Geopolitical and economic turmoil are dominating the national conversation, but Canada’s institutional investors still see climate change as a major business risk.
How they deal with it is changing, however. There is less focus on net-zero and emissions-reduction targets, and more emphasis on determining if companies are integrating the impact of climate change into their overall business planning.
That conclusion stems from an annual survey of investor sentiment being released on Tuesday that shows how sustainable finance, often considered a sphere unto itself, has become regular finance.
In fact, the way many asset owners and managers see it, lessons learned analyzing how companies are adapting to regulatory and government policies dealing with the changing climate, as well as protecting their assets from wild weather, are now being repurposed for a host of other risks that are currently hogging the headlines.
Those include artificial intelligence, sovereignty and trade disruption, said Milla Craig, chief executive officer of Montreal-based Millani Inc., which conducted the survey of Canadian institutional investors.
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Ms. Craig, who has consulted on sustainability for nearly two decades, said Canada is at an inflection point where all of these issues are coalescing for businesses and their investors, because of the material impact they have on operations and the speed at which they can change.
“It’s no longer just climate and biodiversity. It’s the economic conditions that we’re living in, it’s geopolitics. That’s the shift, and that’s where we heard from the investors how, with all of these topics, governance is what we rely on,” she said in an interview.
Some of this transformation in focus is driven by backlash in the United States to environmental, social and governance, or ESG, measures that began several years ago in Republican states and has become the policy of President Donald Trump’s administration. But investors say they also need to know that boards and managers have the systems and processes to reassess and adapt to fast-moving risks.
Translation: G – governance – rules over E and S, and pretty much everything else.
Respondents to the survey brought up governance frequently. Regardless of the issue, investors want to know whether boards have expertise, that material risks are factored into strategy and spending plans, and that people are in place to be accountable.
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Climate was expressed as the most material issue for investors in the past year, at 22 per cent. AI came in second at 19 per cent, followed by nature and biodiversity at 11 per cent, and Indigenous rights and reconciliation at 10 per cent. The list also included geopolitics and defence.
For the future, 29 per cent of investors see climate remaining a priority topic, followed by AI at 14 per cent, Indigenous issues at 12 per cent and governance at 8 per cent.
Millani surveyed professionals from 36 Canadian institutions representing $7.2-trillion in assets under management. Participants included professionals from such asset managers and owners as Beutel Goodman Investment Counsel, BMO Global Asset Management, Desjardins, Healthcare of Ontario Pension Plan, Rally Assets and Scotia Global Asset Management.
Even with trade friction and geopolitical turmoil, another summer of destructive wildfires, heatwaves and devastating flash floods across Canada has shown why the physical risks of climate change remain a top concern for investors.
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However, the focus for businesses and their investors has shifted from making climate-related promises to implementing energy-transition strategy, including assessing how to guard against potential damage to assets from increasingly severe weather, the report said.
Just over 57 per cent of respondents said more consistent climate-related corporate disclosures would affect investment decisions, compared with nearly 23 per cent who said they wouldn’t or probably wouldn’t.
However, 37 per cent said inconsistent climate disclosures affect investment decisions, and the same percentage said they do not. The results don’t necessarily mean that disclosure is unimportant. Instead, it suggests many investors operate with imperfect information from companies and use their own data and expertise, the report said.
AI is not traditionally part of ESG, but increased emphasis on dealing with material risks has pushed it into the discussion for investors, Ms. Craig said. The speed at which it is developing and being adopted has been surprisingly quick, she said.
“AI feels to me like where climate change was maybe three or four years ago. They’re really in the early stages of trying to understand it, and we’re supposed to be asking,” she said.