Following consultations with some 200 representatives from the private and public sector and civil society across Canada, the National Round Table on the Environment and the Economy (NRTEE) launched its Capital Markets and Sustainability report at the Toronto Stock Exchange today.

The government appointed body concluded that, by linking sustainability factors with investment decisions, capital markets are key to addressing environmental issues such as climate change and ensuring Canada’s long-term economic competitiveness. Given recent polls showing the environment rising to the top of the public agenda, the report’s recommendations about how to overcome barriers to integrating environmental, social and governance (ESG) factors in investment decisions, is particularly timely.

The task force found that, while companies and pension funds are beginning to listen to the marketplace when it comes to integrating sustainability factors into strategic decisions there remain significant market barriers.

The task force also noted that the efficiency of Canada’s capital markets and long-term economic prosperity is at stake and capital markets need to be better equipped with information and analytical tools, as well as incentives, to invest in our sustainable future.

Among the report’s key findings are three key reasons why sustainability factors are not taken into consideration in investment decisions to the extent required.

First, the task force discovered that there were long held views among pension fund trustees that the consideration of such “non-financial” factors was in general conflict with fiduciary duty. Recent research has revealed, in fact, that a failure to take ESG factors into consideration in investment decision-making is actually a breach of fiduciary duty.

Second, the task force revealed that a lack of clarity over the definition of materiality and its inconsistent application and disclosure constituted an important market barrier as well. This is particularly problematic given the highly material nature of many ESG issues, including diminishing ecological services, natural resources and often related social unrest.

Finally, it became clear that, because many ESG factors may only become material over long time horizons, an obsession with short-term performance goes against long-term sustainability — both in terms of not mitigating potential negative impacts but also in lost opportunities.

The report presents a set of recommendations for overcoming barriers related to fiduciary duty, materiality, and short-termism to promote economic competitiveness and environmental sustainability.

The task force believes that these solutions will encourage Canadian capital markets to not only catch up with our European counterparts in integrating ESG factors into investment decisions, but also gain a sustainable competitive advantage.

The complete report is available at www.nrtee-trnee.ca/eng/programs/Current_Programs/Capital-Markets/Capital-Markets_E.htm.