Within and among the boards of charitable foundations, a range of viewpoints may exist in terms of what constitutes climate leadership and how to effect meaningful change on the path toward a net-zero-carbon economy. How funds are invested matters, write Greg Elliott and Monika Freyman – and allocating invested assets in ways that accelerate the pace of change matters most.
The complexities associated with the transition to a net-zero-emissions economy by 2050 are substantial and undoubtedly will require innovative and multifaceted solutions on a scale previously unseen in Canadian history. The growing sense of urgency to mobilize capital toward a low-carbon-emission – and ultimately net-zero-emission – economy should correspond with investment portfolio strategies that prioritize decarbonizing the economy in meaningful ways.
Transition finance is one such strategy. It focuses on driving companies – particularly those operating in high-emitting sectors – to take credible steps to reduce carbon emissions consistent with a net-zero pathway and investing in companies with catalytic solutions offering new technologies and business models required for a net-zero world. For countries like Canada that have economies with significant resource-extraction and energy-production components, effective engagement with high-emitting sectors (and specifically high-emitting companies that share a genuine interest in achieving collective change toward a resilient net-zero-emissions society by 2050) is vital if we are to achieve the aggressive emission-reduction targets that are necessary.
Be the catalyst
As the Navigating Responsible Investing series has sought to articulate, there are significant opportunities for foundations to sustainably invest their assets in ways that achieve meaningful social impacts and drive positive climate-transition outcomes alongside financial returns. There are also legitimate questions within the broader sustainable finance space that pertain to issues such as what truly constitutes a sustainable investment. Despite ambiguities that exist, foundations can play a meaningful role in catalyzing capital toward solutions that accelerate Canada’s progress toward its net-zero-emission goals.
There are significant opportunities for foundations to sustainably invest their assets in ways that achieve meaningful social impacts and drive positive climate-transition outcomes alongside financial returns.
According to Philanthropic Foundations Canada, Canadian foundations collectively have assets exceeding $100 billion. With the disbursement quota in Canada requiring a minimum of 5% of assets to be distributed annually, how foundation boards choose to allocate their remaining invested assets is highly consequential, offering opportunities to generate further social and environmental benefit beyond what could be achieved through charitable giving alone. As the market for sustainable investing continues to develop and grow, foundations should consider if and how they wish to leverage their investments in ways that align with positive social and/or environmental outcomes. Many are already well along this path, having recognized the significant opportunity for their investment portfolios to generate financial returns and positive impacts beyond what can be achieved through grantmaking alone. A number of foundation boards have committed to allocating capital in ways that help build an inclusive, resilient, and decarbonized economy. Others, while perhaps contemplating their ability to allocate a portion of invested assets in a manner that accelerates the transition to a net-zero-emissions economy, may be reluctant or unsure of how they can meaningfully do so.
Accelerating the transition
Mobilizing capital at the scale and speed required to effectively transition Canada’s resource-based economy toward net-zero emissions will by necessity require engagement with high-carbon-emitting sectors. To illustrate this point, according to Statistics Canada, in 2021 Canada’s energy sector alone (including oil and gas extraction, natural gas distribution, petroleum refining, pipeline transportation, electric power generation, transmission and distribution, coal mining, and other metal ore mining) accounted for approximately 9.7% of Canada’s GDP, and approximately 35% of our national emissions total. Engaging with sector leaders who are seeking to transition to a net-zero-emissions economy by 2050 is crucial.
Divestment strategies are part of the ecosystem of change that is required; however, divestment can preclude meaningful engagement with high-emitting companies whose involvement in the transition would accelerate reaching net-zero goals. Further, since a “cleaner” investment portfolio of any single investor doesn’t necessarily lead to actual emission reductions in the real economy, it’s not clear that divestment is an adequate climate leadership path, especially when shareholder pressure can enact meaningful climate commitments and actions. However, when climate commitments lag or promises are made but little action follows and active shareholder engagement doesn’t move the needle, this approach could become a viable option for net-zero committed portfolios. It is critical to not only seek climate-transition and solutions strategies that steer our economy toward net-zero-emissions pathways, but also use one’s voice as a shareholder to try to enact positive change and ensure that asset managers are doing so on one’s behalf. This can include collaborative engagement efforts such as Climate Engagement Canada, direct engagement, standard-setting, and climate policy engagement to voting proxies aligned with climate and net-zero goals.
It is critical to not only seek climate-transition and solutions strategies that steer our economy toward net-zero-emissions pathways, but also use one’s voice as a shareholder to try to enact positive change.
We must acknowledge that complex societal issues require working at multiple levels of change to effectively achieve positive impacts and a multipronged approach of both allocating capital and being an active owner. The transition to a net-zero-emissions economy is a good case in point of a highly complex challenge that requires multiple innovative solutions to be brought to bear. Transition investing is an example of an alternative, solutions-oriented approach that Addenda Capital (a privately owned investment management firm and subsidiary of The Co-operators Group Limited with $35.5 billion in total assets as at June 30, 2023) is using in its efforts to catalyze capital, with the goal of accelerating the transition to a net-zero-carbon economy. Three key elements of Addenda’s climate-transition investing approach include:
- allocating capital to companies that are transitioning and decarbonizing their portfolio over time,
- actively engaging those companies and policy-makers on climate change or making sure investment managers are doing this as part of their climate transition approach, and
- allocating capital to climate solutions such as new technologies that will help old industries transition (i.e., chemical processes that allow carbon dioxide to be captured in cement production) and innovating new business models that are needed in a net-zero-emission world.
Addenda’s climate-transition investing approach focuses on supporting companies that are taking credible steps to reduce carbon emissions consistent with a net-zero, 1.5°C-temperature-increase pathway. A key objective of transition investing is to identify and continuously engage companies operating in high-carbon-emitting sectors – including mining, oil and gas, steel, and concrete – that have adopted clear emission-reduction targets. Over time, inclusion criteria within the portfolio become increasingly stringent with an overarching goal of ensuring that the carbon intensity of the portfolio is reduced in line with pathways to a net-zero future. Critically, an ongoing process of engagement with portfolio companies seeks to foster the necessary conditions for improved climate performance over time. The transition-investing approach acknowledges the realities of Canada’s resource-based economy. Having launched two climate-transition equity pooled funds in 2021, focusing on Canadian and international equity opportunities respectively, Addenda is stewarding an approach that provides climate-conscious investors a practical method for asset allocation to help decarbonize the economy.
In alignment with its climate-transition investing approach, Addenda is among Canadian asset management firms that have joined the Net Zero Asset Managers (NZAM) initiative. Launched in 2020, the NZAM initiative includes more than 300 signatories globally (representing US$59 trillion in assets under management) that are committed to achieving net-zero alignment for their assets under management by 2050 or earlier. The NZAM initiative recognizes that engagement and stewardship are important levers to be used in support of decarbonization goals. Particularly in the Canadian context, prioritizing the achievement of real-economy emission reductions in high-emitting sectors and companies in which investments are made is critical.
Growing pains invite solutions
As with any emerging area of opportunity, there will be hurdles – some readily apparent, some unforeseen – as it develops. The broader sustainable finance market is no exception, as legitimate concerns exist in terms of what actually comprises a credible sustainable investment, along with challenges around reliability and comparability of data, just to name a few. However, momentum in the sustainable finance space is unmistakable, as the move toward a net-zero-emission economy gradually picks up speed and an optimistic sense of inevitability takes shape.
Recently, the Sustainable Finance Action Council released its Taxonomy Roadmap Report, emphasizing the urgent need for Canada to scale up climate investment in order to achieve a net-zero economy by 2050. The roadmap offers a unique framework tailored to the realities of Canada’s carbon-exposed economy. The taxonomy seeks to establish standardized and science-based definitions of climate-compatible investments, including both “green” and “transition” investments, the latter of which will focus on reducing emissions from high-carbon and hard-to-abate sectors that have investable projects with “well-defined lifespans that are approximately proportionate to the expected decline in global demand in representative 1.5°C pathways.”
For foundations considering opportunities to invest in ways aligned with a net-zero society, it is an encouraging sign that sustainable investment strategies prioritizing real-economy emission reductions have emerged.
The release of the taxonomy is an important development given its potential for helping mobilize the massive amounts of capital required to meaningfully reduce emissions on the path toward a net-zero economy by 2050 (the report notes that some estimates peg Canada’s climate investment gap as high as $115 billion annually). The importance of a credible framework that takes into account Canada’s unique transition pathways cannot be overstated for investors attempting to navigate the complexities of a genuine and credible sustainable investment approach.
For those foundations within Canada’s philanthropic sector that are considering opportunities to invest in ways aligned with a net-zero society, it is an encouraging sign that sustainable investment strategies prioritizing real-economy emission reductions have emerged. Progressing along the path toward a net-zero economy in an accelerated manner will require incredible ingenuity given the complexities of the challenge. Harnessing the capabilities of truly innovative financing solutions, to the fullest extent possible, is essential to achieve the scale of investment required. Transition finance is a viable and necessary path for climate leadership in Canada.