From dealflow to a lack of education, this week leaders in social finance addressed some of the key barriers preventing the UK market from flourishing. Last month Antony Bugg-Levine, the chair of the Global Impact Investing Network, told delegates at London’s Critical Mass conference that in the world of social finance there were “hypers, haters and […]Read More ›
Mainstreaming ESG: A Look at the Policy Environment
Reflections on ImpactOntario
I recently had the pleasure of attending ImpactOntario, a conference on impact investing hosted by the MaRS Centre for Impact Investing. Abigail Noble, Head of Impact Investing at the World Economic Forum, kicked off the day with a thought provoking talk about mainstreaming impact investing.
Impact investing is an investment strategy that integrates environmental, social, and governance (ESG) criteria to help resolve societal challenges. Abigail’s talk motivated me to add to the discussion on mainstreaming ESG integration.
One of Abigail’s most important insights is that some of the biggest opportunities for mainstreaming ESG may lie not in the products, but in the approach. In other words: although there is room for improving responsible investment (RI) products, there are certainly gains to be made by examining the broader strategy. I agree with Abigail, and I think that the policy environment is a good place to start.
Mainstreaming ESG integration could be facilitated by adjusting the policy environment to be more favourable to socially and environmentally responsible enterprises and investors.
The following policy tools could help to scale up ESG integration. This is by no means a comprehensive list, but it’s a starting point that draws from, and complements, the discussions at ImpactOntario.
ESG Policy Tool #1: Mandatory ESG Reporting
A mandatory “report or explain” policy for publicly traded companies would make it easier for investors to integrate ESG into their investment strategies. Under a “report or explain” policy, companies would be required either to disclose their ESG performance using a standard guideline such as the Global Reporting Initiative, or to issue a report outlining their reasons for not disclosing. Under this type of policy, investors would have greater access to information that enables them to integrate ESG criteria. This could be a powerful tool to help mainstream ESG integration to catalyze positive societal impact.
Coro Strandberg, a prominent corporate social responsibility (CSR) professional in Canada, makes the same case here.
ESG Policy Tool #2: Expand the Scope of Fiduciary Duty
Taking ESG risks into account is increasingly considered to be part of a smart, responsible investment strategy. Yet it can be difficult for investors to obtain information regarding a company’s exposure to ESG risks.
Expanding the scope of fiduciary duty to explicitly require companies to disclose their exposure to ESG risks could help to mainstream ESG integration. Under this expanded version of fiduciary duty, executive boards would effectively be required to report on their understanding of potential social and environmental impacts on company operations. This translates into enhanced accountability on ESG risks, which is an important step to investing for positive societal impact.
This policy proposal is not far fetched. In response to shareholder activism, Exxon Mobil recently agreed to report on its exposure to carbon risks. Exxon Mobil’s decision reflects the growing acceptance among investors that smart investing means understanding ESG risks.
ESG Policy Tool #3: Say on Executive Pay
Rising inequality is a growing concern for Canadians – it presents a threat to both our social fabric and our macroeconomy. Socially-minded investors can help to address the sometimes egregious pay ratios between executives and workers by investing in companies who practice the “say on pay” approach. “Say on pay” is a strategy that promotes shareholder democracy on executive compensation. In this approach, a company’s shareholders vote to oppose or approve executive pay.
Indeed the “say on pay” approach is already practiced by some companies. But mainstreaming ESG integration would be assisted by a policy to require companies to let shareholders approve or reject the pay ratio between executives and workers.
Mainstreaming ESG: You Can Help
The good news, for responsible investors and enterprises in Canada, is that Industry Canada is currently conducting a public consultation on the Canada Business Corporations Act (CBCA). This is a unique opportunity for socially-minded businesspeople and investors to contribute to the development of public policy. Visit Industry Canada’s website to learn more about the public consultation. I encourage all who are interested in mainstreaming ESG integration to submit a proposal to Industry Canada. Feel free to share your thoughts the the Responsible Investment Association’s discussion forum here.
Big thanks to the MaRS Centre for Impact Investing and SocialFinance.ca for hosting a fantastic event, and for their ongoing efforts to scale up one of RI’s fast-growing sectors. It was a well-organized event full of thought-provoking discussion about catalyzing positive societal change through our investments. I look forward to attending again next year.
This year’s Canadian Responsible Investment Conference will feature loads of content dedicated to impact investing and ESG integration. Check out the conference agenda here.
Editor’s Note: While ImpactOntario is complete, our coverage of it is not! We’ll be continuing the conversations started there by covering ventures, talking with financial organizations and more! Stay tuned!