An expert panel on sustainable finance is advocating for the government to implement a number of recommendations, including some related to pension plans and individual retirement savings accounts.
For defined contribution plans, other group pension programs and registered retirement savings plans, the report suggested offering tax-based financial incentives for people who invest in accredited climate-conscious products, like green bonds. It proposed offering a super tax deduction, specifically taxable income deductions greater than 100 per cent on eligible contributions.
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The panel also recommended an extended fixed-dollar contribution limit available for eligible investments so plan members who already maximize their contributions — whether in an RRSP, a DC plan or a combination of both — have room and can benefit from the super deduction.
Once sustainability principles become more mainstream in markets and key fundamentals mature, plan providers should be encouraged to offer default options with climate-conscious investments, the report said.
“We would absolutely welcome that and we would love to see increased contribution room in RRSPs specifically for climate-friendly investments,” says Dustyn Lanz, chief executive officer at the Responsible Investment Association.
The focus is often on institutional funds, but having individuals look at their portfolios from the perspective of environmental, social and governance issues is very important, says Jennifer Reynolds, president and chief executive officer of Toronto Finance International. “By educating the broader public, I think that goes a long way to having everyone understand the complexity, really, of moving to a lower carbon economy and, hopefully, obviously drives capital there too. That’s what we want to happen.”
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The report highlighted the need to develop a roster of eligible investment products and accreditation standards for the super deduction program.
It also noted provinces should assess the responsibilities of investment advisors and agents when it comes to engaging with clients on sustainability preferences and communicating the merits of related investment options.
“I was particularly pleased to see this recommendation that the provinces should assess the responsibilities of investment advisors regarding their clients’ sustainability preferences, because I would argue that if a client is interested in sustainability and, if their advisor doesn’t know that, then their advisor simply doesn’t know their client well enough to give suitable investment advice,” says Lanz. “So we would implore regulators for action on this. I would argue that assessing clients’ sustainability preferences should be part of the [know your customer] process.”
The report also recommended clarifying the scope of fiduciary duty in the context of climate change. Particularly, it said the federal minister of finance should make a public statement that he considers that climate factors fall within fiduciary duty.
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In addition to this, it called for the government to create a legal task force to assess and report on avenues to clarify the need for fiduciaries to consider long-term climate factors and related systemic risk and to explore whether a safe harbour rule for climate-related disclosures made in good faith, with due process, is viable.
“If you think about the concept of fiduciary duty, which the report talked about quite a bit, we do need clarity on this,” says Reynolds. “Taking into account climate change factors and different ESG factors, that should be considered part of one’s duty if you’re managing assets, and to be thinking longer term about climate.”
The panel also recommended that federally regulated pension plans be required to make climate-related disclosures in their statement of investment policies and principles, following the example currently required in Ontario. And it suggested other provinces should be encouraged to introduce similar requirements.
The expert panel’s report also aimed at supporting a transition to a climate-smart future. This included advocating to expand Canada’s green fixed income market by convening key stakeholders to develop green and transition-oriented fixed income taxonomies and working with the financial sector to accelerate the supply of liquid green and transition-linked fixed income products.
It recommended the government consider a range of temporary issuance-based incentives, including tax credits, tax exemptions, interest deductibility and cost reimbursement.
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As well, the report said asset managers should be encouraged to create pools and index providers to develop indexes of domestic green and transition-linked fixed income products for institutional investors.
And it suggested the promotion of sustainable investments should become business as usual for asset managers.
“Integrating ESG factors into investment decisions is already business as usual for many large investors,” says Lanz, citing the Alberta Investment Management Corp., the British Columbia Investment Management Corp., the Canada Pension Plan Investment Board, the OPSEU Pension Trust and the Ontario Teachers’ Pension Plan.
“These are not tree-hugging organizations. These are some of the largest and most sophisticated institutions in the world, and for them thinking about environmental, social issues is already business as usual.”
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It’s now about engaging the rest of the investment community to understand that ESG issues are material and climate change is a systemic issue, adds Lanz. “You can’t diversify away from it. So we need to think holistically and long term about how we adjust our investment strategies.”
The expert panel’s members included: Barb Zvan, chief risk and strategy officer at the Ontario Teachers’ Pension Plan; Kim Thomassin, the executive vice-president of legal affairs and secretariat at the Caisse de dépôt et placement du Québec; Tiff Macklem, dean of the University of Toronto’s School of Management; and Andrew Chisholm, a board member at the Royal Bank of Canada.