Capital Markets and Sustainability: Investing in a Sustainable Future

Premise

Information is important to the proper functioning of capital markets. The quality of the decision to allocate capital whether to invest or divest depends on the quality and availability of the information relevant to the decision at hand. Choices between investment options rely to a large extent, too, on the comparability of the information. Given the short- and long-term consequences of these decisions to the capital provider and issuer as well as to the individual decision-maker the question of motivation also becomes paramount. What, then, are the incentives or penalties associated with these decisions? What are the core criteria for making these decisions? Are they short- or long-term factors? Are they financial? And do they take into account the social or environmental risk factors or values?

Financial stewardship

Private and public institutional investors, in general, and pension plans, in particular, invest large pools of capital on behalf of shareholders and employee beneficiaries. Their decisions and the criteria upon which the decisions are based can have broad economic, social, and environmental consequences. For publicly held corporations, pension plans often represent the single-largest share ownership positions. For those individuals relying on pension plans for their retirement income, the ways in which the plans are managed can also have serious personal impacts. In fact, the nature and prospects of the Canadian economy and competitiveness depend to a large extent on the choices made by the managers of these plans. The managers, for their part, ultimately make their choices based on established criteria, regulations, and traditional practices. All the expectations of pension fund stakeholders, including policy-makers and the public at large. And in the end, we Canadians get the financial stewardship we deserve.

We get the financial stewardship we deserve.

Risks and rewards

For an economy such as Canada?s one that relies so heavily on natural resources and export markets it is crucial to be keenly aware of both the sustainability issues here at home and the competitive innovations abroad. Other regions such as Europe and Japan, less blessed with natural resources, have invested more effort and money in environmentally sustainable business and investment practices. In much the same way, investors and companies that do business in those places and are faced with the difficult social consequences related to economic decisions particularly in developing countries have learned how to integrate such factors as human and labour rights into their decision-making processes. In Canada, we are faced with similar challenges, particularly now that we realize more clearly that our resources are finite, that the carrying capacity of many of the planet?s ecosystems may be less than previously thought, and that the growing internationalization of trade has deep social consequences.6

The ultimate question for this report, then, is: What can Canada do to encourage capital markets so that we not only catch up with our European and other counterparts in integrating environmental, social, and governance (ESG) factors (or sustainability factors) into economic decisions, but also gain a sustainable competitive advantage?

What is working? What is holding us back?

Sustainable advantage

It is becoming clear to Canadian corporate executives, members of boards of directors, investment trustees, employees, pensioners, customers, activists, and voters that Canada?s collective future depends on the extent to which we are able to leverage our advantages in human, capital, and natural resources to serve present and future generations. Ignoring issues such as human rights or climate change within new international regulatory regimes is no longer an option. Acting as if our resources are unlimited will not make them so. Pretending that we do not rely on foreign financial and consumer markets will not make us any the less dependent. If we ignore the global trend to include non-financial risk factors in investment decision-making, we do so at our peril.

We must now ask ourselves the following questions: Are we gaining a sustainable advantage or disadvantage in the way we invest the resources at our disposal? What is working in our favour? What is holding us back? And what can we do about the situation?

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