Canada: Environmental, Social And Governance Considerations And The Investor Perspective

Recent divestments by certain major global investment funds of their holdings in companies due to Environmental, Social and Governance (ESG) concerns demonstrates the increasing importance of ESG as an investment criteria for all classes of investor. These funds assessed the divested companies as having unacceptable levels of greenhouse gas emissions and deficient environmental practices.

While COVID-19 has introduced new challenges for issuers across all industries, it has also caused divergent reactions to the importance of ESG practices by companies. On May 26, 2020, Millani, an ESG advisory and consulting firm, issued a new report detailing the results of interviews with 20 Canadian institutional investors regarding the current and anticipated effects of the COVID-19 crisis on ESG matters, Responsible Investment and Sustainable Finance.

Report Findings

The report details the views of the surveyed investors with respect to the anticipated impact of the COVID-19 pandemic on future ESG practices and disclosure. The following is a summary of the key findings of the report:

• ESG practices and considerations will not be hindered in response to COVID-19. Despite a focus on managing the impacts of the COVID-19 pandemic in the immediate term, respondents on the whole reported their belief that ESG and Responsible Investment have advanced too far to be hindered in the longer term. Seventy-four percent of surveyed investors believe that COVID-19 will have a positive impact on the momentum for ESG and Sustainable Finance and further, that only four percent expected companies to put less focus on their disclosure of ESG issues.
• The value of "Social" issues among other ESG considerations is now clear to investors. Prior to the COVID-19 crisis, environmental issues were viewed as the predominant concern among ESG considerations. Investors now see social issues, including management of a company's workforce and the health and safety of employees, suppliers and customers as being of primary importance.
• Climate change remains a priority while social considerations grow in importance. Eighty-seven percent of the surveyed investors still consider climate change to be a top priority. However, a large majority of these investors now consider the issue to represent a top three risk for companies to consider rather than the most important risk, as was the case at the beginning of 2020 pursuant to the World Economic Forum's top global risks report.
• Coherent messaging and responsible behavior will impact reputational capital. Investors are looking for more than respectful treatment of employees, but are also seeking evidence of adjustments to business models or product innovation in response to rapid market shifts. The surveyed investors indicated that responsible behaviour during this time could lead to reputational advantages and improve access to capital in the future.
• Quantitative and meaningful ESG disclosure could improve access to capital. The surveyed investors expressed a desire for more accurate, reliable and complete quantitative ESG metrics as well as recognized standards and frameworks against which to compare. The investors expressed a belief that enhanced disclosure supported by a strong engagement strategy could increase a company's access to capital. 
• Risk assessment and management is expected to be more rigorous. Investors expect that risk managers will further integrate systemic risks and related impacts into their models in the short term, which may lead to greater scrutiny of these issues and impact market valuations. Corporate boards will be expected to develop detailed organizational risk management and crisis control procedures. 
• Increased focus on impact investing. Investors noted an expectation that investors will begin asking more challenging and precise questions about how their assets are being handled, with an increased focus on how investment decisions affect different stakeholder groups, including communities and employees.
• Focus on the long-term vision. The surveyed investors acknowledged the significant challenges posed by operating in the uncertain times caused by the COVD-19 pandemic, but noted that companies should maintain a view towards the future and a focus on their long-term strategy.

Considerations for Companies

The policy trend toward comprehensive ESG practices, regulation and disclosure will continue gaining momentum. The federal government recently reinforced this trend by requiring annual climate-related disclosure for those employers receiving assistance from the Large Employer Emergency Financing Facility established in response to COVID-19 challenges.

Regular disclosure of ESG practices also continues to be a part of ongoing periodic reporting by a growing number of issuers. Proxy advisory firms such as Institutional Shareholder Services have begun to prepare ESG "scorecards" as part of their annual reviews of listed companies while regulators have in certain instances provided additional guidance, such as the Canadian Securities Administrators Staff Notice 51-358: Reporting of Climate Change-related Risks.

The COVID-19 pandemic has in part illustrated the breadth of ESG considerations that organizations face beyond climate change and environmental issues. Moving forward, organizations will need to continually review their exposure to systemic ESG risks, assess the measures currently in place to mitigate against those risks and identify opportunities to distinguish themselves through strong ESG practices.

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