Companies can be exposed to climate risks that range from the physical to the reputational.Nastco
Tougher rules from regulators in Canada and around the world on how companies report on climate risks will have implications on how investment advisers approach their relationships with clients and invest their money.
Late last year, the Canadian Securities Administrators (CSA) proposed a standardized reporting framework on climate risks greenhouse gas (GHG) emissions for Canadian-listed stocks and bonds.
“It will enable a level playing field when it comes to disclosures,” says Jean-François Gagnon, co-leader of sustainable finance at EY Canada in Montreal. “When you look at the different ESG rating agencies, there is a lack of convergence. Part of it is due to the fact that disclosures are hard to come about, so this should normalize things and support better decision-making.”
The CSA isn’t alone in taking these measures. The International Sustainability Standards Board is planning for global sustainability or non-financial disclosures for corporations or issuers, such as implementing minimum requirements for reporting GHG emissions. The U.S. Securities and Exchange Commission and European Union are also developing new standards around environmental, social and governance (ESG) disclosures.
These proposals share the common goals of increasing transparency on ESG risks and making it easier for advisers to compare companies from a risk perspective.
That’s especially important as investor interest in sustainable funds continues to rise. Morningstar Canada reported that assets invested in these funds doubled to $34.5-billion in 2021 from the year prior. To add an extra layer of protection for investors and increase transparency, the CSA has introduced guidelines on disclosure practices for funds that consider sustainability or ESG in their objectives or strategies.
“Advisors should start to see more disclosure in terms of how an investment manager or portfolio manager is taking some of the material factors into consideration in their investment decisions, and whether they engage in shareholder activism,” says Fate Saghir, head of sustainability at Mackenzie Investments in Toronto.
Standard disclosures are like financial statements
Climate risks can be physical (damage to assets and operations), reputational (if a company is seen as hindering the transition to a low-carbon economy), market-related (shifts in demand for certain products/services), legal and regulatory (costs of compliance or exposure to legal action), technological (displacing old tech and investing in new alternatives), and more.
While climate risks are becoming even more prevalent, they can be hard to assess as a risk category. That’s why disclosing material climate-related risks is vital for advisers and investors in order for them to make more informed investment decisions.
Standardized disclosure rules on ESG-related risks will help in the analysis of companies for asset managers, somewhat akin to comparing financial statements, says Mr. Gagnon. Ultimately, that will make it easier to build ESG-friendly investment funds without sacrificing returns.
“ESG is an additional dimension in which you can enrich your risk/return profile as you build your client’s portfolio,” he says.
While Canada and the U.S. are more aligned on the ESG-reporting front, the divergences begin to widen on a global scale. Europe is generally viewed as stricter and Asia as less so.
In 2018, the European Commission (EC) introduced the Sustainable Finance Action Plan to promote sustainable investments across the bloc, combat greenwashing (misleading claims about a product’s ESG credentials) and change how funds are classified. Although the EC’s plan is approaching the end of its five-year implementation, some more complex changes have been given a longer timeline before they take effect.
“It will be easier for advisers or portfolio managers to understand how a company’s activities or revenue are aligned to sustainability,” Ms. Saghir says.
For international securities that might not have enough ESG disclosures, she says advisers should take the time to engage with the company.
“If you’re investing directly in a company and not going through an investment fund, it’s actually a great opportunity for portfolio managers or advisers to better understand how they’re thinking about sustainability and managing their climate risks,” she says.
There are also other tools advisers can use to help compare climate risks. Ms. Saghir says MSCI Inc. is starting to make more of its company disclosures and rating publicly available. Data from Morningstar Inc. and ESG-focused research firms, such as Morningstar subsidiary Sustainalytics, can also provide an overview of regulatory or geopolitical challenges that fund managers should be looking at, she says.
“If you’re going to go through a third-party ESG-reporting route, it’s important to understand the methodologies because they’re all different,” Ms. Saghir says. “So, spend the time on the methodology if you’re going to invest in the securities directly. Otherwise, get that aggregate disclosure and get a feel for how that portfolio manager thinks about sustainability in their investment process.”
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
