Survey offers glimpse into institutional investors’ expectations on climate-related financial disclosures
Since the onset of the pandemic, ESG interest among investors and regulators alike has been accelerating. And based on new research, Canadian issuers may have trouble catching up with institutional expectations.
Citing data from Morningstar, a new report from Millani noted that assets in sustainable funds have surged since the pandemic-driven market dip in early 2020. The first quarter of 2021, it said, saw record global inflows of US$185.3 billion going into sustainable funds, propelling assets to a record US$1.6 trillion worldwide.
The report draws primarily from a sentiment study of Canadian institutional investors representing a collective $4.4 trillion in AUM. When asked what development in the world of sustainable finance over the past six months they found most surprising, most respondents pointed to the accelerating pace of change around ESG integration, including regulations such as those recommended by the Task Force on Climate-Related Financial Disclosures (TCFD).
Amid increasing support for mandatory TCFD-aligned financial disclosures abroad and in Canada – including endorsements from the G7 nations, the Ontario Capital Markets Modernization Taskforce (CMMT), and the formation of Canada’s Expert Panel on Sustainable Finance – Millani noted that only 23% of Canadian issuers currently report in alignment with the TCFD.
Recognizing that TCFD reporting will be a challenge for most of Canada’s issuers, many institutional investors surveyed by Millani suggested that they start with what can be reported for now, and think about how to go on an iterative and progressive reporting journey.
On the subject of greenhouse gas emissions, respondents unanimously agreed that scope 1 and scope 2 reporting is now table stakes. When it comes to scope 3 emissions, 75% considered it a must-have, while others questioned the current methodology to calculate scope 3 data as well as the reliability of data currently being published.
Two thirds of those surveyed agreed that issuers should disclose data on both absolute emissions (the total quantity of GHG emissions by a company) and emissions intensity (which normalizes the absolute emissions over some unit of economic output), as each data type can be leveraged for different purposes.
Respondents were more split with respect to how issuers should disclose their energy data. Just over a third (35%) said they considered only energy usage as important, while 30% said they looked for data on both energy consumption and energy efficiency (energy consumed per unit of economic output). Some responses were even more nuanced, such as one that argued the relevance of energy usage is determined by the energy source used by a corporation; those connected to a coal-dependent grid, for example, are more likely to be exposed to carbon pricing regulations.
And while a slew of companies have come out with net-zero commitments this year, the investors surveyed viewed it only as a good first step. What they most desire, the report said, are interim targets that are linked to the company strategy, with some respondents signalling an openness to engage with corporate management teams and discuss plans to meet emissions-lowering targets.
“Targets alone are difficult to assess,” the report said. “However, targets backed by a clear strategy, interim milestones, and a pathway towards net zero brings credibility to the commitments.”
