Skip to content

Subscribe to Asset Servicing & Fintech Insights

Discover more information in our monthly publication, the AXIS newsletter, including industry trends, product innovation, Fintech and more from our team of experts.

    Pension Plans Increase Focus on ESG Investing for a Sustainable Future

    The rise of ESG investing has caused a paradigm shift in the industry. Standardization and data automation will play an integral role in ESG reporting, thus driving transparency and informed decision-making.

     

    Interest in ESG (environmental, social, governance) investing is continuing to reach new heights. While a focus on ESG has been prevalent for some time now, this surge in interest has been fueled by Canada’s commitment to achieving net-zero emissions by 2050 and an increasing number of stakeholders who expect ESG considerations be integrated into their investment programs. As a result, sustainable investments among large Canadian pensions, spurred on by growing climate concerns and social and governance issues observed globally, went from $163 billion to $276 billion in one year.1 More importantly, the awareness of the potential impact that ESG can have on sustainable risk-adjusted returns is why plan sponsors and plan members have increasingly focused their attention on ESG investing.

    As the level of ESG investing has increased, the need for better, more consistent and transparent disclosure standards and regulatory frameworks has also accelerated. With that comes the necessity for higher quality data and the ability to pull together disparate data sets for investor and regulatory reporting.

    Net-Zero Commitments

    In response to growing concerns about climate change, the Government of Canada made a commitment to achieve net-zero emissions by 2050.2 Following the government’s commitment, several pension funds accepted the challenge. In just one year, the number of funds making public net-zero portfolio emission commitments by 2050 or sooner grew from two to nine funds.3 These commitments demonstrate the increased recognition among pension funds of the importance of implementing sustainability measures.

    In an effort to reach net-zero emissions, companies are turning to carbon credits. These credits are used to offset emissions and allow the owner to emit a certain amount of carbon dioxide (CO2) or greenhouse gases. The voluntary carbon-offset market is rapidly evolving and is expected to grow to around $250 billion by 2050 from only $2 billion in 2020.4 While these credits are intended to help companies meet their climate goals, it is imperative to ensure the quality and transparency of them in order to achieve genuine emission reductions and to avoid greenwashing. Greenwashing involves making an unsubstantiated claim to deceive consumers into believing that a company's products are environmentally friendly or have a greater positive environmental impact than they actually do.

    ESG Standardization Efforts

    Canada is taking meaningful steps toward increased standardization. Canada’s 2022 budget addressed the federal government moving towards mandatory reporting of climate-related financial risks based on the international Task Force on Climate-related Financial Disclosures (TCFD) framework.5 This will require financial institutions to publish climate disclosures that align with the TCFD framework beginning in 2024, using a phased approach. The government will also be moving forward with ESG disclosure requirements for federally regulated pension plans. In addition to these new requirements, the Taxonomy Roadmap Report was developed by the Sustainable Finance Action Council. The report contains ten recommendations that address the merits, design and implementation of a green and transition finance taxonomy for Canada.6 Taxonomies can provide better standardization for benchmarking economic initiatives that align with domestic and global climate goals. A sustainable taxonomy has the potential to significantly improve ESG standardization industry wide.

    While the government has recently taken steps toward ESG standardization, this comes about two years after the CEOs of Canada’s eight leading pension plan managers signed a statement emphasizing the importance of a more complete and consistent disclosure on ESG practices from investors and corporations.7 Pension plans have been leading the effort on industry standardization and have released yet another joint statement in June 2023. This time, eleven CEOs of Canada’s largest pension fund investors issued a statement supporting the International Sustainability Standards Board’s (ISSB) new reporting standards.8 The statement suggests companies in which they invest and those seeking their capital should consider these standards as they will become an increasingly important factor when making investment decisions. Additionally, the Canadian Association of Pension Supervisory Authorities (CAPSA) developed their own Guideline for pensions to follow. This Guideline provides guidance around ESG considerations in pension plan management and is intended to support plan administrators who are considering ESG factors that may be financially relevant to their plan’s investments.9

    While there is a burgeoning interest in environmental initiatives, social considerations are just as important too. The Canadian Securities Administrators (CSA) recently proposed changes to corporate governance disclosure rules that would increase transparency surrounding diversity on boards and in executive officer positions.10 The proposed changes are intended to provide investors with more detailed information, allowing them to better understand the connection between diversity and an issuer’s strategic decisions.

    Clearer Vision

    Implementing regulatory standards is likely the most effective way to see real change from a responsible investing standpoint. As the TCFD disclosure framework, taxonomies and CAPSA and CSA guidelines get adopted, pension funds will benefit from having a clearer vision of what securities are a fit for their portfolios and ESG goals. While the depth and scope of future ESG legislation is still to be determined, the continued discussions and emphasis on the topic, along with the growing level of investment, indicate ESG considerations are undoubtedly top of mind for regulators.

    ESG and Data Automation

    Consistent disclosure on ESG practices by Canadian investors and corporations is a significant improvement, but it will come with further reporting requirements for plan sponsors. Institutions will need data to support their governance and oversight objectives – for example, providing evidence of their ESG scores and exposures and supporting adherence to regulatory requirements and global standards. With no standardization of ESG data or shared industry standards for analysis and reporting, this may seem like a daunting future. Fortunately, digital innovation is transforming the investment landscape and advances in data automation will be key to managing and analyzing ESG data. Next generation analytic tools can help asset owners that manage their own portfolios to complete idea generation, research management, portfolio construction, and risk management. For example, investors can include ESG as an input factor in the decision process and simulate portfolio impact across various metrics. They can perform ESG materiality assessments over time by decomposing the relevant pillars specific to each investment’s industry.

    ESG data management is both a challenge and an opportunity for pension funds. As ESG standards continue to evolve, plan sponsors will need fundamental and diligent analysis at every level, including investment processes, compliance practices, organizational design and governance and reporting. With transparency and accountability as the foundations of ESG investing, it is paramount that sponsors demonstrate that their investments are in fact green and not greenwashed. Learning how to put data to work and relying on tools like data science to enable decisions and to communicate those decisions to stakeholders will be key.

    Turning to Service Partners for Data Insights

    As plan sponsors establish and refine their ESG policies, they will want to seek out service partners with advanced data analytics and reporting capabilities to provide the insight needed to evaluate their portfolios. Service partners should also be able to report how closely a portfolio is complying to a firm’s ESG goals via benchmarking and scoring.

    As pension plans continue to drive ESG investing and as the regulatory framework becomes standardized, they will want to be sure to have access to data that meets their needs and the tools to help them maximize their information. Evaluating the right resources and partners to support their investment decisions will help them as the future evolves.

     

    1 Canadian-Pensions-Dashboard-for-Responsible-Investing-2nd-Edition.pdf (corporateknights.com)
    2 Net-Zero Emissions by 2050 - Canada.ca
    3 Canadian-Pensions-Dashboard-for-Responsible-Investing-2nd-Edition.pdf (corporateknights.com)
    4 Carbon Offset Market Trends and Growth: 2050 | Morgan Stanley
    5 budget-2022-en.pdf
    6 Taxonomy Roadmap Report: Advice and Recommendations (publications.gc.ca)
    7 Top Canada Pension Funds Ask for Better ESG Disclosure - Bloomberg
    8 Factiva Newsletter
    9 1914 (capsa-acor.org)
    10 Canadian securities regulators propose changes to corporate governance disclosure practices and guidelines - Canadian Securities Administrators (securities-administrators.ca)

    Katie Pries portrait

    Katie Pries

    President & CEO, Northern Trust Company Canada
    Katie Pries is President & CEO of The Northern Trust Company Canada and serves as a member of the Corporation’s Canadian Management Committee and Canadian Board.

     


    © 2024 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients (or equivalent) only and is not intended for retail clients and should not be relied upon by any other persons. This information is provided for informational purposes only and does not constitute marketing material. The contents of this communication should not be construed as a recommendation, solicitation or offer to buy, sell or procure any securities or related financial products or to enter into an investment, service or product agreement in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. This communication does not constitute investment advice, does not constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it. Moreover, it neither constitutes an offer to enter into an investment, service or product agreement with the recipient of this document nor the invitation to respond to it by making an offer to enter into an investment, service or product agreement. For Asia-Pacific markets, this communication is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF; Northern Trust Global Services SE UK Branch, UK establishment number BR023423 and UK office at 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden, registered with the Swedish Companies Registration Office (Sw. Bolagsverket) with registration number 516405-3786 and the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) with institution number 11654; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA #160018; Northern Trust Global Services SE Norway Branch, org. no. 925 952 567 (Foretaksregisteret), address Third Floor, Haakon VIIs gate 6 0161 Oslo, is a Norwegian branch of Northern Trust Global Services SE supervised by Finanstilsynet. Northern Trust Global Services SE Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE. The Branch has its registered office at Grosspeter Tower, Grosspeteranlage 29, 4052 Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License #12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) are licensed by the Guernsey Financial Services Commission. Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579)/Northern Trust Fiduciary Services (Ireland) Limited (161386),  Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.