In 2023, 65% of surveyed Canadian investors expressed interest in responsible investment (RI), and two-thirds of respondents (67%) would like their financial services provider to inform them about RI options that are aligned with their values. However, only one third of those surveyed reported that their advisors are initiating discussions around RI, indicating a significant service gap. Year after year this service gap persists, leaving a full third of investors eager to speak to a financial service provider about responsible investing. With such clear client demand, why are so many financial advisors sitting on the sidelines of responsible investment?
– Reasons not to offer RI centre around a lack of knowledge and resources, or a perceived administration burden. Product availability is not a barrier.
– Advisors’ education and knowledge of RI are tightly linked to their overall use of RI. The more confident they are about RI, the more extensively they will use it in their practice.
– Advisors rely on investment companies – especially wholesalers – for information, and will likely turn to them with questions when introducing or increasing their RI usage.
– Investor demand is driving advisor adoption.
– Nearly 90% of RI users anticipate the growth of RI over the coming years, and non-users are open to using RI.
This means that financial advisors who learn to engage clients on ESG topics and RI strategies stand to gain tremendously.
Client and Advisor Fulfillment Gaps
Source: 2024 Advisor RI Insights Study – Topline Report
How can we drive greater adoption of RI at the retail level? It will take a 360-degree approach, from advisors informing themselves and servicing their clients based on needs and priorities, to fund manufacturers and wholesalers providing the needed support.
It is clear that the more RI knowledge an advisor has, the better positioned they are to serve their clients’ ESG-related needs and narrow the RI service gap. These recordings from the 2024 Advisor RI Bootcamp present an excellent jumping off point for anyone looking to learn about leading responsible investment products from the portfolio managers and analysts behind them.
And if you would like to learn more about RI assets and trends in Canada, be sure check out the virtual launch of the 2024 Canadian RI Trends Report on November 19th.
The opportunity is there – but it is incumbent on all of us to play our part in closing the RI service gap.
For more information about the 2024 Advisor RI Insights Study, contact Kristen Sheppard at kristen@riacanada.ca
In March 2024, the U.S. Securities and Exchange Commission (SEC) enacted the legislation that would require U.S.-listed companies to publicly report their climate-related risks and impacts. The long-awaited SEC Climate Disclosure Rules were released following months of intense public debate (including fierce opposition) and a record 24,000 comments submitted by companies, investors, auditors, legislators and other groups.
Now, and for the first ever time in the U.S., corporate climate disclosures would become mandatory in SEC filings and would be subject to the same level of scrutiny and audit requirements as for financial statements – ultimately putting climate disclosures on par with financial disclosures. In doing so, this groundbreaking ruling was intended to help make these climate disclosures “more reliable” and “provide investors with consistent, comparable, decision-useful information, and issuers with clear reporting requirements,” according to Gary Gensler, the SEC Chair.
However, the SEC made key omissions, including most notably, dropping requirements for the disclosure of value-chain emissions, otherwise known as Scope 3.*
*Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain.
Scope 3 emissions represent one of the Grand Challenges of Net Zero, and what the London Stock Exchange Group calls “one of the most vexing problems in climate finance.” These emissions are broad, spanning multiple sources upstream and downstream of company operations, and often across multiple tiers of suppliers and customers. They are also complex, as Scope 3 emissions are both costly and challenging to estimate, let alone measure directly. And often, they represent the overwhelming majority of a company’s overall emissions footprint. Increasingly, Scope 3 also represents a major obstacle for investors who are looking to cut financed emissions across their portfolios and meet net-zero commitments.
By excluding Scope 3, the SEC ruling has prompted companies and investors to wonder if this would be the end of Scope 3 disclosures for U.S. issuers and for corporate carbon accountability.
Scope 3 disclosures are on the rise, globally and in the U.S.
Here is a quick primer on Scope 3. Within carbon accounting, greenhouse gas (GHG) emissions are divided into three discrete ‘scopes’ based on where the emissions are created across a company’s operations and its wider value chain—as shown in Figure 1.
While companies have more control and influence over their Scope 1 and 2 emissions, Scope 3 emissions are generally more significant and result from companies’ supply chains (‘upstream Scope 3’) and use of companies’ products by consumers (‘downstream Scope 3’). Scope 3 is more complex for companies to track or estimate, but if gone unmanaged, may present financial risks, ranging from declining product competitiveness as consumer awareness for global warming increases, to higher cost of capital as insurers and investors aim to manage their own exposure.
Figure 1: Overview of GHG scopes and emissions across the company value chain.
Given the complexity and wide reach of these emissions, it comes as no surprise that globally, fewer companies report on Scope 1, 2 and 3 emissions, as compared to on Scope 1 and 2 alone – and U.S.-based companies in particular tend to lag on Scope 3 reporting.
However, the number of companies, both globally and in the U.S., that are reporting on their Scope 3 emissions has been consistently increasing year-over-year. According to the MSCI Net Zero Tracker, as at January 2024, approximately 42% of listed companies globally disclosed at least some of their Scope 3 emissions – a 17% increase compared to two years ago.
This disclosure trend is echoed by CDP. Of the 1,077 U.S.-based companies that reported on the CDP Climate Change questionnaire in 2023, only 13% did not report any Scope 3 emissions.
We see this trend reflected within our Mackenzie climate action engagements across U.S.-based issuers. Of the 100 companies with whom we engage via Mackenzie’s thematic climate engagement program, 41 are U.S. based, and of these companies:
– 44% have committed to SBTi (Science Based Target initiative) or set a SBTi validated target – 41% have set GHG targets that include Scope 3 emissions – 73% report in line with TCFD (Taskforce for Climate-Related Financial Disclosures) – 76% report to CDP
From our climate engagement discussions, we are seeing a modest but consistent year-over-year increase in Scope 3 emission disclosure. Listed below are some notable examples of U.S. companies leading the way on disclosing and abating Scope 3 emissions.
Ahead of the pack: U.S. companies leading on Scope 3 disclosure, based on Mackenzie’s climate engagements
Marathon Petroleum Corp. (MPC) is a leading integrated, downstream energy company, based in Findlay, Ohio. Marathon reports on Scope 3 Category 11: Use of Sold Products,* which is the largest source of the company’s overall Scope 3 footprint. In addition to this, Marathon has also set a 2030 target to reduce absolute Scope 3 Category 11 emissions by 15% below 2019 levels on refined product. This target is informed by methodologies devised by the SBTi and Ipieca,** and aims to demonstrate the competitiveness of Marathon’s business within the global market.
Linde PLC (LIN) is one of the world’s largest industrial gases (such as ammonia and hydrogen) and engineering companies that is helping enable the clean energy transition. With operations spanning more than 80 countries, including the U.K. and the U.S., Linde is subject to various climate disclosure rules globally. Therefore, it’s not surprising that Linde currently reports on 14 categories of Scope 3 emissions representing all relevant categories for Linde. –About 40% of this inventory has been verified by a third party to the limited assurance level. Linde has set a SBTi-validated target to reduce its Scope 1 and 2 emissions and is working on emissions estimation and methodology development in anticipation of setting additional Scope 3 emissions reduction targets by 2026.
WEC Energy Group Inc. (WEC) is one of the largest electric generation and distribution and natural gas delivery group of companies in the U.S., based in the Midwest. WEC recently undertook an extensive review of all 15 categories of Scope 3 emissions across their organization to build the company’s first Scope 3 inventory. The disclosure was a cross-functional effort, relying on subject matter experts across WEC’s supply chain, finance, gas distribution, fuels, energy efficiency and environmental teams, and overseen by a dedicated Scope 3 Executive Steering Committee. WEC currently discloses multiple categories of Scope 3 through its ESG reporting.
*Per the GHG Protocol, emissions classified as Scope 3 – Category 11: Use of Sold Products are the GHGs emitted during the use of a company’s sold products [Source: GHG Protocol (2013) – Technical Guidance for Calculating Scope 3 Emissions (V1.0)].
**Ipieca is a global not-for-profit, oil-and-gas industry association for environmental and social issues.
Based on public disclosure and our own experience, company efforts to disclose and abate Scope 3 emissions continue even as the SEC removes its focus on Scope 3.
What’s driving this increased disclosure?
These emissions disclosure trends are being driven by several factors, but most notably by the shifting regulatory landscape around Scope 3 and the rise of climate disclosure rules globally.
During the two years that the SEC spent deliberating on the final rules, a suite of climate disclosure rules and standards emerged, all of which included provisions for the disclosure of emissions across a company’s Scope 1, 2 and 3. In 2023, the European Union’s (EU) Corporate Sustainability Reporting Directive entered into force, the International Sustainability Standards Board released its IFRS S2 standard, and the state of California passed the S.B. 253, the Climate Corporate Data Accountability Act.
We operate in a globalized economy – companies have global value chains, global consumers and global investors. Rather than seeing a form of ‘accounting arbitrage,’ and a race to the lowest level of disclosure when it comes to emissions reporting, what we predict is increased disclosures for companies that operate globally. Texas-based firms doing business in California or in the EU, for example, may now be required to disclose their Scope 3 emissions, regardless of the SEC final ruling.
We see this divergence in Scope 3 disclosure rules between the U.S. and other parts of the world as analogous to the longer-standing divergence between the US Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS), where the U.S. decided to maintain their own accounting standards.
In the early 2000s, the International Accounting Standards Board released a new accounting standard, the IFRS, which was intended to establish global common accounting standards. However, the U.S. continued following US GAAP, leaving many U.S. issuers to report in adherence with both GAAP and IFRS.
The direction of travel on Scope 3 disclosure is more, not less
We believe a notable paradigm shift has emerged regarding Scope 3 emissions reporting. Even if the SEC has dropped requirements for mandatory Scope 3 disclosure, U.S. issuers choosing to access global investors and supply chains will be required to adopt international climate disclosures. Ultimately, this leads us to believe that the direction of travel on Scope 3 disclosure is likely to be more, not less.
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Investing in India’s rapidly developing economy offers a promising opportunity for substantial returns, yet it also presents unique challenges. As the world’s most populous country and one of its fastest-growing markets with over 4,400 listed companies, India is drawing attention in the global investment landscape. Investments are pouring into the country from institutions as well as the retail arena; some increasing their existing allocation, others making a dedicated initial allocation to the country while others are diversifying or fully divesting from their existing China exposure and into India.
India’s economic growth story is compelling. With a population over 1.4 billion, a rapidly growing middle class and robust economic reforms, India is poised for substantial growth, setting the stage for the domestic economy to thrive. Approximately 40% of India’s population falls within the age group of 18 to 35 years (the highest Gen Z and Millennial ranking in the world) which is propelling the consumer markets and is the major driver of economic growth and development regardless of events in the USA or elsewhere in the world.
India’s infrastructure is rapidly preparing for decades of growth, with examples including the new underground in Mumbai, bullet trains, the network of major highways connecting cities and the rapid increased acceptance of on-line payments. It is clear that India is on a journey to modernization at breakneck speed.
The country has emerged as a global hub for technology, manufacturing and services with major companies moving operations into the country. “Apple Aims to move half its supply chain from China to India where a quarter of the world’s iphones will be made” (Wall Street Journal). “Boeing’s deal with Air India is the biggest in civil aviation history” (CNBC);=. “Amazon will invest $12.9 billion in India by 2030 to build new data centers” (Nikkei Asia). And the list continues…
India is uncorrelated with major markets in the world – as reported by Bloomberg: 0.27 versus NASDAQ; 0.43 versus MSCI World Index; 0.49 versus FTSE and 0.33 versus S&P 500 and is a stock picker’s dream market with significant alpha potential especially in smaller companies outside of the Index. There is an abundance of quality companies that are not yet recognized by the market which offer huge growth opportunities vs. investment in companies that have already been publicly acknowledged and peaked. Indices are backward looking (reflecting successes already realized) and ignore smaller companies which have outperformed larger ones over the past decade due to their agility and ability to adapt quickly to changing market conditions.
However, investing in India is not without its hurdles. Issues such as regulatory complexity, political volatility, environmental degradation and social inequalities pose significant risks. Navigating the complex market structure requires more than just financial analysis – it requires a deep understanding of the Environmental, Social and Governance (ESG) factors that drive investment returns. The ability to accurately identify these factors and apply their impact on the future of a company is imperative to mitigate risk and enhance returns.
ESG Integration
ESG analysis cannot just be an add-on or an after-thought. It must be incorporated throughout all stages of the investment process in order to understand a company’s long-term financial return potential, structural growth drivers and their overall societal impact. This can be achieved through several approaches:
1) Negative Screening: Excluding companies or sectors that do not meet certain ESG criteria. For example, avoiding investments in companies with poor environmental records, unethical labor practices or those where revenues or profits are derived from areas that provide no environmental or societal benefits.
2) Positive Screening: Actively seeking companies that are making significant contributions to sustainable practices, social progress and ethical governance. This includes investing in firms with demonstrated environmental stewardship, social responsibility and robust governance practices.
3) Qualitative assessment: No two companies are alike, and external sustainability rating assessments may not provide sufficient in-depth analysis. Meeting with company management and discussing their approach to the environment, staff and minority shareholders can provide invaluable insights in identifying leaders.
4) Engagement: Engaging with companies to encourage better ESG practices. Investors can use their influence to promote improvements in corporate behaviour and policies. This is particularly important in a market such as India, where ESG investing remains in its infancy.
Furthermore, identifying key performance indicators that can be monitored on a continual basis is imperative to tracking the progress of a company and quantifying commitments and targets. These indicators represent a general set of transparency and ESG standards that firms are expected to meet over time.
Prioritizing ESG factors, as well as traditional financial analysis, enables investors to focus on the next story, not the last, and to thus identify new opportunities before they become mainstream and the broader market catches on.
Conclusion
As India continues its trajectory of economic growth and structural reforms, integrating ESG principles into investment strategies is not only a moral imperative, but can pave the way for long-term value creation and stakeholder prosperity. As global regulatory requirements become more closely aligned and mandated across investment platforms, partnering with skilled and experienced investment professionals is key to successfully meet your targets and ultimate goals.
Embracing sustainability is not just about doing good—it is about harnessing opportunities for growth, resilience and sustainable prosperity in India’s dynamic landscape.
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The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.
In the search for opportunities that can provide additional financial returns, investors often incorporate considerations beyond traditional financial metrics into their investment decision-making process. This concept is known as return additionality. The circular economy, where materials and resources are reused and waste is avoided, can potentially offer economic benefits and may be an avenue for return additionality.
A study by Oxford University revealed that companies with robust Environmental, Social and Governance (ESG) practices often experience lower risk and greater long-term financial performance. This same study stated that companies which have specific and effective ESG strategies achieve better operational performance, and their stock price performance is positively influenced by good sustainability practices .
This may provide an opportunity for investors to identify companies that might have unrealized opportunities for revenue growth or expense savings and to encourage them to adopt circular economy practices across their operations. This shift is not just theoretical; it is already happening. Between January and September 2020, public equity fund assets focused on the circular economy increased sixfold, from US $0.3 billion to US $2 billion, according to the Ellen MacArthur Foundation.
Benefits to companies and investors
1. Saving on packaging costs
In our economy, we can see wasted resources in countless industries and situations. Packaging, for instance, can constitute a good portion of the overall cost of goods sold. Most of this value is lost once the consumer discards the package. To recuperate this value, the market is currently concentrating on recycling materials like plastic to create new products, such as outdoor furniture, construction materials and yoga mats. However, only a small portion of these recyclable material inputs are being reused (less than 12% in the EU, for example).
Reusing packaging at a larger scale may represent a potentially significant opportunity. The beauty industry, for example, tries to reduce packaging costs by using bigger bottles. Certain restaurants and grocery stores in the U.S. offer discounts to consumers who bring reusable containers: the Just Salad restaurant chain offers free toppings for customers with reusable containers . Several major hotel chains (Mariott International, Hyatt Hotels and InterContinental Hotels) are replacing single-use shampoo bottles with re-fillable ones.
Consumers are increasingly prioritizing sustainability. According to a study from Nasdaq, Gen Z shoppers worldwide are willing to pay up to 10% more for a sustainable product . They are more interested in sustainability-related concerns than the brand names themselves and they place value on sustainability over cost saving measures. As consumer preferences shift towards sustainable products and services, companies that consider sustainability are better able to build customer loyalty, capture market share and drive revenue growth. Also, innovative waste reduction programs and sustainable product designs can boost a company’s brand and public profile, better positioning it in the green economy.
3. Boosting supply chain resilience
The current linear economic model can lead to resources scarcity and eventually depletion, but a circular model can help to mitigate supply chain risks. By using fewer raw materials, companies are less exposed to the price volatility of these materials. This stability can assist with the decrease of the cost of goods sold while helping with long-term planning as it reduces the dependance on new raw material integration.
4. Managing emissions
Reducing greenhouse gas (GHG) emissions is a core pillar of the circular economy. To achieve net-zero by 2050, our economy would benefit from the redesign of products, such that they are made with reusable resources. By reducing waste at multiple stages (from production to disposal), companies can reduce the need for production, thereby cutting emissions. Waste reduction also brings down the amount of material in landfills, which decreases methane emissions. With net-zero commitments for 2030 and 2050 becoming the norm, companies have an opportunity to innovate and implement best practices to reduce cost while meeting net-zero commitments (as opposed to buying carbon offsetting credits, for example).
5. Anticipating future regulations
Regulations related to the circular economy are expected to expand rapidly worldwide. For example, the European Commission adopted an action plan for a circular economy in 2019. In 2022, heads of state and global government representatives committed to developing by the end of 2024 an international legally binding agreement to end plastic pollution. The circular economy is also a key pillar of the European Green Deal, a set of policies approved in 2020 which aim to make the bloc carbon-neutral by 2050. Countries outside of the E.U., such as Chile and China, have already adopted ESG-related regulations aimed at promoting a circular economy. By cultivating an innovative and forward-thinking mindset, companies can start to implement circular economy policies and procedures. This can help them avoid potential future fines, reduce cost and risk, and leverage first-to-market brand opportunities.
6. Diversifying operations
Participating in the circular economy can help to diversify a company’s operations when it comes to the design and production of products. This is because in the circular eco-system, companies use old materials to create new things and design products with longer lifespans. This value recovery can be further developed and implemented at scale for greater economic gain.
Conclusion
The circular economy is often seen from a GHG emission reduction perspective, but it can also offer economic benefits. Shareholders can leverage these benefits when looking for growth investment opportunities or opportunities for existing investee companies to reduce expenses. Implementing a circular economy model can help companies achieve financial savings by recapturing wasted value. As investors continue to look for return additionality, they can encourage companies to implement circular economy practices, which could improve financial returns while contributing to positive environmental changes.
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The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.
