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As investors push for responsible business practices more is needed from Canadian policymakers
For three days in a row in 2021, the village of Lytton B.C. set the all-time Canadian heat record, reaching a stunning high of 49.6 degrees Celsius and suffering through a devastating wildfire that destroyed 90% of the town. Lytton’s tragedy is just one example of many climate change-induced disasters caused by the growing threat of extreme heat, destructive storms, and severe drought. Canada is trying to curb the impact of global warming – but so far, its efforts aren’t paying off. Corporate Knights’ Earth Index analysis shows Canada as the worst performing country in reducing greenhouse gas emissions among the G20’s 10 most developed countries despite the fact that we now have an ambitious target to achieve Net Zero by 2050.
Investors pushing companies to adopt more sustainable business practices, particularly in the energy sector, have been doing their part – but there is a growing sense that policymakers are rowing in a different direction. Without everyone on board, how can Canada possibly find its way in a shifting global economy? In this discussion, Fate Saghir, senior vice-president and Head of Sustainability at Mackenzie Investments, and Dwayne Zaba, Corporate Knights’ Chief Sustainability Officer, talk about the challenges in applying a sustainable lens and the opportunities that lie ahead as Canada seeks to transition to new forms of energy production and sustainable economic growth.
Q: Dwayne, how do Canadian companies rank relative to their global peers around sustainable practices?
Dwayne Zaba: On the surface, Canadians are punching well above their weight. Out of the 100 companies in our 2022 global ranking, 13 of them are Canadian. Given our population, it looks like Canadians are doing very well from a sustainability perspective. However, when you broaden the lens to our overall emissions compared to other G20 countries, our emissions don’t reflect that. We’re patting ourselves in the back when it comes to sustainability, but in reality, we need to take a broader, more responsible look at the situation.
Fate Saghir: Dwayne is right. Canada makes up about 2% of global emissions which doesn't seem like much. But on a per capita basis, we're among the top emitters. So, on a population basis, we are quite carbon intensive even though in aggregate as a country we may not be.
Q: Fate, how hard is it to apply that sustainable lens across all the asset classes at an organization the size of Mackenzie?
F.S.: Theoretically, it's not hard when you look at ESG since there are specific environmental, social and governance risks that could impact the value we're able to deliver to our investors and our clients. On paper, it’s very easy to apply an actual dollar amount to climate risk because we have physical evidence of what’s happening – the wildfires in B.C. for example. We can also integrate transition risks, such as the cost of a carbon tax into the valuation of a company because it impacts its ability to be profitable relative to those which are successfully decarbonizing their operations and will face less tax in the future.
In practice, the challenge is data. In non-financial reporting there is a great deal of inconsistency in how we all report. Last year, the IFRS (International Financial Reporting Standards) Foundation set-up the international Sustainability Standards Board, which is meant to bring all of these standards together and provide something that's consistent across the globe and across different non-financial metrics. But it will take a couple of years before the data providers catch up and start collecting this for us in a format that is usable to investors. You’ve also got data providers that are all assessing ESG risks and opportunities using very different methodologies and lenses, which creates inconsistency and confusion in the market
On the private market side, we are still waiting for standards to be developed. An article that Corporate Knights put out a couple of weeks ago showed a sample of public firms are selling off their carbon intensive operations to private companies because they're not going to be regulated as much. Our own private markets sister company, Northleaf Capital Partners, does a great job integrating ESG risks but, again, the data is only as good as what the underlying companies are willing to report.
D.Z.: I agree. We need to be really mindful of companies that are divesting from risky assets and do a better job of tracking them. The private sector is far less regulated as Fate said. Minimizing these risks on paper increases them in many ways.
Q: Do you think Canada's Net Zero target is realistic?
F.S.: I wish it was. There is a general lack of investment from the governments in Canada. Research we’ve looked at suggests that we need to invest between $70 billion and $100 billion a year to make a meaningful impact on our emissions. I think the lobbyists and the carbon intensive sectors are quite strong in Canada so there will be a lot of trade-offs. Because the oil and gas sector is such a big part of the Canadian economy, I wish we had put a more achievable target in place that we could actually deliver on. The Net Zero target in place right now isn’t realistic because there is such a heavy dependency across the board on oil and gas in this country and the investments we're making don't reflect the magnitude of the change that needs to happen.
D.Z.: That being said, while the stated commitments are probably not realistic, they are frankly not as ambitious as we need them to be. We need to move far more quickly than we are moving now. We’ve got targets and carbon taxes etc., but the problem is they are not being applied equally. Based on our research, Canadian drivers are being taxed at the pumps at about $30 per ton while the industry is paying as little as $2.00 a ton for their taxes. We’ve really got to think about how carbon taxes are applied. The policies coming out of governments, both federal and provincial, is clear as it relates to taxing the high emitters. But in reality, there are exemptions that undermine them. There must be a way to incentivize high emitters to invest in efficiency and transformation – without that kind of policy, we're never going to get there.
Q: Fate, you’ve done a lot of research in this area. What's your view on the role policymakers should be playing in this push to Net Zero?
F.S.: They need to be at the forefront. The PRI initially put out this model outlining the role of clients, investors, and policymakers in achieving these targets. In that model, these groups are all converging and coming together. But in reality, this transition has been driven by investors and specifically institutional investors because of the nature of their long-term investment horizon.
D.Z.: From an investment perspective, we need to incentivize investors, both institutional and retail, to pour money on the solutions. We can do that logically and I think it's the responsible thing to do. But we also need to think about the overall cost to society as it relates to the industries that we are subsidizing. The oil and gas industry is similarly positioned to the cigarette industry. If we think about the cost of society as it relates to fossil fuel companies, it's very easy to understand that the carbon tax should be through the roof. It's simply taking the cost to society into consideration and then applying that as a tax so we get the behavior that we want and the transition that we need. Tax laws need to be changed to reflect that as well.
Q: Is divestment the way forward?
F.S.: Absolutely not. We are a Canadian company and we're mindful of the economy and the energy poverty that actually exists in this country. In New Brunswick for example, one out of three households can't afford to pay their energy bills. And that was before the conflict in Ukraine and the energy crisis that we are facing today. I'm sure this issue extends beyond just that province. Rather than divestment, I think we need to have a seat at the table and we need to work with these carbon intensive sectors to help them transition and to ensure that they are factoring in the cost to society that Dwayne was talking about. As investors, we bring this perspective to our companies on the energy transition and what is expected globally from investors in Europe or the U.S. In order to ensure Canada is set-up for success, we've got to work collaboratively and thoughtfully across Canadian companies to ensure they're transitioning.
Q: How ready are Canadians to support the options for replacing fossil fuels such as nuclear energy?
D.Z: We're not a proponent of expanding nuclear energy however we obviously want to take full advantage and increase efficiencies in that industry to ensure safety and the best use of resources. There are other alternatives that can be built out rapidly in order to facilitate the transition to cleaner forms of energy. But again we need policy to drive the infrastructure and the change. Without that, it's just not going to happen in a timely enough fashion.
Obviously, there are tremendous amounts of minerals that come into play and they need to be mined responsibly, efficiently, and in a low carbon fashion. Mining and resource companies are going to be a fundamental part of this transition. But I'm not so sure about energy companies in the oil and gas sector. There aren't very many buggy manufacturers that played a significant role in the rise of the automotive sector a century ago. We need to think about the likelihood of the energy sector actually devising solutions to get us beyond the problems. The sector really isn't there. I mean, many of the companies have spent more money on their PR to promote the transition inside their company than they've actually invested in the transition, which I think is telling.
Q: Fate, is there an opportunity here from an investment standpoint?
F.S.: I think there's an opportunity for Canada to grow our GDP and wealth overall by thinking about how we can lead the energy transition. As investors, we don't want to exclude traditional oil and gas, but we need to ensure that those companies are still thriving into the future which is a low carbon and sustainable one. We rely on partners like Corporate Knights research to help us understand how those companies are investing their capital in a sustainable future. I think Shell is a great example of a company that said we're no longer an oil and gas company, we are an energy company and we're going to think about the most sustainable energy sources and business model. At the same time, from our perspective, we need to make sure that we're starting to introduce the energy of the future into our investment portfolios. We support, and expect, trillions of dollars to be invested in renewable sources and we want our investors to benefit from that growth, while investing sustainably.
D.Z.: I agree that we need traditional oil and gas in order to continue to move forward. But there are certainly far greater efficiencies that could be realized as it relates to emissions from production. For example, we're working closely with Alberta Innovates on a strategy called Bitumen Beyond Combustion which repurposes bitumen in the ground to make carbon fiber. This has many uses including helping to realize commercial building efficiency. But it comes back to policy which is needed to incentivize these organizations to reinvent themselves.
Q: How big a risk is geopolitical uncertainty? Could it impact global Net Zero targets?
D.Z.: We're in a crisis and the Latin root of the word crisis combines both opportunity and danger. Right now, we’ve got a great opportunity – but we can also quickly squander it. We need to get our act together and behave better than we have in the past. The energy crisis Europe faces now is incentivizing them to rapidly build out renewable energy. And that's a very positive thing. We need to think about the stark reality of the climate crisis: it's the greatest challenge we face as a species. And we've created it. But by choosing to invest responsibly and in the order of magnitude required, we can enable a sustainable future, not just for our species, but for all the species that we rely on for our survival. We need environmental solutions that promote diversity.
From a business perspective, we have a responsibility to ratchet down the risk and think about enhancing the environment that we live in and rely on as opposed to exploiting it. And that's a fundamental shift for businesses. Business needs to have a purpose beyond profit. However, from a sustainability perspective, organizations that are melding purpose with profit, are doing better.
F.S.: There’s so much science behind this. The climate crisis is caused by humans. We are stewards for this planet. We have such a great opportunity to invest responsibly and ensure that this planet exists in a livable state for future generations to come.