Sustainable Finance | Research

When teenaged environmental activist Greta Thunberg addressed members of the United Nations Climate Action Committee last fall, she chided them for touting “fairy tales of eternal economic growth.” Her colourful language undoubtedly captured the way many people regard the tension between the profit-seeking motives of the business community and the much broader ambitions of those who would rein in humanity’s damage to the natural world. It might seem an impossible task to resolve the many conflicts that separate these perspectives, but an initiative at Queen’s University aims to do just that.

The , which launched in November 2019, is based at Queen’s Smith School of Business. The Institute serves as the linchpin for the Canadian Sustainable Finance Network, which includes over 65 academic researchers and educators from 22 universities across the country, all dedicated to exploring how the many different ways in which we spend money might be adapted to reflect the principles of sustainability.

These principles have become a bulwark of environmental policy. Most of the discussion around sustainability has focused on its scientific and technological aspects, such as the mechanics of obtaining materials or energy and how these processes might be conducted more efficiently. Until recently, few observers were asking more subtle questions about what sustainability might mean for the financial systems that drive these industrial activities.

Those questions formed the mandate of the Canadian Expert Panel on Sustainable Finance, which was convened by the federal Minister of Environment and Climate Change and the Minister of Finance in the spring of 2018. When the Panel submitted its a year later, the document included 15 recommendations for mechanisms and strategies that would integrate sustainability into the way in which major expenditures and investments are made.

“Changes are coming, such as physical and transitional risks,” explains Sean Cleary, Executive Director of the Institute for Sustainable Finance. “And the flip side of risk is always opportunity.”

The consensus is: it no longer makes business sense to ignore either the risks or the opportunities associated with sustainability.

"The idea of sustainable finance is that we need to start integrating sustainability considerations in the day-to-day decisions of finance – the big ones and the small ones. What we’re trying to do is promote sustainability on a variety of fronts, including environmental, social, and governance considerations."

– Dr. Sean Cleary (Smith School of Business)

Dealing with disclosures

The Institute’s origins coincided with the creation of the Expert Panel, when the Toronto-based Ivey Foundation offered seed funding for an academic body that would conduct research on the challenges climate change poses to the world’s economic infrastructure. The Smith School’s proposal for the Institute was ultimately chosen for this purpose and its soft launch was announced at a conference jointly organized by the Institute for Intergovernmental Relations in the School of Policy Studies at Queen’s and Smith in Summer 2019.

Among the speakers at that event was Andrew Chisholm, member of the Board of Directors of the Royal Bank of Canada as well as the Expert Panel. He emphasized the Panel report’s call for better expertise to deal with complex environmental challenges through financial means. Cleary argues that while this need was clearly being referred to the country’s academic community, addressing it also requires collaboration with other interested parties.

“That means working with other universities, with industry participants, with policymakers, to try and develop research and education that is practical and relevant as well as thorough and objective,” he says. “It is an opportunity for us to take a leadership role alongside others.”

Integrating sustainability considerations into all relevant business and financial decisions. I.e., Aligning financial systems and services to promote long-term environmental sustainability and economic prosperity.

A bond is a financial debt instrument used to borrow money or raise funds. Green bonds are a type of bond designed to raise funds to invest in environmental or climate change mitigation projects. Green bond issuers commit to provide investors with detailed on-going information on the projects and infrastructure supported with the green bonds proceeds.

The terms sustainable investing and responsible investing have come to be used interchangeably. At the core, sustainable (responsible) investing involves the recognition, consideration and incorporation of environmental, social, and governance (ESG) factors into the investment management process.

Transition bonds are a new class of bonds, the proceeds of which are used to fund a firm's transition towards a reduced environmental impact or to reduce their carbon emissions. The proceeds can be used exclusively to finance new and/or existing eligible transition projects. These bonds require the issuer to commit to shifting to more sustainable business practices.

Bridging the gap

For Ryan Riordan, the Institute’s Director of Research, the was signaled by an invitation to discuss the subject with business reporters at the Toronto Globe and Mail newsroom in winter 2020. Their interest indicated just how much the staid coverage of profit and loss now intersects with much messier considerations that environmental lobbyists have voiced for decades.

“Over the last three years, environmental concerns have been the highest in terms of investor-sponsored topics being discussed at board meetings,” he observes. “There are more and more individuals—investors, money managers, traders—who understand that this is important and we need to do something.”

In addition to conducting research that reveals the extent of attention that is now being dedicated to this field, the Institute intends to build bridges amongst communities that have a shared stake in the outcome.

“There are lots of individual pockets of activity on sustainable finance, but until recently we haven’t been talking to each other,” says Riordan. “Now we’ve realized there’s a whole Canadian community that’s interested in this who didn’t know each other were out there.”

According to Cleary, the Institute is dedicated to building a platform for this kind of forward-looking collaboration, including around issues of responsible investment, fiduciary duty, and adequate climate-related disclosures.

��Ƶ researchers Ryan Riordan, Director of Research, and Sean Cleary, Executive Director, of the Institute for Sustainable Finance at Smith School of Business.

“We’re trying to provide guidance on where we’re going by looking into areas that need additional research, so people have more information to make better decisions,” he says. “We’re saying this is where it seems to be going, this is what would help it go faster in the right direction, and this is what will help to do it in the most prosperous manner possible.”

One of these areas is Canada’s transition to a low-carbon economy, which will require a mobilization of capital to facilitate and provide financing for greener investments. These include the provision of loans, the underwriting of bonds, developing climate resilient infrastructure as well as early and late-stage equity investments. However, the amount of capital the financial system needs to mobilize to meet environmental goals is unclear in the form of equity, fixed-income and infrastructure markets and public and private investments. To provide a concrete, data-driven capital blueprint for Canada's low carbon transition, the ISF team launched the in September 2020. The plan highlights that cooperation between the public sector, private sector, and financial system is critical to securing investments needed to meet Canada's 2030 climate targets.

In addition to the mobilization plan, the ISF also plans to develop a Climate Finance Data Lab that will provide businesses access to environmental (flood maps, forests, watersheds), climate, emissions, and financial data. It will gather data from public (e.g. Statistics Canada) and private sources. The lab will aggregate, clean, match and integrate this data in a way that is easy to use for financial and economic decision making. The belief is that, by allowing financial decision makers access to accurate environmental data, they will support informed and effective capital allocation decisions and ensure that the best projects for spearheading Canada’s transition to low-carbon economy are addressed first.

Credit: Gary Neill

Credit: Gary Neill

COVID-19 and sustainable finance

The outbreak of coronavirus has threatened our health and communities and the global response has also crippled our economies and investments. According to Cleary and Riordan, addressing the COVID-19 crisis, which is significant and demands our immediate attention, does not mean we have to stop preparing for the future risks and disruptions from climate change.

Seen through a climate lens, these choices could ensure that a post-COVID world is also a more sustainable one. Even amid COVID-19, our leaders across finance, industry, and government can continue to mitigate future risks from climate change as we have what it takes to grow world-class sustainable finance expertise here in Canada to help us better manage these risks and steer the country through historic transition to a more sustainable economy.

“Governments and businesses are now making massive economic decisions—from relief spending to bail out packages—that may shape the future of industry. Now is the time to think about the future, and how it can be more sustainable for generations to come,” says Cleary.

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Fixing financial fairy tales – The rise of sustainable finance in Canada