Canada stands out by embracing sustainable investing regulation

Unlike other countries, asset owners are using governance to their advantage, FTSE Russell global survey finds

Canada stands out by embracing sustainable investing regulation

By and large, global asset owners continue to take a robust long-term view of their sustainable investing (SI) strategies, although macroeconomic and geopolitical factors have also influenced respondents’ short-term sentiment, finds a report from FTSE Russell.

FTSE Russell’s ‘7th Annual Sustainable Investment Asset Owner Survey 2023’ shows that SI continues to mature although asset managers are reconsidering their strategies. Following five years of steady growth, there has been a directional dip to 80 percent this year from 88 percent in 2022 in the level of asset owners globally that are implementing and evaluating SI. This dip can be attributed to influential macroeconomic factors, such as high interest rates to combat inflation and geopolitical volatility caused by the war in Ukraine.

However, despite short-term influences on sentiment towards SI, respondents maintain long-term conviction for this continually maturing investment theme, with asset owners in Canada now driven primarily by regulatory requirements (40 percent).

“We’re seeing a contrast in Canada compared to other countries where regulatory requirement is driving asset owners’ long-term conviction of adopting SI strategies within portfolios,” says Paul Bowes, Canada country head at FTSE Russell. “Almost half of the survey respondents view regulation as helpful in meeting their SI goals, rather than a barrier. This is consistent with how independent Canadian pension boards have worked together with regulatory bodies to create one of the best run pension industries in the world.”

Bowes says that when the Canadian data in the survey is broken out – or rather, the US data is removed – “the trend shows Canadian asset owners applying or considering ESG as a factor in their investment strategies continues to grow.”

Governance a rising priority

Governance is a priority that has significantly risen across all regions, increasing notably from one in three (33 percent) in 2022 to 54 percent of asset owners globally in 2023. In Canada, climate/carbon is a priority for 47 percent of asset owners, followed closely by governance at 46 percent. In fact, regulation of SI and ESG (environmental, social, and governance) helps asset owners meet their SI goals very well, according to 47 percent of Canadian respondents.

Bowes says the report shows governance is very important to Canadians. “I think we have proven with our pension industry how good governance can result in an extremely well run pension industry. The Canadian model, through collaboration between pension funds and government and regulators, can arguably make a more sustainable pension industry than some other countries.

“I am intrigued by this idea that governance is a priority, particularly in Canada. In fact, rather than hiding behind governance, we can use governance and regulators to help the industry make further progress and further embed through reporting requirements.”

Over half (58 percent) of Canadian asset owners say regulation is helpful in removing barriers to SI adoption while 50 percent note it may improve investor disclosures to the market around SI strategies and SI outcomes. Another 32 percent say regulation helps improve the quality and consistency of corporate reporting and disclosures, with 23 percent indicating it might be helpful with respect to providing guidance around fiduciary/investor duty. 

As SI matures, asset owners believe their firms are successfully meeting top priorities for governance and climate/carbon related strategies, although some data and regulatory challenges do persist as perceived barriers to increased implementation of sustainable investment.

Fifty-seven percent of respondents in Canada expressed concerns around the availability of ESG data and use of estimated data. Respondents also indicated the most challenging factors to meet regulatory requirements as the inability to align portfolio/index with SI/climate (55 percent) and the lack of transparency across ESG ratings (45 percent).

“Sustainable investment is not the new thing,” says Bowes. “It is maturing and becoming the new norm. However, we still need further maturation. It's really about the data and we do need better data to make better investment decisions.

“The sustainable investment industry is sort of at a crossroads and we probably need to work with regulators to ensure that some of the reporting requirements are more consistent, more understandable, and more comparable.”

FTSE Russell spoke to 350 asset owners with AUM between US$7.9 trillion and US$14.2 trillion between March 27 and April 28, 2023. For more information, visit FTSE Russell.