Climate Engagement Canada: How Investors are Building on a Global Initiative to the Net-Zero Transition

As 2022 continues to be punctuated by disruptive weather and climate disasters around the world, pressure is mounting for both public and private sectors to support and meet net-zero targets. Yet Canada is uniquely positioned – and challenged – by the global transition to net zero.

In 2018, the Government of Canada appointed the Expert Panel on Sustainable Finance to present a set of recommendations to scale and align “financial sector expertise, ingenuity and influence towards the challenges and opportunities posed by climate change.” Included among these recommendations was to: 

“Encourage Canada’s leading asset managers to establish a national investor-led engagement Program, akin to Climate Action 100+, to drive a broader and more consistent dialogue with Canadian issuers. To be led by Canada’s asset management community.” 

Climate Engagement Canada (CEC) is the response to that call to action, aiming to become Canada’s blueprint for investor-led climate action. The first-of-its-kind national collaboration builds on Climate Action 100+ (CA100+), a global initiative which seeks to ensure that the largest global corporate GHG emitters take necessary action on climate change. CA100+ is an investor-led initiative focused on high estimated or reporting emitting corporations. Out of the 167 issuers CA100+ engages with, only six are Canadian: NRL, Enbridge, Imperial Oil, Suncor, TC Energy, and Teck. In that sense, the CEC picks up where the CA100+ initiative leaves off. 

CEC was launched in October 2021 to drive dialogue with Canadian corporate issuers to promote a just transition to a net-zero economy and, through constructive collaboration, ambitiously manage climate change risks, while considering factors that are unique to Canada. Engaging constructively with top emitters is critical for the success of Canada’s transition to a low carbon economy and the long-term prosperity of Canadian communities as we move toward a net-zero world. 

Guiding Principles for Engagement

CEC engagements aim to collaboratively discuss with company boards and senior leaders the concerns and expectations of the financial community relating to a timely transition to a low carbon economy. These include shared engagement tools and approaches ranging from formal letters, to ongoing meetings with company leadership. Specifically, CEC engagements revolve around the following objectives: 

  1. Define accountability and oversight of climate change risks and opportunities; 
  2. Develop a clear roadmap anchored in comprehensive strategies to reduce their GHG emissions across their value chains; 
  3. Set measurable targets of relevance to their sector; 
  4. Disclose climate data in alignment with the best-in-class standard of the Task Force on Climate-Related Financial Disclosures (TCFD); and 
  5. Align advocacy activities, including those done through industry associations, with the goals of the Paris Agreement. 

From CA100+ to the CEC

CEC will be maintaining core elements of CA100+, as discussed by CEC leadership in a panel conversation at the RIA Virtual Conference. Benchmarking is a key component of this approach. The CA100+ Net Zero Company Benchmark is used to assess the performance of companies against three high-level goals: emissions reduction, governance, and disclosure. CEC will use this robust framework as a starting point for its work and find opportunities to build further and integrate, where necessary, a Canadian approach to this framework and methodology. 

“One of the great things about this initiative is all the benchmarking work that will be done can be leveraged by the organizations, and it will be done on a consistent basis. That work can be leveraged in our investment decisions and proxy decisions.”  

-Barbara Zvan, President and Chief Executive Officer, University Pension Plan Ontario & CEC Steering Committee Chair at the CEC panel discussion of the RIA Virtual Conference 2022

Building the Approach for a Canadian Context

CEC participant investors manage over $3.6 trillion in assets, with many participating in CA100+ engagements as well. CEC is implemented by several investor networks, including the Responsible Investment Association (RIA), Shareholder Association for Research and Education (SHARE), Ceres, and supported by the Principles for Responsible Investment (PRI). 

Applying the pioneering work of CA100+ to Canada’s net-zero transition comes with several challenges and opportunities. For the transition to be inclusive and successful, its impact on all groups must be considered. Just transition metrics that evaluate consideration and mitigation of transition impacts on the Canadian workforce and Indigenous communities are part of the CEC Net Zero Company Benchmark considerations. 

“We have a great and growing Indigenous economy. We have to have the expertise in where the Indigneous economy is growing and can be included in this transition, and not just excluded as has been in all previous manifestations of this economy.”

Kevin Thomas, CEO of SHARE, CEC Secretariat, during the CEC panel discussion at the RIA Virtual Conference 2022

Working Together to Build Bridges to Net Zero

The CEC is overseen by its participants through its Steering and Technical committees which reinforce and guide its work. The initiative engages top financial sector leaders through its Industry Leadership Advisory Panel, and partners with institutions like the TSX to deliver wide-reaching communications with Canadian corporate issuers. Furthermore, CEC engages and includes expertise from a wide range of experiences to support collective success, including: labour relations and workforce transitions, just transitions, Indigenous knowledge and business, think tanks, environmental organizations, corporate governance, corporate disclosure and accounting knowledge, among other strategically relevant themes. 

Given the pace of change required to limit global warming to 1.5°C, the role that the CEC and its various stakeholders can play in Canada is both exciting and challenging. As summarized by Karen Lockridge, Director of ESG Investing at Canada Post Corporation Pension Plan and Chair of the CEC Technical Committee, during the CEC panel discussion at the RIA Virtual Conference:

“We all depend on the health, resilience and prosperity of the Canadian economy and financial system. The CEC contributes to this by bringing a cohesive message from the financial community, supporting industry alignment, and bringing a collaborative, unified approach to engagement.” 

To learn more, the 2022 RIA Virtual Conference CEC session is available online.  

Managed Phaseouts: an Investor Alternative to Divestment

Amid the shifting global energy landscape and mounting investor pressure, many large publicly traded North American oil and gas companies have committed to achieving net-zero greenhouse gas emissions by 2050 in an effort to limit global warming to below two degrees Celsius. 

With net-zero commitments come varying strategies on how each company will achieve these goals. Steep decarbonization in such a carbon-intensive industry requires significant capital allocation, and for some companies, a complete pivot away from fossil fuels toward renewables. 

Climate supporters should rightfully cheer the commitments and transition efforts these companies are undertaking. However, these actions raise the question of what happens with carbon-intensive assets that still have a useful life, such as fossil fuel power stations, pipelines and wells, but which are not aligned with a company’s decarbonization plans. One approach is for firms to recoup value for shareholders and progress on their climate ambitions by selling these assets.  

Trends in Oil and Gas Asset Transfers

A recent paper from the Environmental Defence Fund has shown that over the last five years, these assets are more often being acquired by companies whose climate commitments are lower or non-existent compared to the companies divesting of these assets[1]. Globally, between 2017 and 2021, 155 deals led to the transfer of assets from companies with a net-zero target to companies without a net-zero target. Similarly concerning, 211 deals moved assets from companies with a methane reduction goal to companies without methane goals. 

Overall, 886 deals transferred assets from public companies to private companies, versus 541 from private companies to public companies. When an asset shifts from one public company to another public company, investors keep the ability to engage with the asset owner. However, when the asset shifts from a public company to a private operator, public equity investors lose that ability. Also, the private operator may not be subject to the same standard of reporting regulations and requirements as listed firms – and it may become more difficult to track the actual emissions from that asset or operator over time.  

This in turn means that while the divesting company’s emissions may decrease with the sale of the asset, real-world emissions may stay the same, decrease, or in some cases even increase, depending on the purchasing company’s plans for the asset. Ultimately, this sale may negate any positive real-world climate impact. 

Managed Phaseout  

As fiduciaries, it’s imperative that asset managers stay up to date on best practices to manage risks and seize opportunities related to the low-carbon transition. The Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of leading financial institutions committed to accelerating the decarbonization of the economy, recently published The Managed Phaseout of High-emitting Assets, which provides a framework for companies to phase out carbon-intensive assets, rather than divest of them. 

The managed phaseout approach is based on the view that certain high-emitting assets can continue to operate until a net-zero-aligned retirement date as an alternative approach to a pathway of steadily decreasing greenhouse gas emissions. This approach has the benefit of promoting an orderly transition and allows for financial institutions to remain engaged with companies in high-emitting industries. 

Integrating Managed Phaseout and Responsible Asset Transfer into Engagement Strategies

As investors with a focus on managing climate risk, it is crucial that we prioritize the reduction of real-world emissions with issuers, as opposed to simply emissions transfers. This is something we should raise while engaging with companies which own carbon-intensive assets and are developing pathways for their net-zero targets. Key questions we can ask are: how big of a role will divesting play over the short to medium term to achieve interim targets? And do you evaluate prospective buyers on any environmental criteria? 

Asset transfers are a normal part of company strategy and several factors go into any decision to divest of an asset. An offer must balance the legitimate need to maximize shareholder value with climate-related considerations. 

On top of incorporating responsible asset transfer into engagement strategies, investors can encourage oil and gas companies to conduct scenario analysis and produce reports on the risk of assets in their business suffering from unexpected write-downs. It is crucial for companies to understand the risks and develop plans for a managed phaseout where responsible asset transfer may not be a viable option. 

Looking Forward 

As the net-zero transition continues, it is crucial for investors to remain supportive of oil and gas decarbonization efforts while prioritizing the reduction of real-world emissions. Investors can do so by encouraging investee companies to adopt responsible asset transfer policies and implement a framework for a managed phaseout of carbon-intensive assets.  

[1]  Copyright © 2022 Environmental Defense Fund. Used by permission. The original material is available at

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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.

Seeking Assurance: the Opportunity for Climate-Concerned Investors to Shape the Mining Boom

When one imagines a world powered by renewable energy, it’s often a landscape of rolling hills topped by whirling wind turbines—not an open-pit mine hundreds of meters deep and a kilometer across. Yet the hard truth is, the former is not currently possible without the latter. Experts warn that if we go full speed ahead into a renewable energy transition without considering the impact of mining the required materials, we may do more harm than good. 

This immense shift brings with it a sizable opportunity. The demand from automakers, technology companies and energy providers has the potential to generate long-term profit for investors and transform mining into a more responsible, sustainable industry.

In this conversation between Aimee Boulanger, Executive Director of the not-for-profit Initiative for Responsible Mining Assurance (IRMA), and Jamie Bonham, Director of Corporate Engagement at NEI Investments and IRMA board member, we discuss how the IRMA standard can be a lever to drive change in the industry and the investor role in encouraging companies to participate.

JB: The energy transition is bringing new focus on mining, whether investors have direct exposure to miners or indirect via the companies driving the transition. What are some of the key areas for improvement in the industry?

AB: While the global focus on mining and material sourcing may be unprecedented, the challenges facing the mining sector have remained essentially unchanged. Additionally, while there is a focus on reducing greenhouse gas emissions across supply chains—and this is important to pursue in the mining sector—carbon emissions are not mining’s greatest risk. Grave concerns around water quality and quantity, community displacement, human rights violations, loss of biodiversity, unfair labour practices, loss of cultural heritage, and lack of transparency in the name of mineral security, among other issues, have come to the fore. 

JB: I feel like ESG investors knew these issues were prevalent ages ago. What are some of the reasons they are still occurring?

AB: A range of events—from tailings dam failures, to community protests, to mine worker deaths—have periodically served as wake-up calls, but frankly the world often hits the snooze button after short-lived, largely ineffective mitigation efforts. 

There is a better way. If we evaluate existing mining practices against a robust definition of best practice, we can understand the gaps between the two. We need to look at a mine site holistically—stakeholder engagement, governance, emergency preparedness, plans to protect community health, management of environmental impacts and so on—in order to fully assess the opportunities and risks.

The renewable energy transition will likely focus global markets’ attention on mineral sourcing for decades to come. Their sustained attention will create the ongoing demand for more responsible practices necessary to prevent governments and the mining sector from dozing off again. It also creates profit opportunity for investors.

JB: How does IRMA fit into this picture, and what are some of its benefits?

AB: IRMA sets rigorous requirements on every ESG aspect relevant to the mining industry. Mine sites begin with a self-assessment and very often make changes after comparing their practices with ours. 

When a mine site is ready, they hire auditors trained and approved by IRMA to independently assess their site and publish an audit report detailing their performance in every area. This transparent, public report is key to driving improvement, as the mine site is then accountable to communities, customers and other stakeholders to adjust practices and improve over time.

There are several certification systems for mined materials in existence. As an investor, is there anything that stands out about IRMA to you?

JB: Essentially, an IRMA-audited mine is going to answer any ESG-related question I might have. Following the existing industry-led responsible mining frameworks is largely a no-regrets decision, but it won’t bring the certainty investors are looking for. The rigour and credibility of the IRMA standard brings an unprecedented level of detail; there is a transparency to the audit that provides very granular ESG performance data.      

Three key differentiators are:

  • Equal governing authority. Multi-stakeholder consultation is a facet of many certifications, but IRMA’s core governance characteristic is one where those stakeholders have equal governance over the standard, not just industry. 
  • Rigour. The governance structure leads to a standard that is truly world class, whether it is looking at impacts on water, respecting human rights or seeking free, prior and informed consent of Indigenous communities. 
  • Third party certified. It is in the name! Assurance by accredited third parties brings unmatched credibility and, well, assurance. 

AB: Can you share an example where these differences are apparent to investors?

JB: The transparency of the audit process and the unique focus and inclusion of workers and affected community voices brings value to investors. But from an impact perspective, the act of auditing a mine can itself lead to real on-the-ground change. Like at the Carrizal lead-zinc mine in Mexico. That mine is operated by a relatively small company and has provided decades of jobs but also the impacts of extraction. 

The company used an IRMA audit to understand where global best practice exceeded national regulations. For example, IRMA’s requirements on worker representation are more comprehensive and robust than what is required in Mexican law. These practices were not previously identified as priorities for Carrizal because they were not legal requirements. For smaller companies, where cash flow can prevent simultaneous progress on all issues, the audit results will help leadership prioritize where to focus—whether it be on requirements deemed most critical in the IRMA Standard or by consulting workers and community stakeholders to first address the issues they view as most pressing. 

AB: How can investors drive the adoption and growth of IRMA?

JB: Start with learning more about IRMA. Go to the website, get the newsletter, talk to a board member (like me) or reach out to the team directly. Compare it with other certifications and see if it resonates. If it does, engage with the mining companies in your portfolio to encourage them to assess against the standard. Talk with the end-users of minerals to ask how they are ensuring that materials in their supply chain are responsibly mined. Push them to set expectations for IRMA certification in their supply chain. 

In the end, investors need to be vocal about the importance of responsible mining—to governments, to mining companies, to the industries driving the demand for minerals. If investors can make that expectation clear, and sustain it, the value of a standard like IRMA will be evident. 

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.

Active Investing and Market Solutions to Plastic Waste

Reducing plastic waste produced by the economy is not just about plastic bans. Plastic products have important functions in many parts of the economy, including in life saving technologies and in  food waste. Packaging alternatives to plastic are not always better in terms of reducing the impact on the environment. Having said that, there is no way around the fact that society has a plastics problem. According to OECD data, annual global production of plastic is over 460 million tonnes, and only 9% is recycled. 

International Solutions

The UN PRI created a plastics working group to highlight the risks companies in specific sectors face and provide guidelines on how to engage with companies regarding plastics. It suggests that engagements with packaging companies consider packaging types, packaging design, consumer preferences for product features, and data gaps on plastic use. The UN PRI guidelines on key risks are a useful reference; however, we view the opportunities to generate strong returns as companies invest and innovate to reduce plastic waste as equally important. 

Investor Approaches

As an active fundamental asset manager, our sustainability-focused mandates have made the UN Sustainable Development Goal of Responsible Consumption one of the pillars of how we invest. Our engagement activities with our consumer, industrial and waste management company holdings support the transition to a more sustainable plastics cycle by letting them know it is relevant for our investment decisions, and that we could provide them the capital needed for the transition at attractive returns. 

Shareholder proposals and proxy voting further support companies to tackle plastic pollution. Large corporations such as McDonald’s and Amazon had shareholder proposals this year to expand reporting on plastic pollution. While both of those proposals were defeated in proxy voting, a meaningful proportion of independent shareholders supported them and signalled to the companies that plastics pollution is an important issue to address.

Challenges in the Recycling Industry

Historically there has been a market failure to deliver on the desired level of plastics recycling. Waste management companies contracted by municipalities  have not expanded their plastics recycling capacity at the rate needed to solve our plastics challenge.  According to OECD data, 15% of plastic waste is collected for recycling, but 40% of it cannot be recycled because of contamination, while the vast majority of plastics collected by waste management companies gets sent to landfills. To improve the plastic recycling rate, companies will have to build large-scale facilities and invest in state-of-the-art sorting technology to effectively separate and recycle different types of plastic. Consumer brands are increasingly advertising the recycled content of their packaging to attract environmentally conscious consumers. In our meetings with consumer, industrial and waste management companies we have heard that consumer brands are desperate for high quality recycled plastic at reasonable prices, but there just isn’t enough supply. So why aren’t waste management companies growing plastic recycling capacity at a sufficient rate to meet demand?

A significant hurdle to date has been the economics of recycling. Historically, waste management companies collected and sorted plastic effectively for free, then earned revenue by selling the recycled material. The commodity price of recycled plastic has been volatile and demand has been uncertain. It has been hard for waste management companies to justify large capital spending for facilities with state-of-the-art sorting technology, without more certainty on being able to earn a return on the investment. While for a variety of reasons, including the limited supply, recycled plastic is generally more expensive than newly made plastic. 

Investors Playing a Role

Investor proxy voting and engagement with companies and policy makers may be having an impact. There is reason to be hopeful that this market failure will be overcome with new regulations that will create market incentives for private companies to build the necessary level of plastics recycling capacity. Two of the more important forms of regulation for helping solve the plastics challenge are Extended Producer Responsibility (EPR), which requires producers of plastic packaging to pay a fee that is used to partially reimburse recycling costs, and Minimum Recycled Content (MRC), which requires plastic packaging to have a minimum percentage of recycled plastic. 

For packaging producers, MRC regulation forces them to use recycled plastic even if it is more expensive than virgin plastic. Packaging producers will therefore be incentivized to ensure a stable supply of the recycled plastic they need to meet all of their packaging requirements. This is expected to result in many of them signing offtake agreements with waste management companies to guarantee a supply of recycled plastic at a reasonable price. Offtake agreements with packaging producers such as consumer companies, combined with the fees from the EPR regulation will provide waste management companies the certainty of revenue they need to make large investments in state-of-the-art recycling infrastructure. The outcome is private companies with market incentives to build a circular plastics economy that dramatically reduces plastic waste. 

Bringing Capital to Improve Recycling Outcomes

As a large investor we contributed to Conference Board of Canada Research on how to attract private capital for recycling capacity, and earlier this year spoke to a conference where we engaged with policy makers at different levels of government in Canada on policies that could help attract that capital. Our research has identified at least twelve US states and ten provinces/territories in Canada already have or are in the process of enacting EPR regulations, with more expected to follow. At least three US states are developing MRC regulations, and in Canada the federal government held a public consultation in February 2022 to support the development of MRC regulation. Meanwhile, offtake agreements between producers of plastic products and recyclers are being signed regularly by companies including Berry Plastics, Dow Chemical, and Honeywell.

As the process plays out, our role as investors is to engage and support the companies involved where we feel it can help drive their financial performance in all stages of the plastics life cycle. For consumer companies, the greater use of recycled plastics can support their brand power over time. There is money to be made by providing capital to build recycling infrastructure and develop the innovations in recycling technology and plastic materials as part of our role in using investor tools to reduce plastic waste.

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.

Double, Sesqui, and “Regular” Materiality: Sustainability Disclosures and Different World Views

Materiality refers to significant business risks or opportunities that might cause an investor to invest or not invest in a company. Materiality dictates what information must be disclosed and what is left out in corporate reporting.  This concept is at the centre of current debate over the best way to develop streamlined and effective sustainability accounting and reporting standards for public issuers as expectations increase. “Single materiality”, “double materiality” and now, “sesquimateriality” each represent different methods for filtering information that reflect shifting perspectives about the kind of information investors need to achieve their goals. 

Sustainability reporting is at an important cross-road: the International Financial Reporting Standards (IFRS) and the European Financial Reporting Advisory Group (EFRAG) are both developing accounting standards for sustainability disclosures, and each has a different interpretation of materiality. Which interpretation is adopted and by which standard setter, will affect:

  • What type of sustainability information companies are required to disclose and subsequently manage, or not;
  • To what extent stakeholder voices are incorporated;
  • The efficiency of capital markets in addressing some of the greatest challenges of our times. 

This article provides a high-level outline of each materiality concept, Canadian context, and what we can do as investors to weigh in on the debate.

Comparing Proposed Sustainability Accounting Frameworks and Materiality Perspectives


The ISSB, single materiality and a ‘markets will self-correct’ perspective 

Officially announced in November 2021 at COP26, the International Sustainability Standards Board (ISSB) is an amalgamation of multiple, voluntary and pre-existing sustainability reporting frameworks whose purpose is “to develop – in the public interest – a comprehensive global baseline of high-quality, sustainability disclosure standards to meet investors’ information needs.”

Overseen by the IFRS foundation, the ISSB applies what has been called a ‘single materiality’ or more traditional approach that prioritizes a universal framework for reporting on financially material “outside-in” impacts on enterprise value arising from environmental, social and governance (ESG) concerns. These can then be more effectively integrated with traditional financial statements.  In sharp contrast to the Global Reporting Initiative (GRI), the oldest and most widely adopted sustainability reporting framework launched over 20 years ago, the ISSB prioritizes the reporting of information for traditional investors concerned with the management of material financial risks to enterprise value from ESG issues.  The GRI, on the other hand, has always applied a multistakeholder lens, and prioritizes reporting of information for understanding external or “inside-out” impacts from business activities on society and the environment, regardless of impact on enterprise value.

The ISSB’s focus on financial materiality at the enterprise level as the foundation for sustainability reporting aligns with a world view in support of free and unfettered markets and faith in their ability to self-correct from the bottom-up through a focus on profit maximization.  This view was recently reiterated in a blog post by ISSB Chair, Emmanuel Faber and it appears to be a strategy for appeasing those in the world’s largest market economy, the United States, who recently supported the blocking of the Environmental Protection Agency’s ability to regulate greenhouse gas pollution under the Clean Air Act and who also criticize “ESG investing” as ‘woke capitalism’. 

Likely in response to concerns expressed by many on the other end of the spectrum, in March 2022, the ISSB announced a collaboration with the GRI to develop a second “pillar” within its reporting framework to address disclosure of “inside-out” impacts from business activities on people and planet.  But it is unclear the extent to which impact reporting will be integrated in a meaningful and consistent way across jurisdictions given it is a secondary focus of reporting in what ISSB members describe as a “building blocks” approach.  In its eventual adoption in Canada, we will have the opportunity to decide how to integrate the finalized standards according to Canada’s unique market characteristics, including considerations related to our heavily resource-based economy and the need to ensure respect for inherent Indigenous rights and title, among others.  The Canadian Sustainability Standards Board was recently launched to support this process.

The CSRD, double materiality, and a ‘markets need active shaping’ perspective

In Europe, EFRAG began developing streamlined sustainability reporting standards just ahead of the ISSB.  EFRAG’s proposed Corporate Sustainability Reporting Directive (CSRD) takes a ‘double materiality approach’ in which understanding the most significant impacts from business activities on society and the environment, regardless of any direct link to enterprise value, is considered an essential first step in sustainability reporting.

Understanding double materiality is essential in determining ESG Priorities

Source: Kearney analysis

The CSRD aligns with the GRI and reflects a more European world view and theory of change in which there is less faith in the natural efficiency of markets prompting a framework for active intervention to mitigate negative impacts on society and the environment before they occur.  The CSRD will require disclosure from public issuers on environmental and human rights due diligence processes, including practices for stakeholder engagement, detecting and understanding the most salient impacts from business activities, and methods and rationale for prioritizing what gets managed, regardless of immediate or direct link to financial materiality.  

Double materiality proponents point to the dynamic nature of materiality and emphasize the need for more intentionality and proactive management of sustainability risks and opportunities.  

Arguments against double materiality include that it is too big a departure from status quo investor-focused reporting frameworks that would inappropriately expand the reach of policy and regulation, generate significant extra costs for public companies, distort capital allocation and erode the voice of shareholders in corporate governance.

Universal Investors, sesquimateriality, and a ‘systemic risk management’ perspective

Sesquimateriality is the latest conception of materiality within sustainability reporting that lies halfway between single and double materiality (hence sesqui, which is Latin for one and a half). In this iteration, sesquimateriality prioritizes the need for sustainability standards to provide decision-useful information for Universal Owners (e.g. pension funds and other widely diversified institutional investors) who account for approximately 90% of globally traded equities today. Universal owners own a little bit of everything in the economy and therefore have vested interests in maintaining the health of social, environmental, political and economic systems required to generate long term value that can be significantly eroded by negative externalities.  

Proponents of sesquimateriality argue that the unaccounted for externalized environmental and social costs of corporate activities amount to trillions of dollars that are ultimately internalized by Universal Owners in the long run. They argue decision-useful sustainability disclosure must go beyond financial materiality at an enterprise value level to inform the effective management of systemic risks, also known as beta risk, that research studies show is responsible for 75-94% of all portfolio returns.  Sesquimateriality places consideration of “inside-out” impacts on society and the environment (negative externalities) firmly within the bounds of fiduciary duty to manage for systemic, or beta, risk.

Choosing your place on the spectrum          

We encourage readers to consider their own view related to these conceptions of materiality in the development of fit for purpose corporate sustainability disclosures.  With more consistent, comparable and verifiable data about the “outside-in” impacts of ESG issues on enterprise value designed for traditional investors, will markets self-correct with the speed required to mitigate climate change and inequality risks?  Is the multistakeholder double materiality approach a more direct path to understanding and mitigating sustainability risks because of its departure from a traditional shareholder primacy point of reference?  Or does sesquimateriality’s emphasis on the perspective of Universal Owners’ (whose underlying clients are essentially anyone who qualifies for an old age pension, eventually) need for decision useful information to better manage negative externalities and systemic risk resonate the most?

Investors may have opportunities to influence Canada’s approach

These questions help crystallize the distinction between ESG risk management and investing for sustainability and impact.  Investors should reflect on where they fall along the spectrum and follow the CSSB’s progress and eventual implementation of the ISSB standards in Canada.  There may be future opportunities to influence expectations for Canadian issuers’ sustainability disclosures to ensure they match the unique characteristics and perspectives of the Canadian market.  

For example, while support for Indigenous reconciliation action continues to grow through increasing public awareness, education and regulatory enforcement of respect for Indigenous rights and title, unfortunately, corporate reporting on Indigenous reconciliation action remains sorely lacking.  Canada’s economy is primarily a resource based one that is increasingly dependent on the development of equitable partnerships with First Peoples to ensure sustainable economic growth.  Similarly, Canada’s ability to reach national Net Zero by 2050 goals and the energy transition that is required to get there, directly necessitates effective land stewardship and responsible business development.  Creating effective sustainability reporting frameworks for corporate issuers can help drive more proactive management of critical environmental and social issues like Indigenous reconciliation that will impact long term value creation. We all have a stake in advocating for a materiality approach to sustainability accounting standards in Canada that will best support our ability to reach our collective goal of a more sustainable future.

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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.

Can Active Engagement Bolster Investment Performance?

ESG engagement is an increasingly important aspect of being a responsible investment manager. Engagement can be accomplished both directly – when the investment manager contacts a company themselves (usually regarding environmental, social or governance (“ESG”) factors that may harm shareholder value long-term) – or collaboratively – where various managers pool resources and concerns together to achieve a greater positive impact. One question that is worth examining is whether there is a link between the use of engagement as a central part of an investment strategy and investment results.  

The Mackenzie Betterworld team set out to see if there was a relationship between funds that used an engagement strategy and investment performance by looking at investment funds that identify ESG engagement[1] as a key investment strategy, and those that meet the criteria for being a dedicated sustainable equity fund.

Our research found that over the 3- and 5-year periods ending February 28, 2022, the average return of global engagement funds outperformed their respective peer groups[2], and that outperformance was heightened when we looked at global engagement funds that also had a sustainable investment objective. 

 Table 1: Relative Fund Performance for Engagement funds versus all Actively Managed Funds [3]

In our study, we started with a universe of Morningstar tracked equity funds and restricted it to include actively managed funds only; screening out index funds and ETFs. We also screened out “fund of funds”, funds that have fewer than 20 holdings, and funds that have more than 1,000 holdings. We included all fund domiciles and looked at this analysis for three distinct peer groups, based on their regional equity focus – Global Large Cap, US Large Cap and European Large Cap. For each of these peer groups we analyzed performance for three baskets of funds: 

  1. all funds, 
  2. engagement funds and,
  3. funds that actively utilized engagement and also had a sustainable investment objective

How Engagement Affects Performance

While we recognize that correlation does not necessarily imply causation in the case of superior performance for engagement and sustainable funds, we believe that there are some reasonable explanations for this historical outperformance.  

Previous research on engagement and fund performance by the Society of Financial Studies found that successful engagements on ESG concerns are followed by positive abnormal returns, and that “after successful engagements, especially on environmental and social issues, engaged companies  experience improved accounting performance, improved governance, and increased institutional ownership.”[4]   We believe these improvements are caused by the following:

  • Engagement allows fund managers to better understand how a company perceives risks, and the extent to which the firm can manage those risks. 
  • Engagement opens dialogue which can reveal gaps in the company’s management and reporting of ESG issues. 
  • Investors can make suggestions for change directly with the board and executive management. 

In our experience, ESG engagement on sustainability issues provides a competitive advantage for investment funds by infusing engagement findings into the investment process. Companies may benefit from embracing shareholder engagement due to growing investor attention on the reporting of improved ESG performance.

Figure 1: Active Engagement Cycle and Impact Process.

A circle with "Active Engagement Cycle" in the centre. Around it is 1: Investor Recommendation 2: Company Acts 3: Impact and Investment
Image: Mackenzie Betterworld


As demonstrated in table 1 above, funds with ESG integration and robust engagement on sustainability and ESG issues have outperformed actively managed funds in European, US and Global markets. This outperformance was strongest in US markets with 2% or more outperformance in both 3- and 5-year periods, followed closely by European markets and then Global markets. Outside research appears to support these results due to the characteristics unique to sustainable funds with engagement mandates. While engagement may not be the sole driver of outperformance, we believe that it contributes to a 3-part cycle: by providing recommendations to companies, companies acting and in turn gathering increased investment and interest from investors. 

Engaging with companies plays an important role in maintaining not only portfolio ESG performance but also accountability for companies and encouraging more sustainable business models. All of which contribute to, according to our research, higher returns in the medium and longer term.

[1] Morningstar defines their “ESG Engagement” attribute as those that specifically discuss in fund level documents using active ownership practices (raising resolutions, active proxy voting, and direct company engagements) to pursue ESG goals with invested companies. Sustainable funds refer to funds that have a specific sustainable investment objective. 

[2] We used three distinct peer groups, based on their regional equity focus – Global Large Cap (funds with at least 20% of their AUM in US stocks), US Large Cap and European Large Cap. The table represents a comparison of average returns for each group.

[3] Research completed in collaboration with RBC ESG Research. Note: the 3-year period is capturing performance from March 1, 2019 to February 28, 2022 and the 5 year period is capturing performance from March 1, 2017 to February 28, 2022. 

[4]  Dimson, Karakas and Li: Active Ownership. The Society for Financial Studies. Oxford University Press.

Contributor Disclaimer
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

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.

Putting Biodiversity at the Forefront of Conversations: Context and Case Study

As climate adaptation and mitigation is increasingly addressed in industry, the discussion of biodiversity loss is also gaining traction. These two issues are related as managing the transition to a net-zero economy cannot happen without addressing the biodiversity crisis. This article will provide context, a short case study, and examples of how investors might approach biodiversity.  

The Importance of Biodiversity

The Natural Capital Coalition defines biodiversity as the stocks of renewable and non-renewable resources that provide products and services essential to human well-being. With up to one million species currently at risk of extinction worldwide, the decline of biodiversity has critical implications for humanity such as the disruption of entire supply chains. This has a direct impact on investments, as over 50% of the world’s GDP is influenced by or depends on biodiversity.

In 2019, the gap between global financial needs for biodiversity and actual financing totalled US$824 billion. Preventing further destruction to biodiversity loss and reversing the negative impacts will require international collaboration. Such collaborations include biodiversity initiatives like the Finance for Biodiversity Pledge and the Taskforce for Nature-related Financial Disclosure (TNFD), whose objectives are to understand biodiversity, our opportunities, risks and impacts, and possible mitigating action plans. Initiatives and conferences allow for increased conversation to restore, conserve, and use nature in a sustainable way, building a ‘nature-positive’ pathway.

United Nations’ Biodiversity Conference

COP26 highlighted the need to stimulate climate action and restore deforested lands by taking on the Bonn Challenge. The United Nations Biodiversity Conference (COP15), which started in 2021 and continues in 2022, identifies a potential global plan to “bend the curve” for biodiversity, stopping its degradation and loss. COP15 will be held in Montreal this December 2022, where thousands of delegates from around the world will convene to agree on a new set of goals for nature over the next decade. The Convention of Biological Diversity concluded talks on the post-2020 framework and nature protection act in Nairobi on June 26, 2022. This meeting, in preparation for COP15, created a written four goals framework with 23 potential targets, and paths to meet the objectives. All effort is going into creating a life in harmony with nature as said by Elizabeth Maruma Mrema, Executive Secretary of the Convention on Biological Diversity. Canada will be at the forefront of COP15, advocating for international collaboration on an ambitious biodiversity framework, targeting 30% of lands and oceans conserved by 2030.

Desjardins Global Asset Management’s (DGAM) Approach     

As one of Canada’s largest asset managers, DGAM added the theme of biodiversity and natural capital protection to our list of priority issues in 2021. Our Responsible Investment team continues to research and analyze the theme to fully understand its financial impact and implications for the companies we have in our clients’ portfolios. We’ve identified three areas of interest related to biodiversity: 1. Deforestation and land rehabilitation 2. Water quantity and quality, and 3. Regenerative agriculture. ESG metrics for these sub-focus areas are integrated into our internal assessment grid as part of the investment process and included in our dialogues with consumer companies, where we ask companies to explain and provide examples of their various biodiversity strategies. The World Economic Forum called biodiversity one of the top three threats to humanity before 2030, therefore a call to action is required to focus our attention. Nature is an undervalued resource that we have used without regard for too long, changes need to be made to reduce the impact of nature’s loss on our economy.

Case Study: Food Sector Company Ingredients

Over the past two years, DGAM actively engaged with a large Canadian manufacturer and distributor of dairy and grocery products on three axes of influence:

  1. Motivating them to use sustainably sourced ingredients;
  2. Encouraging them to adopt a goal to end deforestation in their supply chain; and
  3. Urging them to increase their supply of plant-based proteins.

DGAM was not the only investor to make such requests; the company had received similar shareholder proposals. 

The company was feeling added pressure as they were in the process of being evaluated by the Farm Animal Investment Risk and Return (FAIRR) initiative, a collaborative network among investors that focuses on material agricultural issues including ESG research and analysis related to animal protein and animal welfare practices. FAIRR works closely with investors to research, analyze data from multiple animal protein producers and manufacturers, and engage with global food companies to diversify their protein sources to systematically transition product portfolios that facilitate healthier and more sustainable diets, while ensuring long-term food security. The company was also undergoing evaluation by the Business Benchmark for Animal Welfare.

In 2021, the collective efforts of the ESG community paid off—the company announced commitments related to its supply chain, including ending deforestation, sustainably sourcing its key ingredients, and planning to obtain traceability certification from a recognized organization for some of its key ingredients. These actions will drive growth and reduce risk exposure while improving their ability to compete and innovate in an increasingly resource-constrained world.

Simply put, the world must support the efforts and act on nature protection. DGAM is one entity contributing its voice and resources to support various initiatives and act on nature protection, but we are not alone. Multiple international financial institutions, corporations and science communities are also raising their voice, inspiring others to prioritize biodiversity and a nature positive future. Our hope is that our efforts allow biodiversity to become part of ESG guidance and the decision-making process.

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.

Inflation and Public Perception in a Just Transition

It’s widely understood that climate change on the current trajectory would be economically devastating across society. Crucial to achieving consensus on climate change action is a fair and equitable approach to its implementation—a just transition that addresses the risk that the costs of addressing climate change fall disproportionately on those unable to afford it.

Momentum is building among countries and businesses to implement initiatives designed to curb reliance on polluting through carbon pricing. In 2021 alone, 65 carbon pricing initiatives were selected by 45 national jurisdictions and 34 subnational jurisdictions, representing 11.65 GtCO2e, or 21.5% of global greenhouse gas (GHG) emissions. These costs threaten a near-term inflation pickup as businesses essentially pay to pollute or, alternatively, invest in the new technology required to avoid emitting GHG.

Carbon Pricing Approaches


As the International Monetary Fund sharply cuts its growth forecast for 2022, with a warning that higher-than-expected inflation and the Omicron variant have worsened the outlook for the global economy, some politicians have started to attack these green taxes as inflation begins to bite in both developed and developing nations.

Messaging is Key for Just Transition Measures

Taxes on energy disproportionately affect the less wealthy, but it’s crucial to achieving net zero that green taxes continue to incentivize a shift to sources of low emissions energy. In the long term, solving climate change can benefit society broadly and, more particularly, its poorest people, communities, and countries, but it’s vital that the proceeds of green taxes are clearly earmarked to show clear value to society and positive direct benefits in the short term.

The gilets jaunes, or yellow vest, protests in France in 2018, sparked by hikes in gas and diesel taxes, serve to highlight that solutions to climate change that don’t acknowledge the reality of economic inequality are perceived as both unfair and politically impractical. Those advocating for climate action in today’s political climate need to anticipate how opponents will portray their proposals and ensure that they’ll be seen as fair. 

photo of fire in front of people wearing yellow vests as part of the gilets jaunes movement

Green taxes, regulations, and tariffs are important components of the transition to clean energy, helping to correct market imbalances that can favour unsustainable fossil fuels. But we cannot ignore that the concept of taxation is unpopular in isolation, and it will be vital to clarify exactly what green taxes pay for to enable a discussion around what they’re intended to achieve. As proponents of action on climate change, we have a responsibility to ensure this message is well delivered and, for these programmes to be popular, we need comprehensive messaging about the tangible benefits resulting from the revenues raised.

In a politically charged environment with substantial scrutiny, it’s important to distinguish these near-term taxes—incentives to tackle climate change—from wild claims about the impact on consumers of other transition activities. For example, a recent report by the World Economic Forum identified a relatively low impact on costs in many industries of between 1% and 4%; however, with large numbers regularly cited and carbon taxes being easy to identify, it’s crucial that proponents of action are clear on costs and benefits.

Political support is growing

Forty-six countries have committed to the introduction of national planning to aid a just transition, and 161 investors, representing US$10.2 trillion in assets, have publicly stated their commitment to supporting the Principles for Responsible Investment’s (PRI’s) recommendations for investor action. In June 2021, EU member states approved a €17.5 billion Just Transition Fund targeting support for regions and sectors most affected by the transition to the green economy, which is conditional on member states submitting territorial just transition plans.

ESG-labeled bonds, including sovereign bonds linked to climate action, have seen a significant increase in issuance over the last couple of years. Building on the success of green bonds, social sovereign bonds direct funding towards projects with positive social outcomes, which can include training, education, and employment generation linked to climate change. Investor interest in these bonds has soared during the COVID-19 pandemic, as the market turns to sources of capital that deliver social benefits while funding recovery.

Global climate bond initiatives

Source: Climate Bonds Initiative. ABS refers to asset-backed securities. Values shown for 2021 are H1 2021.

Both institutional investors and shareholders can use their influence on global companies to ensure that just transition measures are in place, in consultation with workers, communities, and unions. We must replace employment in polluting industries with new, high-quality jobs. We must incentivise investment and more sustainable practices while penalising pollution. We must set higher standards. Some of these come with short-run costs, and we must ensure we understand who pays and who gains and, in doing so, ensure that we demonstrate that we aim for a just transition. 

“Saving our planet, lifting people out of poverty, advancing economic growth … these are one and the same fight.”

—Ban Ki-moon, Eighth Secretary-General of the United Nations