Sustainable finance is quickly becoming one of the biggest issues facing the financial world, and corporate disclosure on climate-related risks is the crucial first step in achieving a sustainable financial system.
The world of finance works best when investors are happy. So, is Barbara Zvan, chief risk and strategy officer at the Ontario Teachers’ Pension Plan, feeling joyful? “Far from it,” she snaps. The reason for her displeasure: a troubling lack of relevant, reliable corporate disclosure about the risks of climate change and other environmental and social issues—information that’s becoming crucial to making appropriate decisions about sustainable long-term investments.
“Investors are generally unhappy with the amount of climate change information that is available,” Zvan explains. “At Teachers’, we hold assets for a very long time. And as a result we have been big proponents of greater disclosure on this issue for many years. You need disclosure to be a good investor, and you need that information to be comparable and repeatable over time.”
Zvan’s opinion—and mood—is significant. On top of her role at Teachers’, one of the largest institutional investors in the country, she’s also a member of the federal government’s Expert Panel on Sustainable Finance, which in June released its final report on what Canada needs to do to keep pace with the rapidly changing standards of global investment.
The financial community would be wise to watch how investors and thought leaders like Zvan are feeling. In their telling, sustainable finance is quickly becoming one of the biggest issues facing the financial world, and corporate disclosure on climate-related risks is the crucial first step in achieving a sustainable financial system. For CPAs, who will play a pivotal role in putting sustainable finance principles into practice, it’s a time of great opportunity—and change.
What do we mean by sustainable finance? The Expert Panel on Sustainable Finance—composed of Zvan, banker Andy Chisholm and Kim Thomassin of Quebec’s Caisse de dépôt et placement, and chaired by Tiff Macklem, dean of the Rotman School of Management and former senior deputy governor of the Bank of Canada—admits there’s no universally accepted definition for sustainable finance. The panel summarizes the concept as “capital flows (as reflected in lending and investment), risk management (such as insurance and risk assessment), and financial processes (including disclosure, valuation and oversight) that assimilate environmental and social factors as a means of promoting sustainable economic growth and the long-term stability of the financial system.”
If that’s too much of a mouthful, Zvan offers a pithier take: “We’re trying to get mainstream finance to help us with the transition to a low-carbon economy.” Her goal is to harness the power of conventional finance and accounting practices to protect economic growth and make the world a better place to live in the long term.
“This is about companies demonstrating their concern for their own future,” says Rosemary McGuire, director of research, guidance and support at CPA Canada. “It may not be an easy path, but it is an inevitable one.”
It helps to imagine sustainable finance as having three linked components, each intended to bring about a gradual transition to a low-carbon, sustainable economy:
Report: Start by collecting and disclosing relevant, comparable non-financial information on how climate change and other environmental and social risks—including greenhouse gas emissions, hazardous waste storage, labour conditions and more—can affect a firm’s long-term profitability.
Internalize: As reporting on these matters becomes commonplace, investors and firms will need to take this information into account when making risk-management decisions.
Act: Once these long-run risks are fully incorporated, major changes to capital flows will occur. Investors will prefer opportunities that demonstrate sustainable, long-term growth, and firms will respond by allocating capital toward projects and sectors that mitigate or avoid climate change and other related risks.