The ESG risk and regulatory landscape in Canada continues to evolve at a rapid pace. This year has already seen significant shifts and strides forward in respect of Environmental, Social, and Governance related imperatives, setting the stage for even more transformative change in the months and years ahead. 

For financial institutions, staying ahead of these developments is crucial, especially given heightened scrutiny from customers and shareholders as well as regulators. Firms will need to treat sustainability as not just a business requirement but an essential component of long-term success. In this article, we highlight recent progress around ESG and emerging trends in three key areas – integrated risk management, data and reporting, and sustainable finance – that are set to shape the industry as we move into 2025.

INTEGRATED RISK MANAGMENT

Traditionally, ESG issues have been treated as separate from other financial risks, which has limited their effectiveness in addressing broader sustainability challenges. However, by integrating ESG considerations into existing risk management frameworks, institutions can not only mitigate risks more effectively but also capitalize on new opportunities for sustainable growth. 

Regulators are sharpening their focus on ensuring that financial institutions integrate ESG considerations into their operations and reporting practices. The Office of the Superintendent of Financial Institutions (OSFI) has stressed the importance of climate-related financial disclosures and urges financial institutions to enhance resilience against climate-related risks, expecting scenario analysis and stress testing which is embedded into overall risk management practices.¹ 

The Canadian Securities Administrators (CSA) mandates comprehensive reporting on how climate change impacts finance performance and strategy, expecting governance around ESG, strategy to mitigate ESG risks, and metrics and targets to assess these risks.² By integrating ESG considerations into their frameworks, financial institutions can comply with evolving regulations and position themselves for sustainable growth and resilience in a rapidly changing environment.

To successfully integrate these frameworks, financial institutions can implement several strategies. 

• Foster ESG awareness and commitment. Educating employees at all levels about the importance and impact of ESG on business operations and providing training on incorporating ESG factors into decision-making processes that form the basis of risk management frameworks.  
• Engage stakeholders to build trust and credibility. Transparency and communication are key, as stakeholders increasingly expect financial institutions to demonstrate their commitment to sustainability and responsible business practices. Collaborating with stakeholders – including customers, regulators, and shareholders, can help provide valuable insights and build credibility around ESG initiatives. 
• Collaborate with industry peers. Financial institutions can stay informed about emerging best practices and standards, as well as foster innovation and knowledge-sharing. 

DATA & REPORTING 

Canada’s evolving regulatory landscape has seen increased scrutiny of financial services firms on the part of not only regulators but also investors and customers. A recent survey found that 71% of Canadian CEOs recognise that stakeholder scrutiny on ESG issues is accelerating, and it is clear that the pressure on financial institutions to understand and report on their sustainability performance is intensifying.³ 

This enhanced regulatory scrutiny has mandated robust governance structures for ESG practices, reinforcing the need for advanced data and analytics to assist with reporting. Integrating ongoing, real-time data is key – however, the World Economic Forum found that globally just 9% of companies are using software comprehensively to support ESG data collection, analysis, and reporting.⁴ 

Adopting common frameworks and developing data platforms which integrate ESG data with traditional finance and operational data enables a holistic view of risks and opportunities and also integrates ESG into the institution’s wider corporate strategy. 

Institutions can better identify, measure, and manage ESG risks and opportunities by utilizing advanced data analytics and management capabilities, including:

• Develop tailored ESG data models. Tailored to each ESG reporting factor, these models can help streamline collection, analysis, and reporting processes, ensuring that data is accurately and efficiently processed. 
• Leverage artificial intelligence (AI) for automation. AI can be used to automate data collection, processing, cleansing and integration to ensure consistency and accuracy.
• Utilize cloud computing for scalable data integration. Advances in cloud computing can offer scalable collaborative storage and seamless integration of data from various sources. 

SUSTAINABLE FINANCE 

In 2024, sustainable finance stands at a pivotal moment given the renewed focus on net zero commitments, climate disclosures, and sustainable investment product offerings. 

As of June 2023, 929 companies from the Forbes 2000 list had set net zero targets, double the December 2020 total of 417.⁵ Meanwhile, the UNCTAD World Investment Report 2024 found that the market for sustainable investment products continues to grow, with the value of sustainable investment products reaching more than USD7 trillion in 2023.⁷ 

However, greenwashing remains a significant issue with sustainable finance products, and Morningstar report that only 20% of ‘green fund. portfolios are exposed to climate-positive assets.⁸ This has dampened demand for these portfolios and highlights the importance of efforts to tackle the issue through bringing more clarity and credibility to the sustainable fund market. 

Establishing clear rules and product standards is crucial to define the criteria for labelling a product as sustainable. Financial institutions should regularly review and update sustainability strategies and practices to reflect the latest scientific research, regulatory changes, and market trends. They should look to:

• Be Innovative in reaching net zero commitments. One novel approach to meet ESG goals is carbon insetting, which involves investing in nature-based solutions like reforestation, agroforestry, renewable energy, and regenerative agriculture.⁶
• Launch Products to Accelerate Clients’ ESG Journeys. Client-facing teams are best placed to understand the needs of clients and provide recommendations for product design. As well as products, financial institutions can branch out into service offerings by utilising expertise to advise clients.
• Avoid greenwashing. Develop and adhere to stringent ESG criteria when evaluating investments and business practices and engage independent third parties to verify sustainability claims and ensure compliance with established standards. This adds credibility and reduces the risk of misleading information. 

CONCLUSION

As we look to the future, it is clear that Canada’s financial institutions will need to navigate an increasingly complex landscape of ESG related risks and regulatory requirements. To stay focused, competitive and resilient in the face of increasing scrutiny and evolving market dynamics, organisations should consider the following recommendations:

• By integrating ESG into overall risk management, organizations can address ESG comprehensively, maximizing growth and ensuring all risk areas have effective mitigation strategies. This holistic approach not only safeguards the organization's reputation but also enhances resilience and competitive advantage.
• Viewing ESG reporting through a 'data' lens enables organizations to utilize advanced analytics and management tools for robust data governance and lineage. This ensures accurate aggregation, analysis, and reporting, empowering organizations with actionable insights and compliance with regulatory standards.
• Financial institutions must ensure that sustainable finance products are genuine and meet stringent ESG objectives. By implementing accurate evaluation criteria, institutions can avoid 'greenwashing' and build trust with stakeholders, ultimately driving long-term sustainable growth and value.

By embracing these strategies and adopting a proactive approach to ESG integration, financial institutions can not only mitigate risks and enhance resilience but also unlock new opportunities for sustainable growth and long-term value creation.

HOW CAPCO CAN HELP

At Capco, we have a comprehensive suite of services and offerings designed to help clients meet their ESG commitments and regulatory requirements in Canada. With leading data governance and analysis capabilities coupled with proficiency in software integration, we can ensure seamless implementation and optimization of systems, driving efficiency and growth for its clients. We stay tapped into the latest industry trends and market developments, producing quality thought leadership content and bolstering its strong industry reputation. Our global network allows us to leverage offerings from award-winning ESG practices, providing forward-thinking solutions from multiple geographies. Through effective partnership, Capco ensures our clients are equipped to navigate and thrive in this rapidly changing ESG environment. Contact us to find out more.

REFERENCES
¹ The Guide to Canada’s OSFI Guideline B-15 Climate Risk Management
² Canadian Securities Administrators statement
³ Digital transformation can help accelerate ESG goals
⁴ The No.1 ESG challenge organizations face
⁵ Net Zero Targets Among Worlds Largest Companies Double but Credibility Gaps Undermine Progress
⁶ Plana: Scope 4 Emissions
⁷ World Investment Report 2024: Chapter III  
⁸ SFDR Article 8 and Article 9 Funds: Q1 2023 in Review