Investors can play a significant role on the path to a successful climate transition

By: Roger Beauchemin (c) 2021

For Canada to achieve its climate transition goals, it will undoubtedly require some heavy lifting. The country has an extraction-based economy and is a large producer of energy, much of it fossil-based. Its industry and economy are also energy-intensive, due to the cold climate in part but also to a vast geography that leads to important transportation needs. While companies big and small will be called upon to meet the challenge, one shouldn’t lose sight of what is at stake: the well-being and livelihood of households and communities across the country, for generations to come. This comes with a collective responsibility and if there is one certainty, it is that companies and investors alike can play an important role, says Roger Beauchemin, President and Chief Executive Officer of Addenda Capital.

As the CEO of an investment firm, how do you reconcile climate change and investing?

RB: Climate change is material to long-term investors. Therefore, we want to understand how companies are responding to climate change and how they have adapted their business strategy accordingly. To do that, we need to engage dialogue and we need metrics from companies, so that we can measure progress and exposure. If we take a step back to contemplate the climate challenge, we know very well that it can carry both opportunities and risks.

As asset managers, we believe that capital allocation is best done on a solid understanding of company financials and business models, but also on a thorough analysis of extra-financial issues. Ultimately, we need to be able to compare, and that is why unified frameworks, such as the ones designed by the Task Force on Climate-Related Financial Disclosures (TCFD) or the Sustainability Accounting Standards Board (SASB), are important.

Do investors themselves have a role to play?

RB: Investors have a critical role to play. We provide capital. Capital finances industry and governments, from manufacturing to services and projects. How and where we allocate that capital is very important. Traditionally, investors only considered their financial returns. But they can also consider extra-financial outcomes. For instance, insurers, because they began to see the impact of climate change on physical risks through increasing claims, have been leaders in including climate change in the analysis of their investment portfolios. By doing so, they could seek to mitigate physical risks and improve returns by considering the investment implications of climate change.

It also makes sense for pension investors to assess climate risks and opportunities, since climate change is a long-term issue. This is very aligned with their beneficiaries’ and participants’ long-term interests. As for foundations and endowments, considering climate and other outcomes is a way of aligning their investment strategies with their mission and their granting policies.

You’re suggesting that investors can put their portfolio to use in order to effect change. How does that work?

RB: If we take a larger view, there is a lot at stake for Canada in navigating the climate transition. We cannot ignore the problem and wish it away, nor can we afford to let others make decisions for us. We need to lead the way; we need to be involved. By using sustained engagement with companies to help them through this transition, for example, we can produce outcomes with significantly more upside. This way, we’re using the portfolio to get results that are both financial and extra-financial.

To help make this happen, investors can leverage their collective weight to spur industries into making their businesses operate with a lower carbon footprint. Some have advocated that portfolios should go fossil free, which can make sense if this is a reflection of an investor’s ethics and values. But staying in the room and engaging with companies will contribute to shaping a more resilient economy and, hopefully, result in an inclusive transition for everyone that enables meaningful job creation.

The fact of the matter is that carbon emitting sectors account for all kinds of companies all over the country, which means not only jobs are at stake, but the livelihood of thousands of households and communities. A lot of Canadian families and companies depend on achieving the transition carefully, and that it be well done and as quickly as possible.

What would you say to individual investors who want to make a difference?

RB: Everyone can play a role. Individual investors can use their portfolio to contribute to a lower carbon economy. The magnitude of the climate transition is such that it clearly requires a massive, collective shift. Every small step counts.

Individual investors can talk to their advisors, for instance, and ask about sustainable or responsible investment strategies, which often have climate-guided strategies. The more investor demand there is, the more fund companies will respond with product offerings.  As the consideration of environmental, social and governance (ESG) issues has taken off over the past few years, we have seen a significant wave of new investment possibilities emerge. Investors can also enquire about impact investment products, which could include green bonds that are designed to raise funds for environmental or climate change purposes.