CPA Canada explores global best practices in investment strategies for climate change

CPA Canada invited Canadian investors and the business community to learn about global best practices in climate change investment strategies – lead by Zoe Knight, global head, Climate Change Centre of Excellence, Global Research, HSBC.

Corporate engagement is increasingly critical

“Climate change is uncertain and addressing it won’t be easy. Corporations, investors and policy makers have to step up and work together to come up with solutions,” says Zoe Knight, Global Head of the Climate Change Centre of Excellence at HSBC.

Knight spoke at a Chartered Professional Accountants of Canada (CPA Canada) information session for the investor and business communities, organized in collaboration with the Responsible Investment Association Canada (RIA Canada).

Using the findings from HSBC’s latest report, Keeping it Cool – Do you DCF? (Discount Climate Facts), Knight spoke about what investors should consider when it comes to the impacts of climate change on their investment strategies. Knight acknowledged that the 2015 Paris agreement was the global turning point in addressing climate change, but cautioned that corporate and investor engagement continues to be the need of the hour. And, considering the scale of disruption already being experienced on a global scale due to climate change, she urges the time for action is now.

Following her presentation, a lively question-and-answer session ensued, with discussions on how to apply Knight’s recommendations in a Canadian context.

Scenario analysis is key to investment decision-making

Understanding the risks and opportunities associated with climate change and their implications for long-term value creation is critical for investors. Given the unpredictability and long time horizon associated with climate change, Knight strongly recommended that investors use a multi-scenario, forward-looking approach to understand the potential impacts of climate change on their portfolios.

This involves stress testing to see how profitability might change as a result of different climate-adjusted factors, and optimizing the investment portfolio based on risk tolerance.

Zoe Knight making speech at CPA office

Disclosure challenges exist

While investors and companies may have a plan to address climate change internally, external disclosure gaps remain on a global scale, Knight cautioned.

Access to disclosure data and information continues to be an issue, especially in emerging markets. The level and quality of disclosure about climate change continues to be less than optimal, and, as a result, investors do not have the full picture of potential climate change impacts on investee companies.

Furthermore, investors and companies have different views about what is considered material information in corporate disclosures. Many investors struggle to understand the materiality of disclosures provided by the companies, while many companies believe that investors ask for immaterial information – often resulting in a gap in communications.

Knight encouraged investors and businesses to keep the channels of communication open and continue to ask questions in order to find common ground when it comes to material climate change information. She also reinforced the need for companies to scale up environmental, social and governance (ESG) efforts and highlighted the role of the board of directors in ensuring that climate change factors into the company’s long-term thinking.

CPA Canada efforts in the area of corporate reporting

Sara Keyes, Principal in the Research, Guidance and Support group at CPA Canada, welcomed the guests and reiterated CPA Canada’s commitment to driving awareness of the risks and opportunities posed by climate change to Canadian businesses.

“Climate change is a critical environmental, social and economic risk. [For] investors, as stewards of long-term capital, having access to quality environmental, social and governance information is critical to making responsible investment decisions,” said Keyes.

Keyes added that CPA Canada, through its various activities and initiatives, is focused on bridging disclosure gaps between the finance and business communities, by convening these types of dialogues between investors and businesses in order to move these issues forward in a productive manner.

This event was the latest in a series of CPA Canada events exploring the business and reporting implications of ESG issues.