(Runtime: 4 min, 35 sec; size: 51.71 MB)
Aaron White, vice-president of sustainable investments at CIBC Asset Management.
Industry standards and regulations are at the earliest stages of development here in Canada, and greenwashing is possibly the largest issue we face within sustainable investing. We’re seeing significant increases in the adoption of ESG integration and an acceleration of the number of ESG product launches in the domestic market.
This has raised questions about the authenticity of some firms’ approaches of integrating ESG risk and also the authenticity of ESG strategies that underpin dedicated products. There’s not currently a clearly defined taxonomy or agreed upon product classification system that can help Canadian investors navigate this challenging space. We have seen increased interest in the last year from regulators at the OSC and OSFI in terms of how we disclose our ESG process to investors.
Industry organizations like the CFA Society have been working toward developing standard language and classifications that investment professionals should adhere to. The federal government has established the Sustainable Finance Action Council, tasked with providing input on the foundational infrastructure needed to develop and guide the sustainable finance market in Canada.
We can also look to Europe as a guide to how regulation can help shape our sustainable finance market here in Canada, including a framework for defining strategy objectives and creating accountability to asset managers and asset owners. Their sustainable finance disclosure framework sets robust rules that create a more transparent market and is a great step in preventing greenwashing.
The classification system they have created labels strategies based on the degree of sustainability and is integrated into the investment process. Article 6 strategies do not integrate any kind of sustainability into their process, while Article 8 strategies promote environmental and/or social characteristics, while the companies and issuers exhibit good governance practices. These would encompass ESG integrated strategies or thematic strategies that, for example, look to reduce the carbon footprint of the portfolio.
Finally, Article 9 strategies specifically target sustainable investments. These would include impact strategies that target the UN Sustainable Development Goals or, for example, strategies focused on climate change or gender equality. This classification system is easily accessible to European investors and advisors, simplifying the due diligence process when looking for sustainable investments.
I believe this will inevitably be the guide for global regulators focused on developing transparency and accountability within their domestic markets, and we can likely expect a similar classification system to be adopted within the Canadian market specifically.
Within the Canadian market today, investment managers are trying to solve for some of the greenwashing challenges by being as transparent as possible about what they do and what they don’t do.
Another key challenge we face within the sustainable investing landscape is data and disclosure. We face significant challenges in terms of understanding specific company- and issuer-related ESG factors as there is no standardized disclosure process. When we look to rating agencies, companies like Sustainalytics, MSCI, S&P — some of the leaders in terms of creating ESG ratings and disclosing ESG-related company issues — there is no standard methodology.
One of the major challenges we face within the industry is having an understanding of key disclosure measures as it relates to companies and issuers, how we can take that information, take estimates, and ultimately integrate them into our investment process. What we’re seeing is evolving at the asset manager and asset owner level is utilizing a proprietary approach rather than simply subscribing to what you would call sell-side research on the sustainable investing space.