Lightbulb drawn around tree image, indicating sustainable ideas

Despite all the noise around the rise of ESG investing, Canadian retail investors remain a relatively untapped source for sustainable finance, a new report says, but regulatory action and enhanced tax incentives could help change that.

The Institute for Sustainable Finance at Queen’s University reviewed the progress made on the 2019 recommendations from the Canadian Expert Panel on Sustainable Finance. The institute’s report said Canada has been slow out of the blocks and is falling behind in the global transition to a more sustainable, low-carbon economy.

The report finds that “Canada is being outpaced globally — and its overly cautious approach has left the country in a ‘catch up’ position.”

As a result, the institute called on policymakers to speed up action on the expert panel’s original recommendations to set the groundwork for greater private sector involvement.

Among other things, the report called on governments to move faster on mandating climate-related disclosures, and to clarify the fiduciary duties that companies, institutional investors and others face when it comes to factoring climate risk into their business and capital allocation decisions.

“Governments need to act now to set these standards and to establish processes for their evolution over time,” the report said.

At the same time, the report suggested that more could be done to help recruit retail investors to sustainable finance. Only about 1% of assets under management in mutual funds and ETFs are in products that are marked as sustainable, it said: “Sustainability-focused funds are still a drop in the bucket within the Canadian retail market.”

So far, the report said, little has been done to “provide Canadians the opportunity and incentive to connect their savings to climate objectives.”

Measures such as providing retail investors with enhanced RRSP contribution space, and a “super tax deduction” for investments in “accredited climate-conscious products,” are touted in the report as possible policy moves to drive increased retail investment in sustainability.

“However, based on current public knowledge, no progress has been made on this initiative to date,” it said.

At the same time, the report noted that the Responsible Investment Association has advocated for incorporating ESG considerations into know-your-client requirements. This would “encourage advisors to consider that their clients may have investment objectives that focus on ESG or sustainability preferences, and that advisors should seek to gain an understanding of these preferences.”

Here, too, the report said that adopting the measures “would be a major catalyst for responsible investing in Canada’s retail market.”

Policy-makers also need to address the challenges of greenwashing, the lack of sustainable finance data and the risk of capital flight, the report said.

“As the world rushes ahead, our public and private sector must shift into a higher gear,” said Sean Cleary, the institute’s chair and the report’s co-author, in a release.

“By taking decisive action now, we can propel the Canadian-specific solutions that our industries need to thrive over the next three decades,” Cleary said.