How far has Canada come on ESG adoption

Canada is sometimes thought of as a bit of a transatlantic country. Influenced heavily by our neighbours to the south, it’s hard to ignore the undercurrents of British and European influence in our culture, our politics, and our financial services industry. That transatlantic status is perhaps most apparent when discussing the high-level adoption of ESG strategies. Where Europe has led the globe in ESG adoption, the story in the US has been more fraught. Canada, on the surface, sits between those two massive markets on its journey to ESG adoption.

That middle child status, at least at the high level, belies a high degree of sophistication in the Canadian institutions adopting and using ESG strategies. That’s the view of Catherine Flockhart, Head of ESG at Bailie Gifford. Flockhart believes that when assessing ESG adoption we must look at the quality of the strategies used, rather than just their quantity. She outlined how Canadian institutions have adopted these sophisticated strategies and where she sees the Canadian market for ESG moving now.

“In Canada you will typically find that the larger institutions and pension plans are pretty sophisticated and forward thinking on this topic. On the other hand, there are some that are still just really putting their toe in the water or starting to get to grips with it, or just thinking about it,” Flockhart says. “The level of integration is not as high across the board as you would see in somewhere like Europe, where it's front of mind for almost everybody. But generally, the conversations that we're having are really sophisticated with our big institutional Canadian clients.”

One of the perceptions around Europe’s leadership in ESG has to do with regulation. The idea is that whether at the national or supra-national level, regulations have mandated more ESG inclusion into everyday investment management strategies. Flockhart pushes back on that perception somewhat. While she accepts that regulation has played a role, she thinks in practice it’s still evolving, with historically flexible definitions of ‘sustainable’ now being clarified and tightened.  Contrasting that with Canada, Flockhart argues that our country has an opportunity to follow a similar path but with the benefit of learning from the European experience to help avoid mis-steps.  Nevertheless, she emphasizes that ESG adoption in Canada will have to be market driven to catch up with Europe.

There are plenty of glimmers of that adoption coming through. Flockhart says that Canadian institutions are among the most thoughtful partners that her firm works with. They’ve gone a long way, she adds, in adopting impact funds with dual mandates of investment return and positive social change. That adoption of more sophisticated ESG strategies — going beyond just a blunt screen overlay towards more nuance — aligns with Flockhart’s belief in ESG quality over quantity.

Those more nuanced approaches can be more involved, but Flockhart believes that managers run the risk of being “penny wise, pound foolish” and potentially compromising returns by sticking to blunter strategies. Simplified approaches to responsible investing such as basic exclusions fail to recognise that environmental and social improvement is a nuanced real-world process which brings with it both opportunities and threats, not an exercise in screening.

While Canada has not yet announced a meaningful labelling regime for ESG and sustainable products, Flockhart notes that some of the new regulations around corporate greenwashing can help consumers and institutions navigate the sometimes muddy waters in this space. She expects, too, that as more ESG strategies are adopted and display longer track records, the opacity around disclosures and labelling will become more clear. That, in turn, should help with wider adoption of these strategies as more institutions and investors come to fully understand what they are. The ongoing and increasingly severe impacts of climate change, too, should motivate further action.

Fundamentally, Flockhart believes that Canada will catch up with our European counterparts on ESG when the criteria becomes an innate part of how asset managers view the world.

“Consideration of ESG is just part of understanding the world around you,” Flockhart says. “A lot of Canadian organizations are world leaders, and I think it's important and helpful that Canadian plans can see the paths that other global players are taking and pick what's going to work for them.”