Strong ESG focus helps financial services sector shine

CANADA’S FINANCIAL SERVICES SECTOR ISN’T JUST GROWING, IT’S “DOING GOOD”  –  domestically and internationally. Experts say Canada’s global growth in the sector is due, in part, to its active engagement in key international initiatives on environmental, social and governance (ESG) issues.    

This booming sector, which includes Canadian banks and insurance companies, contributed 10.6 per cent to GDP in 2016, according to Statistics Canada, making it one of the most important contributors to the domestic economy. Its other contributions include generating some $10.3-billion in taxes and $17.1-billion in dividends to shareholders, not to mention purchasing $20.1-billion worth of goods and services in 2016 alone.

Internationally, the sector accounts for almost half of Canada’s outward foreign direct investment, about $537-billion in 2017, a figure that has more than doubled in the past 10 years. Financial services are also Canada’s largest and fastest-growing services export, according to the report Toronto on the Global Stageby the Conference Board of Canada (CBoC.)

For its part, Toronto outpaces many other global financial centres in terms of both employment growth and concentration. The city added more than 55,000 new financial services jobs between 2012 and 2017 – an increase of more than 25 per cent – taking the number of jobs in Toronto directly and indirectly supported by financial services to more than 408,000.

Commenting at the time of the report’s release, CBoC executive director Michael Burt said Canada’s financial sector has significantly increased its footprint in global markets in the past decade. Among the contributing factors, the sector’s international reputation benefited from Canada’s successful weathering of the 2007-08 financial crisis.

Fred Pinto, senior vice president, head of asset management NEI Investments at Aviso Wealth, one of Canada’s leading wealth management companies, says the global success of the country’s financial services sector is due in part to it embracing ESG issues.

He points out, for example, that 23 Canadian financial institutions – including the six biggest Canadian banks and the largest insurers – have endorsed the recommendations of the Financial Stability Board Taskforce on Climate-related Financial Disclosure, an initiative to encourage all companies to provide comparable climate-related disclosures. 

The initiative encourages financial institutions to assess the extent to which their long-term value might be impacted by either physical risks related to climate change or changes in the market for their products and services because of the transition to a lower-carbon economy.

Canadian investors, including Aviso’s portfolio management arm, NEI Investments, are also taking lead roles in the Climate Action 100+ corporate engagement collaboration, which is urging the world’s 100 largest greenhouse gas emitters to improve efforts to curb emissions.

“Controversial projects like the Dakota Access Pipeline in the U.S. have led to a new focus on exploring what constitutes responsible conduct in lending,” says Mr. Pinto. “Canadian banks are participating in discussions on developing new global OECD guidance for responsible business conduct in corporate lending, and also on how the existing Equator Principles framework for project finance could be enhanced.”

Canada’s financial services sector already has a good record of ESG practices, he adds.

“NEI’s ESG team researches corporate ethics and responsibility performance globally. In general, compared to global peers, we have found that Canadian banks and insurance companies are less likely to be involved in the most serious ethical controversies – money laundering, corruption, market manipulation, fraud and major breaches of consumer protection responsibilities – although there is always room for improvement,” says Mr. Pinto.

Canada’s Responsible Investment Association (RIA), one of the organizations pushing for further improvement, believes ESG issues are among the most important drivers of change in the world today because they have as much impact on societal issues as they do economic decisions that have significant implications for businesses and investors.

Responsible investment (RI) refers to the incorporation of environmental, social and governance factors into the selection and management of investments. RIA notes that assets in Canada managed using one or more RI strategies increased from $1.5-trillion at the end of 2015 to $2.1-trillion two years later, representing growth of 41.6 per cent.

Angela Flaemrich, lead research analyst for financials at Sustainalytics, a leading provider of ESG and corporate governance research, ratings and analysis, says overall, the Canadian financial services sector does well on the world stage.

“Pressure to improve reporting on all things related to sustainability is rising, and many Canadian banks and insurance companies do a good job of reporting both on their policies and their programs – and they are getting better at providing concrete targets and timelines, and meeting them,” she says.

However, adds Ms. Flaemrich, there is room for improvement – particularly when it comes to translating stated policies into programs – and that is being driven by a combination of companies’ desire to lead on ESG, regulation and public pressure.

“On the governance front, the cost of not complying with regulations is very high, but that’s not the only factor causing change,” she says. 

“Today, more than ever, consumers expect companies to uphold high sustainability standards. ESG considerations have entered mainstream consciousness and can be a significant competitive differentiator for financial services companies,” adds Ms. Flaemrich.

Mr. Pinto agrees.

“Controversies such as the Wells Fargo sales scandal have highlighted the role that strong culture, controls and effective complaints mechanisms play in preventing misconduct and protecting the interests of consumers,” he says.

Controversial projects... have led to a new focus on exploring what constitutes responsible conduct in lending.
— Fred Pinto, 
senior vice president, head of asset management NEI Investments at Aviso Wealth
Pressure to improve reporting on all things related to sustainability is rising ...
— Angela Flaemrich,
 lead research analyst for financials at Sustainalytics

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Tanya Camp