words ESG on a wood block and Future environmental conservation and sustainable ESG modernization development by using the technology of renewable resources to reduce pollution and carbon emission.
Khanchit Khirisutchalual

Canada’s business community is familiar with the old adage, “When the U.S. sneezes, Canada catches a cold.” The idea is that American economic trends usually spill over to Canada in one way or another.

But does this motto apply to America’s backlash against investments that consider ESG issues? To answer that question, we need to look at the drivers of the U.S. anti-ESG campaign and explore whether similar drivers could emerge in Canada.

The term “ESG” has been dragged into America’s so-called culture war, resulting in a major impact in the U.S. market. For example, Florida banned state pensions from considering ESG issues, and Texas banned state pensions from investing with BlackRock and other asset managers deemed to be discriminatory against the oil and gas industry (despite the fact that BlackRock has billions invested in oil and gas). At least 15 states have enacted various anti-ESG laws, and S&P Global found that at least 165 anti-ESG bills and resolutions were introduced in 37 states in the first half of 2023.

America’s anti-ESG campaign likely started in March 2021 in West Virginia. According to InfluenceMap, a London, U.K.–based non-profit think tank that reports on corporate climate lobbying, a coal industry association helped draft a bill to ban state retirement funds from investing in companies that divest from fossil fuels. Although the bill failed, it led to copycat bills in other states such as Texas, where a similar bill became law, as mentioned.

So, America’s anti-ESG movement is driven by politics, rather than markets or facts. The movement fails to recognize that ESG issues are financially material, as evidenced by the growing number of insurance companies fleeing Florida and California due to these regions’ exposure to climate-related financial risk.

Anti-ESG sentiments are also evident in Canada, for example through think tank publications and shareholder proposals demanding that TD, BMO and CIBC clarify their commitments to oil and gas, which each received around 1% support.

Just as those shareholder proposals saw trivial support, the anti-ESG campaign faces limited prospects in Canada for at least four reasons:

  1. Canada’s oil patch supports ESG considerations. Fossil fuel companies and states like Texas have played a key role in America’s anti-ESG push. Here in Canada, the oil patch has taken a different approach: Alberta’s government has launched an ESG Secretariat that proclaims: “Alberta is positioning itself to be a global ESG leader for clean, secure and ethically sourced energy.” Similarly, the Alberta government–funded Canadian Energy Centre touts Canadian energy companies as global ESG leaders. Meanwhile, Canadian oil and gas companies launched the Pathways Alliance to reduce emissions in the sector. These activities strategically support the industry’s social licence and its access to capital markets.
  2. Canadian investors have a positive attitude towards ESG considerations. This year, Montreal-based Millani, another ESG advisory firm, published a study of 27 Canadian institutional investors managing $6 trillion in assets. It found that 100% of respondents had not changed their approaches to ESG despite what’s happening in the U.S. On the retail side, annual Ipsos surveys commissioned by the Responsible Investment Association have found strong retail investor support for corporate action on diversity, climate change and biodiversity.
  3. Stakeholder and environmental considerations are compatible with fiduciary duty in Canada. Canada and America have different laws around fiduciary duty. While a short-term notion of “shareholder primacy” underpins U.S. laws pertaining to fiduciary duty, Canada’s Bill C-97 codifies stakeholder capitalism in federal law by explicitly stating that directors and officers acting in the best interests of a corporation may consider the interests of shareholders, employees, retirees and pensioners, creditors, consumers, governments, the environment, and the long-term interests of the corporation.
  4. Canada’s financial regulators are on board with ESG and climate disclosures. The Canadian Securities Administrators issued disclosure guidance for ESG funds in January 2022 and recently welcomed the International Sustainability Standards Board’s (ISSB) new corporate sustainability disclosure standards, saying it plans to use the ISSB standards as a point of reference for a consultation on similar standards in Canada. The Office of the Superintendent of Financial Institutions issued climate disclosure guidance for federally regulated financial institutions in March 2023.

While we may see more anti-ESG activity in Canada, such as publications and shareholder proposals, it’s hard to see how a U.S.-style investment-banning campaign would gain traction here given the considerations detailed above. From a market perspective, the ESG train has already left the station, and Canadian regulators seem to get it. Core strategies are unlikely to change, because material issues are material issues.

Having said that, it would not be surprising to see a change in communication strategies. For example, some Canadian institutional investors may start to make less use of terms like ESG, opting instead for more straightforward terminology to avoid confusion and manipulation by a small but noisy opposition. We’ll probably hear more spokespeople leading with comments like, “We consider all material risks and opportunities” and speaking to more specific issues, rather than ESG in general.

And we can surely expect to see some Canadian institutions with U.S. offices modifying their communication strategies to mitigate a new form of political risk at the state level.

Dustyn Lanz is senior advisor with ESG Global Advisors Inc.