For many institutional investors in Canada as elsewhere, assessing the real risks from climate change is simply a rational and prudent approach to investing. But in the United States, a right-wing political movement to eliminate such risk calculations from investing decisions has gained legal force over recent years, pressuring U.S.-based investors to scale back their climate commitments and suppress their considerations of “environmental, social and governance factors,” or ESG, in their strategies.
A new report from the Institute for Sustainable Finance assesses [pdf] whether anti-woke financial activists in the United States are gaining ground in Canada, too. The authors find that the anti-ESG movement is able to exert influence on Canadian institutional investors, but there are enough legal protections in Canada to keep climate-aware investing secure, at least for now.
From the perspective of at least some institutional investors, the logic of climate-aware investing is clear, explains Julie Bernard, the report’s lead author: “One of the ways I can manage my risk is to make sure that I integrate climate because, from a risk perspective, I know that the climate will change, whether I like it or not,” she says in an interview. “And the best way to make sure that I can have return is if I can mitigate some of those risks.” The main motivation of the report was to reassure those investors that “what’s happening in the U.S. is not happening here, and that so far we’re navigating the storm,” Bernard says. “A lot of the things that are happening down in the U.S. could not be happening here, just because of the legal framework we have.”
Canadian corporate law explicitly permits directors to consider material ESG factors and stakeholder interests, the report states. By contrast, the U.S. system relies on a “shareholder primacy” model that emphasizes shareholder value to the exclusion of other considerations, leaving U.S. investment managers more vulnerable to legal challenges from anti-ESG activists. Since 2021, some state legislatures like those in Texas and Florida have enacted anti-ESG measures, while several Republican-led states also withdrew or threatened to withdraw public pension assets from managers over their climate positions. Last year, the Securities and Exchange Commission ended its defence of Biden-era climate-disclosure rules.
Canada has multiple regulatory frameworks that support ESG integration, the report points out, including traditional fiduciary duties for corporate directors and pension trustees, as well as securities disclosure rules, prudential regulations and anti-greenwashing laws. “That doesn’t mean that there is no pressure [or] that there is no tension,” Bernard says. “But we’re not facing the same situation as in the U.S.”
That said, “we’re not bulletproof,” Bernard warns. There have been signs that the anti-ESG movement is weakening climate integration in Canadian investing, according to the report, the clearest of which was last year’s decision by the Canadian Securities Administrators to pause development of a mandatory climate-related disclosure rule. Also, U.S.-based asset managers own large stakes in many Canadian public companies, which sometimes translates to reduced support for climate-related shareholder proposals.
In order for pension and investment boards to do their job well—which is to protect the long-term financial interests of their members—“governance vigilance remains essential,” the report concludes, because “anti-ESG pressure may evolve in ways that create new challenges for Canadian investors.”
Mark Mann is the managing editor at Corporate Knights, where this post originally appeared. The article is republished here with permission.
