More and more Canadian investors expect to have access to one form or another of ESG investment solution. As such, integrating the right environmental, social and governance (ESG) solution into the retirement savings plan sponsor offering requires several critical considerations. 

In fact, setting responsible investment objectives, and the subsequent tracking and reporting on how these objectives are met, is not a straightforward exercise. There are no industry-wide standards on the requirements for ESG products. Moreover, people may have different expectations regarding sustainable investing products, and the sustainability objectives set by the investment manager may take years to be achieved.  

These challenges make it difficult for investors to determine how ESG-conscious (according to their own interpretation and definitions) an investment actually is, opening the door to investment products giving the impression that they are, in fact, what they are not. 

Hence the greenwashing problems.

Problematic labelling 

It’s easy to miss the mark if there is no set way to determine what the mark is, especially when the manners of reporting progress, and the indicators to track this progress, are not clearly defined. 

For example, without accurate climate metric disclosures, it becomes increasingly difficult to assess the material risks that climate transition poses to an investment solution, and therefore hard to make informed decisions when it comes to choosing investments. Various market reports published in the last couple of years in Canada outline the same general problem: ESG data here in Canada—and abroad, for that matter—is often of poor quality, hindering comparison between particular investments in terms of ESG objectives and implementation.  

There is more: regulatory expectations are still adapting and evolving, making it challenging to determine whether ESG investing is simply a box-ticking exercise. It’s a continuously evolving process that many see as more of an art than a science. Not to mention that complying with principle-based regulatory standards, which provides for a wide array of interpretations, has never been easy.  

Regulatory bodies across several jurisdictions, in both Europe and North America, are aggressively tackling this problem, but compliance standards still vary greatly. 

As institutional investors start using ESG issues as a tool for both risk mitigation and value enhancement, plan sponsors looking at ESG investments need a list of criteria to assess products against their own needs and expectations.

Due diligence on disclosure 

Disclosure from public companies is on the rise across the board, but both investors and plan sponsors must have the right tools to be able to offer solutions that match their plan members’ and employees’ core values and priorities. This alignment is becoming an important fiduciary issue in the context of retirement savings programs in Canada. 

The lack of consistent data collection for greenhouse-gas emission metrics, for example, presents obstacles to properly assess companies’ progress, especially when many have pledged to reach net zero greenhouse gas emissions. That is why there needs to be more discussion around how entities are responding to the risks and opportunities posed by environmental, social and governance issues. Ultimately, plan sponsors must ask how their asset managers are dealing with these considerations. 

To identify real ESG investments, plan sponsors require scorecards and benchmarks that will help them determine if the proposed objectives are right for them. Whether the aim is to reduce material risk, align pension investments with the organization's overall philosophies or address a moral imperative, no pension fund administrator wants to dive in and realize the asset management practices of the solutions are not on par with what they—and their plan members—had thought.

For those with limited experience or resources, seeking expert assistance may be a helpful way to navigate the complexities of ESG investing. This might involve working with an asset manager who specializes in ESG strategies or consulting with a third-party expert who can provide guidance on selecting ESG-friendly investments.

Probing deeper

Plan sponsors should evaluate the service providers' environmental credentials before investing. Digging deeper than the byline and looking to identify the person or team at the firm whose responsibility it is to act on those policies should also be on the radar.

For instance, before investing, plan sponsors should ask how an asset manager integrates environmental, social and governance risks into their security selection process. A good measure of that integration could be found in the asset manager's proxy voting policy and the records of votes they've made in the past. If a manager is serious about implementing environmental strategies, it will show up in its investment stewardship practices, and this applies whether the investment manager is active or passive in their investment approach.

Determining whether greenwashing is taking place also means looking at how asset managers are making their investment decisions, and what tools they are relying upon. Assessing the whole picture before investing is the key in those situations. Managers may check the overall ESG performance for securities in which they invest, but put more weight on one criterion to the detriment of others. A security could make it into a portfolio because it scores well on certain metrics, even if performing badly on others.

By keeping these challenges in mind, plan sponsors in Canada can more effectively navigate the complex landscape of ESG investing and avoid the pitfalls of greenwashing.