A growing wave of opposition to environmental, social and governance factors has turned life in the sustainable finance industry into something of a roller coaster over the last couple of years.
But a little turbulence is to be expected, says Alyson Slater, managing director of sustainable investment at Manulife Investment Management, encouraging institutional investors to think of the bigger picture and to remind themselves that the ESG sector is still relatively young and quickly maturing.
“It has only come into the formal financial sector and squarely into the capital markets in the last couple of years and it’s been fast-growing, mainly because clients are demanding it. There has been a lot of road to cover in a very short period of time and I think we’re having our growing pains in that space.”
ESG backlash by the numbers
• 910 million: The number of shareholder votes against a 2023 AGM proposal demanding TD Bank clarify its support for the investment in the Canadian oil and gas sector, representing 98.2% of total votes. Similar resolutions at CIBC and BMO were also voted down, with each attracting around 1% support.
• 18%: The percentage of ‘climate-conscious’ companies that don’t plan to publicize their climate targets, according to global climate consultancy South Pole’s 2024 Net Zero Report
• 197: The number of anti-ESG bills introduced in 38 U.S. state legislatures as of January, according to consultancy Pleiades Strategy
• $3.6 billion: The predicted loss in earnings by a Kansas state pension over 10 years if it was forced to reorganize its portfolio in line with the original version of a later-diluted anti-ESG bill
• 89%: The percentage of Canadian institutional investors that said ESG pushback in the U.S. had “no impact” on their business, according to an August 2023 survey by consultancy Millani
Read: 91% of Canadian institutional investors say climate change is top ESG concern: survey
Most of these adolescent pangs have emerged south of the border, where ESG skepticism has been catapulted into the mainstream thanks to interjections from high-profile figures such as Elon Musk, Tesla Inc.’s chief executive officer — who famously tweeted “ESG is a scam” after his company lost its place on the S&P ESG 500 list — and Republican Party politicians such as Vivek Ramaswamy and Florida Governor Ron DeSantis, both of whom made ‘anti-woke’ attacks on ESG in their U.S. presidential campaigns.
Several state legislatures have also taken their own concrete actions: U.S.-based consultancy Pleiades Strategy identified 165 pieces of anti-ESG legislation introduced by lawmakers across the country in the first half of 2023 alone. By the end of the year, there were 197 bills across 38 states, including in Florida, where DeSantis signed off on a law barring state and local governments from using ESG factors as a basis for investment decisions. Meanwhile, Arkansas and Texas lawmakers approved legislation that will force state pension plans to divest holdings with money managers that boycott energy or firearms companies based on ESG factors.
However, Matt Price, executive director at Canadian environmental advocacy group Investors for Paris Compliance, is optimistic that the ESG back-lash could be a passing developmental phase. “I doubt it’s going to catch on. Even in the U.S., there doesn’t seem to be a big groundswell in favour [of boycotting ESG]. A lot of the sentiment seems to be driven by dark money rather than by grassroots voters.”
Read: ESG investing can help investors identify, address systemic risks in portfolios
Price’s hunch is backed by Pleiades’ findings, since most of the anti-ESG measures it tracked lacked the required support to become law and fizzled on the floor of their respective state legislatures. In states where these bills were passed, the laws that eventually went into force were often less radical than earlier versions.
Such was the case in Kansas. While lawmakers passed a bill barring state bodies from using ESG principles when investing funds or awarding contracts, they backed off from a proposal to impose the rules on private money managers after a report from the Division of the Budget noted the portfolio restructuring required by the original version of the bill could cost the fund around US$3.6 billion in returns over the next decade compared with the status quo.
In addition, the ESG backlash appears to have triggered its own reaction from more liberal-leaning states. California pre-empted the federal Securities and Exchange Commission by moving forward with two of its own mandatory climate disclosure legislation in late 2023. Under the new rules, both public and private companies operating in the state and with annual revenues of more than $1 billion will have to disclose not only their own direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions but also their value chain (Scope 3) emissions — those related to their upstream and downstream activities, including financed emissions — as early as 2026.
The rise of greenhushing
The recent anti-ESG backlash seems to have boosted the phenomenon known as ‘greenhushing,’ in which institutional investors downplay their sustainability efforts for fear of attracting negative attention.It’s a trend that Alexandria Pike, an environmental lawyer partner in the environmental and Indigenous practice group at Davies Ward Phillips and Vineberg LLP, has noticed in her practice.“We certainly have clients who previously would have considered making more public their ESG efforts but are maybe less inclined to do so when they see these anti-ESG measures going on in the [U.S.]. They’re not waving the flag around ESG quite so much.”
In Canada, where the anti-ESG sentiment has largely failed to take root, greenhushing is one of the few areas in which the ripple effects of the U.S. ESG backlash have been observed, says Price. “Canadian companies are either avoiding clear steps on net zero or are taking them and not talking about them. This is particularly true of Canadian companies with U.S. operations.”
Global climate consultancy South Pole declared “the age of greenhushing is upon us,” following its latest survey of global sustainability executives at roughly 1,400 ‘climate-conscious’ companies. It found more than two-fifths (44%) of respondents said communicating their climate goals had become more difficult over the last year, while 18% said they had no plans to publicize their science-based targets at all.
Read: Research finds pensions struggle to determine metrics for ESG goals
That’s not much comfort to financial institutions that operate on an international basis, says Melanie Adams, managing director at RBC Global Asset Management and head of the organization’s responsible investment team.
“We need to make sure that all the policies and processes [align globally and] that we are always acting within the realm of what’s appropriate. That’s always the case for us, but with things changing so rapidly in different directions in different jurisdictions, it can be challenging to keep up. It is really unfortunate to see how much the issue has become politicized in the U.S.”
However, the governance structure of Canadian pension plans leave them well placed to deal with any political pressure they should face, says Chris Brown, CEO of WISE Trust, the administrator of the pension plan for employees of Ontario’s Workplace Safety and Insurance Board.
“The ESG discussion in Canada is much more about ESG as a risk factor to your investments. I think the Canadian pension plans, in particular, do a really good job of framing ESG issues in that context, within the scope of the fiduciary obligations of our respective boards and organizations. There’s a general understanding that you can’t ignore those issues.”
Still, Canadian pension funds could be indirectly impacted when investing as limited partners, if their U.S.-based general partners in private equity deals are constrained by local anti-ESG rules, says Tanya Carmichael, the former global funds leader for the Ontario Teachers’ Pension Plan and who now heads her own strategic advisory practice.
“They have to decide whether the GP is deploying capital in the way they would expect, given the way ESG and other risks are considered. It matters to the resilience of returns, so LPs should pay close attention to how GPs are managing money.”
Closer to home, domestic anti-ESG sentiment isn’t yet a big concern for Canadian institutional investors, according to Dustyn Lanz, a senior advisor at ESG Global Advisors, adding there’s a lack of fertile soil for a domestic anti-ESG movement. “Canada’s investment landscape is not as politicized as the U.S., at least for now. That could change if politicians want it to, but in my opinion, it’s hard to see the upside of making a big spectacle of ESG.”
The Canadian fossil fuel sector — in stark contrast to its U.S. counterpart — has broadly embraced ESG considerations and emissions reductions, he notes. “Why would they do that? Because they understand the concept of a social licence to operate. The point is that it’s not clear to me where a U.S.-style campaign would come from in Canada.”
Read: How AIMCo, Ivanhoé Cambridge are adopting different ESG approaches
Similarly, during the 2023 annual general meetings of the Bank of Montreal, the Canadian Imperial Bank of Commerce and the TD Bank Group, shareholder proposals that requested the banks to reaffirm their commitment to oil and gas investments were voted down, with levels of support that ranged from 0.87 per cent to 1.25 per cent.
At Manulife, Slater says the asset owners she works with seem more engaged on ESG issues than ever before, judging by their growing appetite for information regarding the firm’s own ESG integration and stewardship. “If anything in Canada, there was this almost doubling down of interest from clients.”
Regulatory momentum has also played a role in stifling ESG skepticism in this country, says Conor Chell, national leader of ESG legal risk and disclosure at KPMG in Canada.
For example, some of Canada’s largest banks and insurers are due to make their first mandatory ESG disclosures at the end of fiscal 2024 under the Office of the Superintendent of Financial Institutions’ Guideline B-15, which requires institutions to conduct climate risk stress testing and release their greenhouse gas emission data. By the end of 2025, smaller OSFI-regulated businesses are next in line to make their own disclosures.
Key takeaways
• While a wave of politically driven anti-ESG sentiment has swept the U.S. in the last year, the resulting legislation has been relatively limited in scope.
• Complying with increasingly polarized laws and regulations will prove a challenge for Canadian institutional investors with U.S. assets or operations, but the anti-ESG trend looks unlikely to gain traction in Canada.
• Canadian regulators are leading the way on ESG disclosure but much will depend on their ability to keep up with international standards. In the meantime, it’s important for institutional investors to focus on stakeholder education and communications, emphasizing their fiduciary obligations to pension plan members.
Read: Six pension plan members share their perspectives on ESG investing
When it comes to public companies, the Canadian Securities Administrators is working with the Canadian Sustainability Standards Board as it finalizes the standards for its National Instrument 51-107, which would require reporting issuers to make environmental disclosures largely in line with the framework established by the G-20 affiliated task force on climate-related financial disclosures.
“Take all those things together and it basically means that every company of any size or significance, as well as government institutions, are all required to report on this stuff,” says Chell. “It’s pretty well established the direction we’re going.”
According to Slater, these developments have helped put Canadian regulators near the front of the global pack when it comes to ESG issues, but she warns there will still be plenty of work to do as their counterparts in jurisdictions like the U.S., the European Union, Singapore and Hong Kong set their own rules.
“As those larger markets set the rules of the game, it behooves our regulators to make sure that Canadian companies stay attached to the global capital markets and aligned with those global standards.”
Read: A look at the latest legal issues around ESG investing
In the meantime, Canadian institutional investors and issuers may need to reframe their ESG and sustainability efforts in order to articulate their impact on financial outcomes, says Aaron White, vice-president of sustainable investments at CIBC Asset Management.
“Institutional investors have, historically, struggled at explaining the value proposition of ESG integration to clients. An effective communication strategy may focus on outlining the materiality of ESG risks and the strategies being implemented to reduce those risks, along with highlighting operations and investment portfolio opportunities.”
Michael McKiernan is a freelance writer.