There will be no global net zero unless the energy transition in emerging markets is accelerated rapidly. That requires urgent action by the financial community.

Among developing nations, which now account for more than half of total emissions and rising, China alone has available resources to fund its energy transition. The rest of the developing world requires a massive increase in overseas investment. According to the International Energy Agency, roughly US$1 trillion of annual funding is required to decarbonize emerging economies (not including China). As of 2021, less than one-sixth of that sum was being spent.

Less than 1% of the institutional asset pool would be required to meet all of the developing world’s net zero financing needs. The problem is not a shortage of capital per se. Global institutional assets, most of which are managed by pension and sovereign-wealth funds, add up to about US$120 trillion.

Many allocators we speak to understand the ‘why’ but ask how assets can be mobilized to support the energy transition in emerging markets, while also contributing to their return targets. The first step is for asset owners to recognize that in order to meaningfully contribute to the lowering of global emissions, they must shift their allocations – and hence their influence – toward high-emitting companies, industries, and countries. This means allocating to the developing world especially. To date, too many have sought to clean up their portfolios by doing the opposite.

13 of the 20 biggest carbon emitters are emerging economies. Large emitters among them include a diverse group classified by the OECD as middle-income countries, such as Brazil, China, Colombia, India, South Africa, Thailand, and Turkey. Together, they account for 56% of the greenhouse gases put into the atmosphere each year. Ex-China, they still represent about one-quarter of global emissions. Most of them have fairly sophisticated private sectors and financial systems, offering  broad opportunities and multiple access points for international capital.

The second step, and perhaps the most important, is to dispel the myth that transition investing in emerging markets is a charitable undertaking. The ‘emerging transition’ investment universe is large and robust enough – and, crucially, generating sufficient economic value within individual nations – that it offers commercial returns. By sector, most of the transition investment in emerging countries needs to be directed toward building out renewable-energy generation capacity and upgrading the electricity grid. In our view, these and other transition-linked areas of emerging economies can be extremely competitive from a risk-return perspective.

The third step is for pension funds and other large asset owners in advanced economies to become more familiar with the most effective channels for transition investing in emerging markets: corporate debt and project financing. While many developed-world pension funds currently have an allocation to emerging markets via equities and sovereign debt, very few invest in emerging credit. Yet this is a deep market, offering a highly efficient pathway to connect institutional asset pools with the businesses and projects at the heart of the emerging world’s energy transition. Moreover, by advancing climate-oriented covenants and embedding meaningful carrots and sticks in bond and loan documentation, investors can incentivize progress toward net zero in a targeted and effective way.

Ninety One’s emerging markets corporate debt team alone manages investments in more than 40 countries – there are many private- and public-sector entities with serious net-zero intent seeking transition financing. The latter are often running well ahead of the former. In India, for example, whose national climate targets are generally seen as lagging, almost 100 companies have now adopted science-based emissions-reduction targets. In South Africa, Anglo American plans to install up to 4GW of renewable-energy capacity by 2040, which could see the mining giant generate about 7% of its home nation’s electricity needs. In short, the building blocks exist to accelerate the emerging world’s energy transition: the capital, via institutional asset pools; the ambition, not least via emerging market companies’ transition plans; and the mechanisms, of which the credit markets are arguably the most important. The urgent task now is to connect and action them.

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This communication is for professional investors and financial advisors only.   

The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Ninety One’s judgement as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct and may not reflect those of Ninety One as a whole, different views may be expressed based on different investment objectives. Although we believe any information obtained from external sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness (ESG-related data is still at an early stage with considerable variation in estimates and disclosure across companies. Double counting is inherent in all aggregate carbon data). Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions. 

Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Ninety One’s prior written consent. © 2023 Ninety One. All rights reserved. Issued by Ninety One, October 2023.

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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.

Since OpenAI’s ChatGPT went viral in late 2022 for its unprecedented ability to engage in human-like conversations and provide articulate responses in wide-ranging domains of knowledge, several competitors have begun introducing their own iterations of the technology. This type of AI technology, known as generative AI, is based on large language models that are trained on massive amounts of data, which could include text, images or other media. The models identify the patterns and structures of the training data and then generate new content that has similar characteristics based on user prompts.

There are various benefits to incorporating generative AI in a business – process improvements, cost reduction and value creation, to name a few. Leveraging these opportunities, companies across different sectors have already begun testing and implementing generative AI tools. Examples range from financial institutions deploying chatbots trained on internal databases to provide financial advice to customers, to healthcare institutions automating the generation of medical documentation based on conversations between patients and physicians. Across industries, companies are also incorporating generative AI tools in marketing, customer service and product development.

As such, investors have to pay attention not only to large tech companies that are building the foundational models, but also to companies that are starting to incorporate generative AI tools into their business. As with most new technologies, there are potential risks that should be adequately considered and safeguarded against before widespread deployment. Regulation will be important in helping reduce these risks. But because the development of regulation occurs at a much slower pace than the development and application of AI, investors should actively consider its risks and seek stewardship opportunities in companies involved in generative AI to address these risks.

Challenges and Risks in Generative AI

Generative AI models have various known issues. These models have the tendency to “hallucinate,” generating false outputs that are not justified by the training data and presenting them as a fact. These errors can be caused by various factors, such as improper model architecture or noise and divergences in the training data. Opaqueness about the generation of model outcomes is also an issue. With billions to trillions of model parameters that determine the probabilities of each part of its response, it is exceedingly difficult to map model outputs to the source data, including in cases of hallucination.

In addition, if the training data contains societal prejudices or if the algorithm design is influenced by human biases, the model may learn and propagate these biases in its outputs. Enterprise applications could also be vulnerable to data privacy issues and cybersecurity threats. This includes leakage of sensitive information within the training data if the model is customer/public-facing, usage of personal or sensitive data in model training that may have needed explicit consent to use, as well as malicious attacks from hackers that aim to manipulate model outputs.

These issues give rise to various legal and reputational risks, the scale of which depends on the criticality of the use case and the company’s industry. For example, the financial and healthcare industries may be subject to severe consequences if problems do arise, due to the high-stakes nature of these industries.

Sample Use Cases in the Financial Industry

In financial advisory use cases, model hallucinations could give inappropriate advice or offer the wrong product to undiscerning clients, which could undermine public trust in AI systems and the financial institutions using them. Lack of transparency about the generation of model outcomes is also a key issue for financial institutions, as these institutions are required to be able to explain their decisions internally and to external stakeholders. Considering all this, it is best practice to implement a degree of separation between direct model outputs and the customer, where internal staff could be trained to recognize potential errors and inconsistencies in model outputs and assume ultimate responsibility for the decision-making process.

Generative AI could also offer a quick and low-cost way for financial institutions to profile their clients for marketing campaigns, risk management and identification of suspicious transactions. However, overreliance on generative AI profiling could violate anti-discrimination laws due to potential bias embedded within the models. Appropriate human judgment will need to complement generative AI models that perform client profiling. Financial institutions will also need to have strong data privacy policies and robust cybersecurity measures to address generative AI’s risks to their sensitive client information and proprietary data.

Questions for Investors to Consider

In view of all these issues and risks, below are questions investors should consider when assessing companies employing generative AI tools:

• What are the risk-mitigating mechanisms and/or circumstances? Solutions include having trained internal staff act as an intermediary between direct model outputs and the customer; working to understand potential biases in the training data and address them in model design; regular and proactive monitoring of model output to promptly identify and address any signs of hallucinations; implementing robust cybersecurity measures; etc.
• What is being done to enhance model performance? Solutions include ensuring that training data is of high quality, accurate and up to date; implementing iterative feedback loops to refine and improve model performance; etc.
• Is there any transparency and oversight of ethical AI principles? This pertains to providing transparency on data sourcing and data privacy concerns; defining clear policies and procedures to ensure compliance with ethical standards and emerging regulations; outlining the roles and responsibilities of individuals involved in the development, operation and oversight of the generative AI model; etc.

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Contributor Disclaimer

The information contained herein is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.

This document may contain forward-looking statements (“FLS”). FLS reflect current expectations and projections about future events and/or outcomes based on data currently available. Such expectations and projections may be incorrect in the future as events which were not anticipated or considered in their formulation may occur and lead to results that differ materially from those expressed or implied. FLS are not guarantees of future performance and reliance on FLS should be avoided.

The statements and opinions contained herein are those of Kate Tong and do not necessarily reflect the opinions of, and are not specifically endorsed by, TD Asset Management Inc.

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.

Nuclear power has been a somewhat neglected energy source for some years now. It provides only around 10% of the world’s electricity (and around 15% of Canada’s), and currently comes far behind oil and natural gas in terms of overall global energy supply. 

However, there are big changes coming in how the world will consume energy. To mitigate the impacts of global warming, most countries have made significant commitments to move away from fossil-fuel use and replace it with net-zero energy. To achieve this within the fairly short timeframes required (2050 for many countries), nuclear power is likely to become a much bigger player in the electricity-generating field.

Let’s take a look at the scope of change as the world moves from fossil fuels to net-zero energy sources; nuclear power’s probable role; and the investment opportunities that it brings.

Net-zero targets and the move away from fossil fuels

Extreme weather, exacerbated by global warming, has had devastating impacts on the planet, causing billions of dollars’ worth of damage along the way. In a bid to minimize these impacts, most of the world’s countries have agreed to cut human-made greenhouse gas emissions to restrict global warming to no more than 1.5 degrees Celsius above pre-industrial levels. The world is currently around 1.1 degrees Celsius warmer than it was in the late 1800s.

According to the Paris Agreement (a legally binding international treaty on climate change), greenhouse gas emissions need to be reduced by 45% by 2030 and reach net zero by 2050. To achieve this, we’ll need to make a huge shift regarding the type of energy we use in every aspect of our lives: for light, heat, cooling, transportation and industry. The world will gradually have less dependency on fossil fuel energy — such as coal, gas and oil — and replace it with renewable energy sources.

This will be a mammoth task, and while it won’t happen overnight, it does need to happen in just a few decades, which will bring with it considerable challenges.

Nuclear power’s role in reaching net-zero targets

Currently, with almost 85% of global energy consumption coming from fossil fuels, we clearly have a long way to go to greatly reduce that consumption and diversify the energy grid.

The good news is that the journey has already begun, and renewable energy sources, such as hydro-electric, solar and wind power are not only growing at a fast pace, they’re also less expensive to set up when compared to new gas or coal generating plants.  

Much of current fossil fuel energy will have to be replaced by electricity in one form or another (either directly from the power grid or in batteries). One of the key issues of renewable energy is storage. The technology to store excess energy from wind and solar farms when the sun is shining and the wind is blowing, is currently insufficient. When it’s dark and still outside, we’ll need an energy source that can continue to feed our power needs. While hydroelectric power (using the power of moving water to generate electricity) is highly efficient at providing energy at the push of a button, wind and solar are not.

This is where nuclear power comes in. While it’s not renewable energy as such (uranium, the source of nuclear power, is a finite resource), it does create energy with zero greenhouse gas emissions. And it can deliver energy around the clock, regardless of the weather or time of day.

There is substantial potential for increased growth of nuclear energy over the short term, to help replace the huge amounts of fossil fuel energy we currently consume. It can be a quick and fairly cost-efficient option to extend the life of nuclear reactors so they can continue to generate power. Also, the development of small modular reactors (SMRs) could provide a more affordable option that is much faster to build than large reactors.

In recent years, there seems to have been concerted political will for nuclear power to play a key role in the transition to net-zero emissions. In 2020, then Minister of Natural Resources, Seamus O’Regan said, “We have not seen a model where we can get to net-zero emissions by 2050 without nuclear.” Nuclear currently accounts for 15% of Canada’s electrical production capacity.

The challenges facing nuclear power

Nuclear power has some hurdles to overcome when it comes to being a key player in the move away from fossil fuels. Some of these issues are contentious, but they’re all worth mentioning, and include:

• New nuclear power plants are expensive to build and take years to complete.
• It’s perceived to be dangerous: disasters like those that happened in Fukushima in 2011 and Chernobyl in 1986 have given nuclear power a reputation for being unstable.
• Uranium mining can have negative environmental impacts.
• Nuclear power generation uses large amounts of water.
• Radioactive waste from nuclear power stations can remain dangerous for thousands of years, and storing it safely can be a challenge.

The nuclear power industry has been working to overcome these challenges. For example, small modular reactors have the potential to produce energy quicker and cheaper than large power plants. And when compared to other means of power generation, nuclear is fairly safe, especially when you consider there have been two major disasters in 37 years among the world’s 440 nuclear power stations.

And, given nuclear power’s ability to produce large amounts of electricity efficiently and continuously, without being beholden to the weather or sunlight, along with political will, it looks set to play a key role in the transition away from fossil fuels.

Investment opportunities in nuclear power

Nuclear power’s main attraction for investors is that it’s a zero-emission energy source that can easily adjust its output to match demand, unlike the current challenges facing renewable energy sources such as wind and solar. As the world moves away from oil, gas and coal, huge amounts of carbon-free energy will be needed. Nuclear power is well positioned to help the world reach net-zero energy consumption.

Governments are committed to transitioning to zero-emission energy by the end of the century, and many are providing tax incentives for nuclear power generation. For example, Canada has a tax credit of up to 30% for clean energy technologies, which include small modular reactors, and the US introduced a tax credit in 2022 for the production of new nuclear power.

Here are some of the key ways that nuclear power can offer investment opportunities:   

• The development of small modular reactors could be extremely attractive. They can be built in a factory and then shipped to the site, meaning that they could be used to provide power to many remote or small communities.
• Traditional nuclear power will only grow in importance as more countries upgrade existing (or build new) nuclear reactors to meet aggressive net-zero targets.
• Many businesses are built around the maintenance and upgrading of traditional nuclear reactors, a sector that is likely to grow enormously over the next few decades.

To find out more about the role that nuclear power will play in the move away from fossil fuels, and the investment opportunities it will bring, read the Mackenzie Betterworld Team’s Pathway to net zero.

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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.

In the rapidly evolving world of responsible investment (RI), it’s more important than ever for investment professionals to stay at the leading edge of what’s current and what’s around the corner in sustainable finance.

On October 26, the RIA will be officially launching the latest edition of our Canadian RI Trends report, the most comprehensive research survey and analysis of responsible investment assets and trends in Canada. Last year, the 2022 Report confirmed that RI’s recent momentum was giving way to demand for sophistication and more vigilant reporting, signaling a maturing industry. The 2023 Report will continue to track national trends and outlooks, as well as provide insights into the most common practices of responsible investors in Canada.

Boost your knowledge of RI knowledge this fall with an advanced preview of the 2023 Canadian RI Trends Report, along with in-person networking in Vancouver on October 18th, Montréal on October 24th, or Toronto on October 25th. 

Advancing RI expertise among our members is a priority for the RIA. Our latest survey of over 1,000 retail investors shows that Canadians want to hear more about responsible investment. While nearly three quarter of respondents wanted their financial services provider to inform them about RI, only a third said their financial services provider had broached the subject with them. That leaves a significant business opportunity for those with an up-to-date understanding of RI.

To keep you on the cutting edge of RI this fall, we’ve brought together top experts, thought leaders and practitioners for four bi-weekly webinars covering:

– The results of the 2023 Canadian RI Trends Report
– The ethical implications of AI and what they mean for investors
– The opportunities of incorporating climate solutions into investment strategies
– The critical connection between climate change adaptation and sound investment decisions

Don’t miss the 2023 RIA Fall Forum Series for the latest trends, topics, and what’s around the corner in responsible investment.

Governments around the world are committed to meeting their climate change objectives. The ability to achieve lower carbon emissions rests on a successful transition to renewable power and lowering emissions in transportation and manufacturing. The world will need a massive quantity of critical metals and securing the primary supply will be key. Meeting that demand will require significant capital, which we believe will create a multi-decade investment opportunity. Historically the mining industry has not been embraced by responsible investment approaches, however lowering carbon emissions cannot happen without the mining industry providing the crucial inputs. We believe there is the potential for a strong alignment between supporting the energy transition and earning strong investment returns.

Growth in Electric Vehicles

While there are many areas that are transitioning toward lower emissions, for this article we focus on electric vehicles (EVs) to illustrate the complexity and scale of the transition challenge for the mining industry. EV production and demand are growing rapidly. According to Thunder Said Energy, electric vehicles accounted for 12.5% of all new global vehicles in 2022, and is projected to be 50% in 2030, or 65 million units [1].

EVs require certain critical minerals that internal combustion engine (ICE) vehicles do not, such as lithium, cobalt, graphite, nickel and others as components for their batteries. Based on market expectations for EV adoption, battery metals are expected to require significant supply growth in order to meet demand expectations. The annual growth rates in demand for most battery metals including lithium, graphite and cobalt are in the 5-10% range, which is unprecedented. Let us not forget the uranium needed for nuclear power plants, which will be required to increase the base load power supply.

Source: Benchmark Mineral Intelligence, May 2023

In addition to cobalt, nickel, lithium and graphite, the world will need more copper for wiring. EVs have a higher copper intensity than ICE vehicles and will be required for the build- out of charging infrastructure. According to CRU and BMO Capital Markets, copper content per light duty vehicle is 3-4x the amount per current ICE vehicle, with next generation EVs hoping to get that down to 1-3x by 2030 [1]. By 2030 total vehicle demand for copper between EVs and ICE vehicles is expected to double [2].

Raw material availability will set the pace and the mining industry may struggle to deliver

In a transition of this scale, there will be setbacks that disturb the supply-demand balance. Production growth along the value chain will need to be synchronized to avoid constraints . The issue is that mining capacity has a long lead time and is on a different timeline to global battery demand, EV charging station capacity and even EV penetration. It takes 2-5 years to build a battery plant, while mines require 5-25 years to develop. For this reason alone, the road towards lower emissions may be bumpier than people expect.

Today, China dominates every segment in the battery supply chain and political tensions are accelerating. In response, Western governments are scrambling to be self-sufficient and independent. The U.S. Inflation Reduction Act (IRA) is the most publicized legislature geared towards security of the energy transition value chain, but other counties are following suit. Effectively, there will likely be two parallel markets for many of the critical metals, and the West will need to catch-up.

Raw material extraction is always complicated but there is additional complexity associated with the growth rates required for energy transition. For instance, processing of critical metals is often problematic, as there is a uniqueness to each deposit which requires advanced engineering. Many of the metals are also located in jurisdictions with geopolitical risk, which adds an extra layer of uncertainty. Overlaying risks, including the lack of technical expertise, will potentially compromise the ability to meet demand.

Obtaining permits can also be extremely complex and time consuming. Today’s world has a heightened focus on Environmental, Social License and Corporate Governance (ESG) factors and new mining projects cannot be rushed through for the sake of satisfying any urgency on the demand side. The industry will need to ensure that all aspects of their mining projects are satisfied.

Another startling metric outlined by Benchmark Mineral Intelligence (BMI), an industry think tank, is the number of new mines that will be required to supply the planned battery gigafactories. BMI estimates that between now and 2035 the planned battery plant capacity will require ~ 50-100 new mines to be built in each of the key battery metals. The industry has never seen growth rates like these [1].

Source: Benchmark Mineral Intelligence

The investment opportunity

Investing in this complex and dynamic environment is difficult, but the opportunities are meaningful and this, we believe, will keep investors drawn to the space. Most importantly, the growth in demand is significant and necessary with enormous capital needs. This is a multi-decade global transition at its infancy and, as this dynamic environment evolves, there will be significant investment opportunities, as well as benefits for society.

BMI calculates that at least $514 billion will be required by 2030 to facilitate a 3.7x facilitate increase in storage capacity. An additional $406 billion will be required between 2031-2035 [1]. Wood Mackenzie, meanwhile, forecasts a total investment of US $1.2 trillion by 2050 to achieve the Accelerated Energy Transition (AET) -1.5-degree Celsius climate change target [3].

It is highly unlikely that the individual supply chain components will increase in tandem. As the world scrambles to transition quickly, there will likely be surpluses and shortages at any point in time. Therefore, diversification through all parts of the supply chain is a prudent approach.

We evaluate potential investment opportunities based on technical quality of the projects, quality of the management and economic robustness. Our active approach to investing in the mining industry can help contribute to overcoming some of the challenges while generating attractive returns for our investors.

Sources

[1] Thunder Said Energy

[2] BMO Capital Markets

[3] Benchmark Mineral Intelligence

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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.

Canada’s recent development of a green and transition finance taxonomy is part of a rapidly evolving global landscape. There is growing recognition by many jurisdictions of the need for robust classification frameworks as a means to address the challenges of financing the transition to a more sustainable economy. By providing clear definitions and technical thresholds, taxonomies are a tool to prevent greenwashing and enable investors to make informed decisions that realistically consider the sustainable growth prospects of an economic activity.

Canada’s Taxonomy

Leading Canada’s taxonomy development is the Sustainable Finance Action Council (SFAC), an advisory body convened by the federal government whose members include 25 of Canada’s largest institutions in the banking, pension and insurance industries. In March of this year, the SFAC released its Taxonomy Roadmap Report to the public. Under the report’s proposed framework, an economic activity can be taxonomy-eligible either as “green” or “transition,” – the specific requirements of which will be determined by science-based screening criteria and emissions thresholds. Issuing companies must also have company-level net-zero targets, transition plans and climate disclosures in line with emerging domestic regulatory requirements and international best practices in order to be taxonomy-eligible. The green category encompasses projects with low or zero Scope 1, 2 and 3 emissions that are expected to experience a significant growth in demand in the global low-carbon transition, such as green hydrogen production and zero-emissions vehicle manufacturing. The transition category includes projects with well-defined lifespans, seeking to decarbonize sectors that historically have high Scope 1, 2 or 3 emissions. Examples of transition activities could include carbon capture, utilization and storage upgrades to existing oil sands production as well as the electrification of steel production.

Having the transition category in Canada’s taxonomy is particularly helpful given the local economy’s heavy reliance on natural resources . In 2023, the oil and gas sector made up 7.2% or $168.2 billion of Canada’s nominal GDP while accounting for 27% of its total greenhouse gas emissions. The oil and gas sector employs 593,000 people and the steel sector employs 123,000. The transition category within the taxonomy acknowledges the importance of incentivizing the decarbonization and shift toward greener technologies, practices and business models within these industries, while maintaining economic stability and job security to ensure a just transition to a low-carbon economy.

Opportunities for Investors

Despite not being legally binding, the standardized framework of the taxonomy is expected to bring about new and exciting opportunities for investors.

The taxonomy will encourage companies to disclose the environmental impacts of their businesses and products in a more effective manner. Referencing the taxonomy’s science-based criteria and emission thresholds, investors can more readily assess the sustainability impacts of an investment and companies’ business activities. This will create new opportunities for institutional investors to conduct taxonomy-focused stewardship to systematically address issuers’ sustainability issues . The taxonomy will also provide investors with opportunities to contextualize reported financed emissions through taxonomy-related ratios at the firm and/or fund level.

Most importantly, the taxonomy will provide a clear and standardized framework for Canadian issuers to consider issuing labeled (i.e., green and/or transition) bonds under a structure that will prevent accusations of greenwashing, incentivizing more development of green financial products. Overall, the enhanced transparency, credibility and accountability in the financial market brought by the taxonomy is expected to increase investor demand for green financial products, such as green bonds and sustainability-labeled funds, leading to the growth of sustainable investment opportunities in Canada.

Green bond issuance as a percentage of total bond issuance by all issuers and each type of bond issuer in the EU, 2014-2022

Source: European Environment Agency, June 14, 2023.

Since the EU Taxonomy was implemented in mid-2020 as part of the European Green Deal – a set of policies designed to help Europe reach its climate targets by 2030 and become the first climate-neutral continent – the EU has seen a rapid increase in green bond issuances. Total bonds issued increased from 4% in 2019 to 7.8% in 2021 and 8.9% in 2022. Corporate green bonds in particular have increased from 4.1% of total corporate bonds issued in 2019 to 11.0% in 2022. While this rapid growth could be attributed to many factors within the European Green Deal, the EU Taxonomy undeniably plays a part in the EU’s sustainability efforts.

To examine how investments can align with the Canadian taxonomy, below is a sample four-step framework for fixed income investors to determine whether a corporate or sovereign bond is green- or transition-eligible under the taxonomy:

1) Evaluate the issuer’s company-level climate strategy to determine whether it has net-zero targets, transition plans and climate disclosures in place that are in line with current domestic regulatory requirements and international best practices.

2) Assess the issuer’s green/transition bond framework against existing industry standards, such as the International Capital Market Association Green Bond Principles and the Climate Bond Initiative.

3) Analyze the underlying projects that will be financed through the bond proceeds to determine whether the projects meet the green or transition eligibility requirements, following science-based criteria and strict emission thresholds under the taxonomy.

4) Assess the underlying projects that will be financed through the bond proceeds against the “do no significant harm” criteria to ensure alignment with existing Canadian law (e.g. environment, labour and Indigenous rights).

Conclusion

Reaching Canada’s net-zero emissions targets will require substantial investment from both the public and private sectors. In order for Canada to achieve net-zero emissions by 2050, it has been estimated that annual investment will need to grow from $15-$25 billion per year to $125-$140 billion per year. The taxonomy is expected to provide new opportunities for investors to mobilize and align capital in ways that promote transparency, credibility and accountability in the sustainable finance space and support Canada’s transition to a low-carbon economy.

Contributor Disclaimer

The information contained herein is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.

This material is not an offer to any person in any jurisdiction where unlawful or unauthorized. These materials have not been reviewed by and are not registered with any securities or other regulatory authority in jurisdictions where we operate.

Any general discussion or opinions contained within these materials regarding securities or market conditions represent our view or the view of the source cited. Unless otherwise indicated, such view is as of the date noted and is subject to change. Information about the portfolio holdings, asset allocation or diversification is historical and is subject to change.

This document may contain forward-looking statements (“FLS”). FLS reflect current expectations and projections about future events and/or outcomes based on data currently available. Such expectations and projections may be incorrect in the future as events which were not anticipated or considered in their formulation may occur and lead to results that differ materially from those expressed or implied. FLS are not guarantees of future performance and reliance on FLS should be avoided.

The statements and opinions contained herein are those of Kate Tong and John Mchughan and do not necessarily reflect the opinions of, and are not specifically endorsed by, TD Asset Management Inc.

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 term, “Just Transition,” was originally coined by labour unions looking to incorporate social dialogue and rights in the workplace and to help counter the idea of decent work and environmental protection being at odds (the “jobs versus environment” dichotomy). Internationally, this concept was affirmed at the 2015 Paris Agreement and gained further momentum at the 26th Conference of the Parties Climate meeting (COP26) in 2022.

The hope of a “Just Transition” approach is that the transition to a low-carbon economy will be more positive than those of the past.

The Risks of an “Unjust” Transition

Achieving a low-carbon economy will require economic, industrial, and technological shifts – shifts that a majority of society has yet to ever experience. Such large-scale shifts will require intensive system-wide change, with the largest burden disproportionately placed on Indigenous peoples and frontline communities.

Globally, governments have been looking to securitise key industries needed for the low-carbon transition which could lead to the exacerbation of negative social externalities. Additionally, transitioning out of high carbon industries could lead to economic and workforce instability – with concern for workers and communities on job transferability and community impact . With that in mind, it is evident that the private and public sector will need to collaborate to encourage the transition towards “sustainable” jobs and economy.

The Global Just Transition

As is most likely evident, the Just Transition will differ depending on several factors including, but not limited to, an organization’s size, demographics, strategy/business, and location. Embarking on a “Just Transition” will require the reconciliation of several complex challenges, including job security, rising energy costs and security issues, financing the transition, the impact on Indigenous communities, and equal access to clean energy .

How are North American government/regulatory stakeholders supporting the “Just Transition”?

Canada:

In Canada, rulemaking around the Just Transition has taken a top-down approach, starting at the federal level, and cascading down to the provinces. Over the past few years, the Federal Government has put forth several regulatory measures to enable a Just Transition, including the release of The Just Transition Act (2021) – strengthening their pledge to transition to a clean and inclusive economy. As Canada has committed to achieving net-zero greenhouse gas (GHG) emissions by 2050, a key piece of the puzzle will be winding down fossil fuel-related projects in a way that considers potential economic impacts. Additionally, Minister Jonathan Wilkinson is progressing with the introduction of “Just Transition” legislation – one of the major mandates meant to be achieved in 2023.

United States of America:

In contrast, the United States has followed a more fragmented approach, with many of the policies and programs originating at the state/regional levels.

Various states within the nation’s largest coal-producing and consuming regions have introduced laws—all within the past 5 years—around the Just Transition to support workers and revitalize local economies. In Colorado, for example, the State’s General Assembly passed a bipartisan House Bill in 2019 that framed the Just Transition as a moral imperative and established a plan for how it will help workers transition to new, green jobs, and to channel investments into coal communities. A handful of other US states have since also followed suit, passing similar laws, and initiating state-level plans for a Just Transition.

In contrast, the US Federal Government has been slower in acting on the Just Transition. In 2021, a Just Transition for Energy Communities Act was introduced by democratic Representatives in Congress but did not receive a vote. The Act aimed to establish a federal program to provide payments to States and Tribes to support transition and economic development efforts. Since then, no further Just Transition bills have been introduced at the federal level.

How Companies and Investors Can Aide the Just Transition

As public transition policy gradually accelerates at the national level, at the corporate level, there is growing expectation for companies to account for, and address, the impact that their climate transition has and will have on their workforce and communities. Companies that fail to do so risk “not only stranded assets but also stranded workers and communities, along with the loss of their social license to operate” . This risk impacts not only individual companies but investment portfolios as well.

As a result, as we move further into the global net zero transition, investors are increasingly expecting companies to disclose and act on their transition impacts (e.g., through reskilling and retraining workers) and to institute policies and governance mechanisms to underpin this process. Although efforts to categorize company progress on the Just Transition remain nascent, Climate Engagement Canada and Climate Action 100+ have both recently updated their respective Net Zero Benchmarks to include new and detailed criteria around this issue.

Supporting a Just Transition is increasingly both a business and moral imperative. Greening the economy must occur in a way that is both fair and inclusive to ensure that no one is left behind. More public policy is needed to support communities and corporations in addressing the transition impacts and to help companies to define medium- and longer-term transition priorities.

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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.

As an increasing number of investors are paying attention to the outcomes of their investments, we are seeing more intense media scrutiny on corporate ESG-related claims. It is unfortunate that a few notable scandals in recent years have caused mistrust and concern among investors around the accuracy of environmental, social or governance (ESG) claims.

The Responsible Investment Association found that concern about greenwashing is the biggest obstacle to the growth of responsible investment (RI). It is crucial that industry actors take steps to be as clear and accurate as possible in their ESG claims. An important question to consider is “how can we build trust?”

Building Trust

Regulatory authorities around the world have taken action to curb concerns around greenwashing and supervise ESG-related claims.

In early 2022, the Canadian Securities Administration (CSA) published a staff notice outlining their ESG disclosure expectations for investment funds. It includes expectations on how funds present their ESG approaches in advertising.

While regulators are addressing greenwashing from a policy perspective, industry players and fund managers also have an important role to play. They can be leaders in maintaining the public’s trust on ESG claims and facilitate clear communication.

This is why it is essential to raise awareness about the public’s concern around greenwashing among anyone involved with the promotion of responsible investment. It is a vital step in ensuring authenticity and avoiding risks.

Responsible investment training courses for industry professionals, and advisors in particular, are multiplying. It is crucial not to forget about communications and marketing professionals, and anyone making public-facing claims while promoting RI. Awareness about the risk of the perception of greenwashing and RI knowledge should be integrated into the entire business line to ensure consistent and accurate ESG communications.

An ESG-related Guide for Communicators

To address this gap, Desjardins has developed a guide to help teams not specializing in RI address the do’s and don’ts of ESG-related communications. The recommendations include the following tips for communicators:

1. Ask questions

When creating communications about RI, put yourself in the shoes of an investor who may question the claims. Can the claims be substantiated? Do they reflect current policies? Could the claim be interpreted as exaggerated or misleading?

2. Manage expectations

While we are often proud of the outcomes our RI products can have on environmental, social or governance issues, we must avoid over-promising or over-selling what they actually achieve. Exaggeration or puffery leads to mistrust. When in doubt, limit claims to information you can verify.

3. Use simple, understandable language

Retail investors rely on us as RI experts to give them the information they need to make informed decisions. They may not have the specialized language or know all the terminology that we do, so keeping language simple and understandable will help ensure the message is not misinterpreted or misleading.

4. Verify

Cite sources whenever possible. For example, when talking about climate data, cite the source, as there are different methodologies for calculating the data. This demonstrates transparency to investors and gives them the tools to verify the information and avoid confusion.

5. Be consistent

To promote industry progress and best practices, teams should be made aware of how to describe investment outcomes. It keeps all communications consistent across the organization and avoids confusion. This training may include the following directions:

– Document outcomes when they can be supported by evidence.
– Avoid attributing outcomes to individual investors.
– Use the term ‘impact,’ in line with industry methodological best practice.

The feedback we received confirmed the need to equip teams with ESG communication tools. We continue to educate employees and our partner advertising agencies so they are better equipped to prevent situations of perceived greenwashing. Ongoing internal dialogue also helps keep everyone up to date about best practices and any new risks or developments.

Firms that are innovative and proactive about ESG-related communications and those target teams not usually involved in RI training can ensure their investors are confident about participating in RI. This is essential for the continued growth of an industry with significant potential for positive outcomes on the planet and society.

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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.

Investors with net zero commitments share a challenge regarding the carbon-intensive companies in their portfolios. For now, most Canadian investors choose – at least publicly – engagement over divestment as the way to decarbonize their portfolios. But this is an unhelpful dichotomy and escalation is necessary for soft engagements that are not working. To decarbonize (and de-risk) their portfolios, Canadian investors need to flesh out their climate engagement strategies. This means a willingness to escalate to stronger engagement tactics, and, where there is no meaningful progress, divest.

At present, the state of investor climate engagement in Canada – as we have come to understand it in our climate shareholder advocacy work over the past two years – is characterized by:

– Confidential meetings between investors and publicly traded companies;

– Some investor-led initiatives like Climate Engagement Canada and CA100+;

– Some voting support for climate-themed shareholder resolutions, although a reluctance by investors to pre-declare their support and file resolutions (especially larger investors);

– Little attention paid to holding directors accountable for climate inaction; and

– A reluctance to extend engagement to fixed income instruments and private equity investments.

In the UK, engagement without escalation is somewhat cheekily called “tea and biscuits” – the practice of having a nice chat with the company and calling it a day. Unsurprisingly, there is little expectation that this will result in much change. Indeed, when we look at the plans of major oil companies, including Canadian ones, despite investor engagement they are doubling down on oil and gas expansion, thereby making investor portfolios even less aligned with net zero.

The Columbia Center on Sustainable Finance recently published a great overview of net zero finance best practices. It states that for any engagement policy to be effective it should “set clear targets, disclose engagement strategies and outcomes, communicate and execute escalation strategies, and have clear consequences for poor performance.” Engagement tactics require teeth to drive change. The Columbia Centre lists the following as best practices for escalating engagement:

– For public equity, lobbying for more stringent public policies and regulatory enforcement to make client engagement more effective. In addition, escalating from shareholder resolutions to voting against financial statements, executive remuneration, and/or directors where no meaningful action is taken on climate-related shareholder resolutions (e.g. BCI is one of the first Canadian investors to publicly do so with Imperial this season).

– For debt holders, “there is an opportunity, particularly during critical moments of refinancing, to require debt issuers to include climate strategies and transition plans as part of debt obligations.”

– For private equity investments, there is an opportunity to buy and restructure “non-1.5ºC-aligned companies to ensure credible and meaningful transition planning for 1.5ºC. Their longer time horizon as compared to public markets as well as their full ownership governance models grant them a strong lever.”

– Asset owners have the potential to “select (or terminate) asset managers on the basis of their climate or other sustainability engagement strategies (which may be laid out in the asset manager’s fund prospectus); the more publicly they do so, the more influential their efforts.”

– Banks have the ability to implement financial incentives and penalties that encourage companies to decarbonize.

Climate engagement is an important tool for decarbonizing financed emissions, but must be associated with these types of escalation tactics to influence management.

This brings us back to the unhelpful engagement vs. divestment dichotomy. In fact, when engagement has failed, and it is clear that a company has no real intention or ability to transition to net zero, financial institutions must be willing to walk away to avoid the transition risk associated with these assets. Rathbones, a UK-based investment firm with over 60 billion GBP under management, is a prime example of an investor willing to commit to divest when engagement escalation fails. This is essential for accountability and will help reduce the liquidity available for bad actors.

This coming year, we expect to see Canadian financial institutions improve their climate engagement practices by adding escalation tactics – per trends in Europe and from some of North America’s most progressive investors – as their clients and the public expect them to follow through on their climate pledges. To support this shift, investors would benefit from more quality, independent assessments of the net zero plans of major emitters, especially financial institutions and the oil and gas sector. In particular, we have noticed an appetite for more information on climate engagement best practices relating to private equity and corporate bond investments. Additionally, daylighting the climate-related proxy voting practices of major Canadian investors will help hold investors accountable to their stated commitments to climate engagement. Voting in support of climate-related shareholder resolutions is a relatively soft engagement tactic, but it is a critical first step in the escalation process and is an effective means of communicating shareholder priorities.

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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.

With the recent launch of the Government of Canada’s groundbreaking Social Finance Fund (SFF), the social finance sector in Canada is set for significant  growth. One of the SFF wholesalers sets out what you need to know about this important new initiative.

What is the Social Finance Fund all about?

In brief, it is about creating a much stronger social finance market in Canada that is better able to deliver positive social and environmental outcomes. The Social Finance Fund is a Government of Canada $755 million initiative. It is part of its Social Innovation and Social Finance Strategy, launched publicly in 2018. In May 2023, the Government announced three fund-of-funds managers (wholesalers) to manage portions of the fund: Realize Capital Partners, Boann Social Impact and Fonds de finance sociale – CAP Finance.

What is the structure of the Social Finance Fund?

Fund-of-fund managers have been allocated money to use as investable capital as well as funding to build the market. Each fund-of-fund manager has its own strategy and structure for deploying capital and for market building. Broadly speaking, capital flows from the fund-of-funds managers to social finance intermediaries (fund managers and structured products) and then through to social purpose organizations (ventures, companies).

At Realize Capital Partners, we’ve structured our fund (targeted raise: $405 million) as a conventional limited partnership and will be investing across private market asset classes. Through this approach, we can aggregate investment needs across smaller emerging and established impact-focused fund managers, while operating at an investable scale for even large institutional investors. The Government of Canada has provided conditionally repayable contribution funding  to meaningfully de-risk private investment in this structure. It is participating on a “first in, last out” basis with its capital being deployed prior to private investors and only being repaid after private capital has been repaid with a minimum return.

How significant is this for the Government of Canada, and for the responsible investing sector in Canada?

This is a significant development. We believe it is a clear demonstration by the government of its interest in enabling markets to drive better social and environmental outcomes in tandem with public policy. It is a clear recognition of the need for private capital to be engaged at a meaningful scale to enable the growth of existing and new solutions. 

It is also meaningful for the responsible investing sector in Canada because it supports the mainstreaming of what has been a relatively niche part of the broader capital markets led by foundations, some family offices, and pioneering asset managers. Impact investments demand a stronger accountability for impact measurement and tangible outcomes, and the industry is already looking to progress in this area with themes such as climate and diversity, equity and inclusion.

This initiative is significant because it will support the maturity of more existing private market fund managers and product issuers, building both the scale and the track records necessary for more meaningful engagement from established actors in the capital markets.

Accredited and institutional investors will be investing alongside fund-of-funds managers, either into the funds or the underlying holdings directly. This provides a turn-key mechanism to invest in a larger, widely diversified strategy that will invest in a variety of impactful private market strategies. It will produce positive outcomes in communities across the country.

We expect that asset managers who may have been thinking of developing more impactful private market products but have been unsure of potential demand, will now consider bringing these opportunities forward.

Why is social equity such a focus for this initiative?

We believe the Government of Canada is trying to create a more equitable society through this initiative. All fund-of-funds managers are focused on this goal. Social equity is a strong focus of Realize Fund I because we believe this lens is both necessary to drive more impactful investments in communities across the country, and because we believe there are opportunities for a social equity lens to drive real financial alpha.

A social equity lens contributes to the selection of more impactful investments because it reflects the fact that social and environmental issues are rarely felt equally. Too often, communities facing greater socio-economic marginalization will  face other issues more acutely. For example, those in  economically precarious situations may be disproportionately impacted by the lack of affordable housing and access to care. By using  a social equity lens, investments will directly or indirectly affect equity-deserving communities, and opportunities that deliver positive social or environmental outcomes should be prioritized. We’re clear that we consider this the responsible, just thing to do.

We also believe that this lens can correct for biases in our own investment process and allow us to invest in opportunities that may drive better financial outcomes. In some underserved markets our partners will often be first or second movers and have the advantage of being able to work with remarkable, undiscovered businesses that just lacked better access to capital to thrive. A social equity lens can enable us to look at opportunities from multiple perspectives, informing a better understanding of if there’s a difference between real and perceived risk.  By creating a focus on underserved markets with untapped opportunities and informing a more complete view on risks, a social equity lens can also support financial outperformance.

How will the Social Finance Fund combat “greenwashing” and “impact washing”?

The Social Finance Fund requires active impact measurement and management across all investments. This creates a good opportunity to create a greater level of standardization around common requirements for impact measurement. This also means there will be more accountability for delivering positive outcomes across a range of dimensions. By acting transparently in our investments, holding fast to our requirements to monitor investments over time, we’ll avoid “impact washing”, and demonstrate authentic benefits to communities in Canada.