As corporations aim higher to become more sustainable, they’re challenged to fill gaps in their ESG agendas. Bank towers are shown from Bay Street in Toronto's financial district.Adrien Veczan/The Canadian Press
As responsible investing continues its growth trajectory, many companies are working diligently to improve their environmental, social and governance (ESG) practices.
Mark Podlasly, director of economic policy at the First Nations Major Projects Coalition in Vancouver, says one area doesn’t get enough focus: Indigenous issues and input from that community.
“ESG standards do not have Indigenous people involved in the setting, evaluation or the maintenance of them,” Mr. Podlasly says. “That’s a huge business risk in a country like Canada. You only have to look at the media every day to see something happening between Indigenous interests and companies. It’s usually not positive in terms of natural resources or anything on the land.”
Indigenous peoples are often brought in or consulted at the end of a deal (if at all), he says, and that’s way too late, suggesting that adding Indigenous knowledge and values is a logical addition to ESG valuations.
A 2022 analysis by PwC Canada of ESG reporting found that fewer than one in five of the top Canadian companies discloses an Indigenous Truth and Reconciliation action plan. Slightly more than a quarter of companies (28 per cent) report policies to attract and retain Indigenous employees, managers and board directors.
Among the top 150 companies PwC analyzed, the report found about one-quarter (27 per cent) included a discussion of policies around Indigenous relations (which can cover everything from community investments to training programs).
That’s a missed opportunity in creating even stronger ESG practices, which can contribute to a company’s overall performance and sustainability. That, in turn, can benefit its investors too, Mr. Podlasly says.
According to management consulting firm McKinsey & Company, around 70 per cent of the more than 2,000 academic studies about responsible investing find a positive relationship between financial returns and ESG scores.
Why are companies that focus on ESG often also solid bets in the long run when it comes to returns? There are clear links.
These companies are often considered better at risk-management and sustainable operations. They’re seen as less likely to be involved in scandals or lawsuits, environmental disasters and human rights violations, which can involve significant costs and reputational damage. Research also shows companies that subscribe to ESG metrics tend to have better access to capital and lower debt.
In the past few years, we’ve seen a substantial shift in investors’ mentality regarding how ESG risk correlates with business risk, says Christie Stephenson, executive director of the Sauder School of Business Peter P. Dhillon Centre for Business Ethics at the University of British Columbia.
“Investors are really understanding that ESG performance translates into corporate resiliency and value creation, and that gets reflected in share pricing or investment performance,” Ms. Stephenson says.
Responsible investors want to be on ‘the right side of change’
Concerns about climate change, a continuing pandemic, the fight for equity and social justice, and geopolitical conflicts are shaping all sorts of decisions by consumers. That includes investors who, along with their advisers, are considering a host of ESG issues in selecting companies and funds.
Investors want to be on “the right side of change,” says Priti Shokeen, head of ESG research and engagement at TD Asset Management. “People are realizing the power of their investing and where they put their dollars.”
An analysis by Bloomberg Intelligence forecasts that by 2025, global ESG assets are on track to exceed US$53-trillion – more than a third of the world’s total assets under management (AUM).
In Canada, responsible investing accounted for 61.8 per cent of Canadian assets under management in 2020, up from 50.6 per cent two years earlier, with ESG investment making up $3.2-trillion in AUM, according to the Responsible Investment Association (RIA) Canada.
“It’s not just about being good, it’s about the ease of doing business for companies,” Ms. Shokeen says. “No company that is publicly listed can get away with not making ESG a core part of their narrative and shareholder discussions.”
Investors increasingly realize they can have a positive impact on the world and in their portfolios. In those twin pursuits, all sorts of ESG factors matter, from greenhouse gas emissions, to diversity, to the treatment of supply chains. With ESG becoming intertwined in the corporate fabric of many companies, Mr. Podlasly says there’s even more potential to make Indigenous action part of the ESG agenda.
Many pension plans, financial houses and capital sources have told him the easiest way to determine whether Indigenous interests have been included in a company’s proposal is to look for an equity investment by a First Nation in the project.
“That [would be] the clearest indication to the financial sector that consent has been secured, and the investment has been de-risked from that perspective,” Mr. Podlasly says.