The Decibel - How Canadian companies are responding to the ESG backlash

Episode Date: February 25, 2025

Since returning to office, the Trump administration has taken aim at diversity, equity, and inclusion (DEI), with major American corporations scrapping their policies and programs in response. But the... backlash goes beyond DEI — corporate climate commitments are under attack, too.The progressive policies being rolled back fall under ESG (environmental, social and governance). ESG factors help businesses evaluate their practices related to sustainability and ethics, and help investors decide who to support. But with major political shifts taking place in the U.S., could Canada’s ESG boom go bust too?Jeffrey Jones is the Globe’s ESG and sustainable finance reporter. He’ll explain the rise of ESG, the growing backlash, and whether we could see Canadian companies roll back their own environmental commitments in the coming months.Enter this Decibel survey: https://thedecibelsurvey.ca/ and share your thoughts for a chance to win $100 grocery gift cardsQuestions? Comments? Ideas? Email us at thedecibel@globeandmail.com

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Starting point is 00:00:00 Since returning to office, U.S. President Donald Trump has taken aim at diversity, equity, and inclusion policies, also known as DEI. In response, we've seen changes from a number of American corporations, like Amazon, Google, and Walmart. But it's not just DEI that's under fire. We're also seeing pushback to other commitments related to climate and the environment. These fall under a framework that evaluates the sustainability and ethical performance of companies.
Starting point is 00:00:38 It's called ESG, or environmental, social, and governance. So while these major shifts are taking place in the US, how are Canadian companies responding? Geoffrey Jones is The Globe's ESG and sustainable finance reporter. He'll explain the ESG boom, the backlash, and whether we could see Canadian companies roll back their own environmental commitments. I'm Maenika Rammen-Wilms, and this is The Decibel from The Globe and Mail.
Starting point is 00:01:14 Jeff, thanks so much for being here. It's a pleasure. So let's just start with the basics here. What exactly is ESG and how does it relate to DEI? So we're going to be talking about a few acronyms here, so that's always fun. So let's take it one at a time. E in the ESG means environmental, so that could be climate-related risks that companies face
Starting point is 00:01:38 or biodiversity or anything else like that. S is the social aspect of it, so that could be DEI, which is a subset of ESG, diversity, equity, inclusion. So in the workforce, on the board, but it also includes a bunch of other more traditional things on the human resources side, like worker safety or labor relations.
Starting point is 00:02:02 And then G is governance. So the governance aspects may actually bleed into those other two things. How companies deal with policy related to environment or social aspects, but also things like executive compensation and for instance, our CEOs paid at least a portion of their salaries based on meeting targets for climate or diversity. Okay. Okay. So ESG, environmental, social, and governance, and then DEI, it's a subset of that S, that middle letter, then diversity, equity, inclusion. Okay.
Starting point is 00:02:34 That's right. Yeah. Jeff, you've covered this for a long time now. How have you seen the conversation around ESG and DEI change? I mean, we've really heard about it a lot in the last five years, but it really goes back to the 1970s and 80s and 90s when there was a new focus on the business world and how it related to things that weren't just profit and loss. So at first it was called ethical investing, for instance, where investors said, well, we're not going to put our money into tobacco companies, to arms manufacturers, and that type of thing.
Starting point is 00:03:13 Then, you know, the late 90s into the 2000s, climate became a very big issue that threatened not only to change weather patterns, but also change the economy as governments thought about policies to limit emissions. Then the lexicon changed a little bit more. We heard about sustainable investing and responsible investing. And so how have we seen the shift though in the last, let's say, five years? Well in 2020, we of course started dealing with a little thing called the pandemic. And when that happened, society really took a look at all of the other vulnerabilities it faced.
Starting point is 00:03:57 So climate, we knew that was a problem. And we were moving very slowly before to deal with it. And it became pretty apparent that countries would have to move faster. And in order to do that, the economy and companies, financial institutions would also have to deal with those things. So that's the E in ESG. On the S side, of course, 2020 was the killing of George Floyd and a renewed focus on the inequities within society and a push to do something about that. So when we talk about DEI, a lot of companies, institutions began to invoke policies to increase the opportunities for underrepresented groups.
Starting point is 00:04:42 AMT – Okay, so it sounds like around that time, we actually saw a boost, more awareness of these ESG and DEI policies then. How long did that continue for? Well, that continued for probably about maybe two and a half years before we saw some backlash. We saw an immense inflow of funds from investors going into ESG related ETFs and that type of thing. We saw companies responding with the appointment of chief sustainability officers and diversity executives
Starting point is 00:05:15 and all that type of thing. But around late 2022, early 2023, we began to see kind of a backlash against this type of thing. It really began in the US, especially in Republican-led states with large fossil fuel constituents. So Texas, West Virginia, and others began to actually ban the use of ESG among financial institutions that operated within their state jurisdictions. And what was their argument for doing that? Why actually make that decision? Well, there was a couple of things.
Starting point is 00:05:51 One of them was that they were accusing ESG as a field as being anti-fossil fuel. And they would say anti-job, anti-economy. But another thing sort of popped up at around the same time is it became kind of enmeshed in the greater US culture war, where we saw ESG and DEI tossed into this bubbling cauldron of opposition against things that they termed
Starting point is 00:06:24 as being quote unquote woke. Remember back in around that time we saw you know parent groups going to school board meetings and voicing strongly their opposition against critical race theory, often without really knowing what it was. And ESG DEI began to be part of that same argument. In some political circles, ESG was viewed as being anti-shareholder and anti-investor as something that was holding back the U.S. economy, whereas the other side of the argument goes is that boards and managers who are taking care of these things and managing these risks are actually doing their fiduciary duty.
Starting point is 00:07:05 So what is the argument that it would go against, I guess, financial gains for the company? You mentioned a little bit before how ESG could be seen as anti-fossil fuels. Was there a similar argument for business to go against these ideas? Well, certainly there was a similar argument when it came to asset managers.
Starting point is 00:07:21 So the big ones like BlackRock and Vanguard came under fire for their pro-ESG messages. As I said, in some of these states, such as Texas, Florida, West Virginia, those types of financial institutions, asset managers, were being targeted by state attorneys general for being anti-business. And when we say anti-business, this is tying back to like this idea of anti-fossil fuel company? Like is that the connection? Yeah, and it's not always true that asset managers will screen out companies with fossil
Starting point is 00:07:59 fuel interests, but you know, many of them will argue that they're working with them to decarbonize. But in the opinion of these red states, what they're doing is removing investor money from fossil fuel companies to their detriment. So let's let's talk about that then, Jeff, like what kind of political pressure are we seeing then in the United States, specifically against ESG related policies? Well first we saw pressure tactics being launched online against companies that had adopted DEI targets to try and shame them for their diversity, equity, inclusion, and ESG policies. And that moved into company annual meetings with proxy fights, that being shareholder proposals to change company policy against DEI, against ESG.
Starting point is 00:08:53 And many of those companies were forced to, or at least were led to, reverse some of the policies they had instituted over the last two or three years to improve the lot of underrepresented groups, for instance, within their workforces, on their boards, and also to move against some of the climate targets they had set up as well. Now, though, with the election of Donald Trump, that has moved from social media and proxy fights into actual federal government policy in Washington. We've seen one of his first orders of business was an executive order to ban DEI policies from federal institutions. There's pressure on companies now to backtrack on those things and so many have. With every week we've seen companies saying that they've abandoned climate targets, that
Starting point is 00:09:53 they've abandoned diversity targets within their workforces. That seems to be just the regular flow of news now as companies rush to not be on the wrong side of the Trump administration. We'll be back after this message. So, Jeff, we've gone through the backlash to ESG and DEI in the United States. Has any of that spread to Canada? A little bit, but it's been slow and has gained the same kind of traction as we've seen in the United States.
Starting point is 00:10:33 I mean, there has been some reaction from, for instance, the Canadian big banks. They had all been part of a group called the Net Zero Banking Alliance that had been a subset within a Mark Carney-started group called the, it's called GFANS, so we talked about acronyms. Great name. Yeah.
Starting point is 00:10:57 But that stands for Glasgow Financial Alliance for Net Zero. They followed US banks over the last several weeks in dropping out of that alliance, which was actually set up to mobilize capital to meet climate targets around the world. It's an international group. The US banks all dropped out, fearing legal action, antitrust action against them. And because Canada's banks, of course, work a lot in the US, they followed suit and have all withdrawn from that organization as well. Now, I mean, it's important to note that they've all said they're still going to continue with
Starting point is 00:11:36 their individual efforts, but not as part of an international alliance aimed at coordinating activities. So it sounds like these banks have become maybe less vocal to those commitments towards ESG measures, but they say they're still continuing these measures, is that right? Yeah, and in some ways they have to. The Canadian banking regulator OSFIE has rules for banks to report the risks that they face when it comes to climate. And so they have to play by those rules. And they've also told their own investors that when it comes to the clients that they have,
Starting point is 00:12:16 whether it's major industry fossil fuels that they've announced plans and they can expect to continue putting efforts into helping them decarbonize their operations. Before we were talking about shareholder pressure in the states, what kind of impact has shareholder pressure or public pressure, I guess, then had on these banks in Canada? Quite a bit. I mean, first of all, they all have set net zero goals on their own, and they've made commitments to report on interim targets for meeting them,
Starting point is 00:12:49 and have set up, you know, institutes within their own operations to share technology and research into this regard. So they're doing it. If you talk to environmentalists, they'll say that a lot of it is overblown that amounts to greenwashing because they haven't gone ahead and stopped doing business with fossil fuel industries.
Starting point is 00:13:13 But at the same time, they've been quite responsive to society at large in putting these policies into place in the first place. I guess it's one thing to say they support these measures, Jeff. Have we actually seen tangible things to support that? Is there still traction among Canadian banks and companies, more broadly, these past few years towards these goals? One of the things that has become quite apparent
Starting point is 00:13:41 over the last maybe year or so, as a lot of this opposition has built up south of the border, is that Canadian companies have not dropped their ESG programs, but they've certainly been a lot less vocal about them. They're not screaming it from the rooftops that they have set net zero goals, that they are still looking to increase the number of women on their boards or other underrepresented groups within their workforce. But it seems to be becoming more of a way
Starting point is 00:14:14 to just do business, right? By taking what are essentially risk management tools and adding them to their overall business strategy. And do we have numbers on this? Like, I'm just wondering how many companies are actually doing this in terms of finances? How much has actually been put into it? Do we know?
Starting point is 00:14:34 Last year, according to Tories, the Bay Street law firm, 95% of companies in the TSX Composite Index published some form of ESG climate action or transition report. And nearly four-fifths of those include ESG climate, environmental, or sustainability within the overall skills inventory of their boards of directors. And here's another interesting stat from that report is that 59% of those companies tie at least some portion of executive pay to meeting climate-related targets or metrics.
Starting point is 00:15:13 OK. That's interesting, because those numbers then do seem to suggest that companies in Canada here are actually putting effort behind this. And not only that, there's another report that came out quite recently from the consultancy based in Montreal called Milani, and this is often quoted in the industry,
Starting point is 00:15:33 is that 93% of investors, so we're talking about large institutional investors, 93% of them integrate ESG-related metrics into their investment decisions. So in Canada, it's still very much a live issue. Yeah. From what we can see, is this trend continuing? I guess I wonder, with all those changes in the States, does it look like that could affect us up here as well?
Starting point is 00:15:58 It's hard to imagine it not affecting us, given the importance of, still, even with the looming tariff threat, the importance of the US economy to ours. But so far, it has been nowhere near the type of furor that's existed in the United States. At the same time, though, there is this building anti-Americanism that's occurring in Canada. We've already seen it in the aisles of the grocery store where shoppers are looking for Canadian made products and that type of thing. So there is a belief in some quarters
Starting point is 00:16:34 in the ESG world in Canada that this may actually extend to the corporate world where we may have a situation where Canadian companies looking to distinguish themselves from what's happening in the United States may actually undertake or double down on ESG as a way to do that. That's interesting.
Starting point is 00:16:54 So this, because we're trying to differentiate ourselves maybe a little bit more from the States now, this could actually be a way that companies could show that they're different from American companies. That's at least one theory out there for sure. I guess I also wonder more broadly Jeff how the conversations in the states, we're also talking about the potential US tariffs a lot these days, has that changed the conversations in Canada about climate and environment at all? Well you've certainly seen a groundswell
Starting point is 00:17:23 of renewed support for things such as building oil and gas pipelines across the country as opposed to relying on those that go into the United States. Don't forget the oil industry is hugely dependent on U.S. demand for its overall well-being. And at the same time, if you look at what's happening in terms of the ability of Eastern and maritime refineries to get Western Canadian crude, I mean, in order to get it there,
Starting point is 00:17:53 you pretty much either have to take the train or go through the United States. So there is growing support for renewing some old pipeline projects such as Energy East to the eastern part of the country from Western Canada or the Northern Gateway pipeline that's been, you know, virtually dead and buried for the last several years. So in a way that's actually reignited pipeline conversations as you're saying. So things that environmentalists wouldn't usually think about, this is stuff that's
Starting point is 00:18:24 actually being brought up again in Canada. That's right and to their chagrin. The thing about this though is that these projects take a lot of time, they take a lot of support from providers of capital to get it through. And then we have not seen one that hasn't been over budget and well beyond original timing, that type of thing. Does Canada have the political will now to maybe ignore some environmental regulations or at least make them easier to meet or go against the will of indigenous groups that may be in the path of some of these pipelines, that's unknown. So we'll see if ESG takes a hit as a result of what's happening
Starting point is 00:19:13 in terms of the U.S. administration and its threats to Canada. So just lastly here, Jeff, from the people you're talking to, where do they see ESG policies going in Canada? On one hand, we've got some new legislation that's already come out and is in force, such as Bill C-59, which is the anti-greenwashing legislation that came out around the middle of last year. And that's the one that forces companies that make environmental assertions to be able to
Starting point is 00:19:45 back them up with scientific proof. So that's one thing that's happening now. And the other thing that has happened that has been quite significant has been the Canadian Sustainability Standards Board, or CSSB, has come out with its first set of standards that companies use to gather data on climate and other sustainability factors and report it. So it can be compared to similar standards elsewhere in the world. So this is a tool for investors. The question now is whether these standards, which are voluntary for companies to use,
Starting point is 00:20:26 will be made mandatory by Canadian securities authorities. So that's something that's going to be determined in the next year. We don't know if what's happening in terms of the U.S. tariff threats, trade wars, and that type of thing may actually stall that process. You'll have to see. Jeff, so good to talk to you. Thank you for being here. Thanks very much. That's it for today. I'm Maynika Ramen-Wilms. Our producers are Madeleine White, Michal Stein and Allie Graham. David Crosby edits the show.
Starting point is 00:21:06 Adrian Chung is our senior producer, and Matt Frainer is our managing editor. You can subscribe to The Globe and Mail at globeandmail.com slash subscribe. Thanks so much for listening.

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