodiversity linked objectives. Investors need to first ramp up their biodiversity capabilities and expertise.

The first step is awareness and education. It is important for investors to start putting resources towards biodiversity to understand risks and opportunities in specific sectors most exposed such as food.

The second step is to strengthen commitments regarding biodiversity including policies on specific biodiversity drivers. For example, some investors are creating deforestation commitments or specific commitments on commodities particularly exposed including soy, cattle, palm oil and seafood.

To effectively carry out these commitments, data is required leading to the third step, quantitative assessment. Finding reliable biodiversity data is overwhelmingly complex. However, new and innovative approaches are starting to emerge and investors can start simple with biodiversity adjacent indicators that are already available including waste, CO2, and packaging.

To increase the quality of biodiversity data, investors must engage on the topic. This can include engagement with corporates on biodiversity risks and impacts, but also can include overall engagement for more robust and granular reporting.

Finally, biodiversity is too complex for investors to address alone. It is essential that investors collaborate with peers as well as experts and data providers. Organizations like CDP can help provide a starting point to assess corporate performance, but as new standards emerge for biodiversity, investors need to be part of the conversation.

Overall addressing biodiversity at the investor level is in its infancy. However, 2021 could be a major turning point for biodiversity with major political and economic initiatives such as the One Planet Summit, which took place in Jan 2021, emerging European regulations, and the first recommendations from the Taskforce on Nature-Related Financial Disclosures (TNFD), similar to TCFD for climate, aiming at providing a framework for companies to assess their exposure to biodiversity.


[1] IPBES, Summary for Policymakers, 2019.

[2] IBPES, 2019

[3] HSBC, 2020

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.