Growing mainstream appetite for green investing highlights perilous holes in our regulatory framework

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When BlackRock, the world’s largest asset manager, told business leaders it planned to make environmental sustainability a key plank of its investment strategy, it was a game changer for green investing.

Chairman and chief executive officer Larry Fink used his annual letter to CEOs last January to predict a “fundamental reshaping of finance” because of a growing awareness that climate change poses a risk to investments. Not only did BlackRock vow to dump polluting investments, it promised to launch new, eco-friendly investment products.

“From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios,” Mr. Fink wrote.

BlackRock’s stand on sustainability is a clear sign that green investing – once considered a niche strategy – is going mainstream. Given its heft – BlackRock manages an eye-popping US$7.3-trillion in investments – you can bet your bottom dollar its strategic shift will prompt other industry players to create a slew of new climate-conscious investment products designed for retail investors.

It’s easy to see why ordinary investors want in on the green investing craze. Governments around the world, including here in Canada, are touting the benefits of a green economic recovery from the COVID-19 crisis. Moreover, ordinary folks want to invest with conscience by doing right by the planet.

But do ordinary Canadians have enough information to separate the wheat from the chaff when it comes to green investing? And who will have their backs if there’s a systemic meltdown of climate-conscious investments?

These are not questions to be taken lightly. Environmental, social and governance (ESG) investment assets totalled $3.2-trillion in Canada at the end of last year, according to the 2020 Canadian Responsible Investment Trends Report.

“There’s a new consciousness amongst this next generation of investors where investing isn’t simply about making a return, but also wanting to invest in the future,” Michael Katchen, CEO of Wealthsimple, told the recent conference of the Society for Advancing Business Editing and Writing.

The trouble is, climate-related disclosures vary from company to company and between jurisdictions, making it difficult for ordinary people to parse corporate-speak on sustainability and assess investment risks.

In Canada, provincial governments are partly to blame because securities law is their bailiwick. The Ontario government, for instance, overruled efforts by securities regulators to toughen up climate-related disclosures by public companies.

Back in April, 2018, the Canadian Securities Administrators (CSA), an umbrella group for provincial securities regulators including the Ontario Securities Commission (OSC), said it was considering new disclosure requirements that would compel companies to detail climate-change business risks.

But after Doug Ford’s Progressive Conservatives won the Ontario election that June, the CSA changed its tune, saying it was only offering “guidance” on how companies might prepare climate-change risk disclosure.

Not only did the CSA water down its rules because the OSC, its largest member, is beholden to the Ford government, its 2019 notice on the matter failed to create any new legal requirements for public companies.

Disclosures of climate-change business risks shouldn’t be voluntary. Part of the solution is for the provinces, territories and federal government to finally launch a pan-Canadian securities regulator.

The long-promised Capital Markets Regulatory Authority (CMRA) would be an effective way to make concrete progress on climate-related corporate disclosures and ensure a harmonized outcome that benefits all investors.

For instance, the CMRA could mandate that companies adopt the reporting standards advocated by the Task Force on Climate-Related Financial Disclosures (TCFD).

Some institutional investors already support the TCFD framework and the federal government is encouraging Crown corporations to adopt those standards.

A recent study by the Global Risk Institute in Financial Services (GRI) found a 40-per-cent increase since 2017 in the number of financial companies aligning their disclosures with TCFD standards.

When asked to comment specifically on climate risk and the proposed pan-Canadian securities regulator, GRI president and CEO Sonia Baxendale noted that “climate change risk management in the financial sector requires ongoing collaboration and co-ordination” between governments, regulators and industry players.

Corporate climate disclosures are like any other serious capital markets issue. Anyone with a lick of common sense can see that having 13 different securities regulators will result in fragmented regulation to the detriment of retail investors.

In addition to offering more uniform investor protection, the CMRA would also monitor for systemic risk in products, services and benchmarks, including those for green investments.

It’s shocking that systemic risk management remains a regulatory blind spot in Canada after thousands of investors, including ordinary Canadians, were stung by the asset-backed commercial paper (ABCP) crisis in 2007.

What if, down the road, a green investing product (perhaps even the green ABCP that European banks are now issuing) grows so large that if the product failed or caused a liquidity crisis, it has the potential to create systemic risk in Canada’s capital markets?

Let’s not wait for the next crisis to protect investors. Greenwashing is a real risk, and Canadians deserve more transparency about their investments.

Ontario, British Columbia, Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island, Yukon, and Newfoundland and Labrador have already signed on to the pan-Canadian securities regulator.

So, let’s end the lollygagging and set a firm date for the CMRA’s launch.

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