It sounds simple enough, but ESG’s journey through the public imagination is akin to a Hollywood star’s: rising from obscurity to a small, devoted following; rushed into the spotlight as a social media darling; and, just as abruptly, decried as over-exposed and over-played.
The drama around incorporating ESG factors into business and investment decisions is primarily fuelled by populist political conspiracies and genuine confusion. However, these debates are a side-show to the main act, which is quietly and diligently playing out before us. In terms of the environment, our global economy is shifting away from climate risk and toward low-carbon opportunity. It is the rational, necessary and inevitable response to the hard realities of climate change.
A new standard for assessing and reporting on climate risks
On June 26, the International Sustainability Standards Board (ISSB)—the body responsible for amalgamating the world’s alphabet soup of corporate sustainability reporting frameworks—released timely guidance on climate-related disclosures.
This new global standard, which mandates how companies should assess and report on their climate risks, is neither a political nor ideological exercise. Rather, it is a response to the large, loud and growing chorus of international investors, financial institutions and their regulators who understand the indelible link between climate change and capital markets. Namely, if we wish to secure the stable functioning of the latter, we must have clear visibility into the impacts of the former.
This major sustainable finance milestone is unlikely to provoke impassioned discussion around water coolers or cocktail tables. Yet, it signifies steady pressure to flip a lever that will fundamentally reroute capital flows through the global economy, shift corporate strategies and send ripples across intercontinental value chains.
What does the ISSB standard mean for Canadian investors?
For the first time, investors and other corporate stakeholders in Canada and around the world will be able to demand and receive clear, comparable and decision-useful data from companies about whether and how they are prepared to survive and thrive through the transition to a net-zero world. No more reliance on high-level corporate commitments, fluffy ESG reports or expressions of good intention—those lattice structures of the status quo. ISSB’s standards require deep analysis of operations and supply chains to reveal how the physical risks of climate change and the global transition to secure a 1.5-degree world—the global warming limit agreed to in the international Paris Agreement in 2015—will materially impact corporate performance over time.
If this sounds like too tall an order, consider the fact that the Office of the Superintendent of Financial Institutions (OSFI) has already mandated disclosure measures for all federally regulated Canadian financial institutions. Any company situated in the value chain of one of these regulated entities should expect and prepare for increasingly detailed and specific requests for data related to their own climate-risk readiness.
Simultaneous to these climate-disclosure advancements, global momentum is growing behind the movement to establish credible, science-based definitions for green and transition economic activities and investments. These “taxonomies,” as they are called, are a classification system designed to create the market clarity and investor confidence required to unlock massive pools of capital to scale up sustainable assets and projects. While the European Union has cornered the global definition of “green”—focused primarily on low- to no-emission climate solutions—Canada is playing a major role in defining “transition”—activities and investments required to decarbonize high-emitting industries and sectors. Establishing a definition for transition will open up critical opportunities for Canadian companies to attract capital from investors at home and abroad. (Japan recently committed to issuing approximately USD$125 billion in transition bonds over the coming decade. CPP Investments has committed to increasing its combined green and transition financing to CAD$130 billion by 2030.)