Over the past year, terms such as “sustainability,” “responsible investment,” and “ESG” were pushed from the investment media spotlight.  Despite this change, investment managers continue to incorporate non-financial considerations into their decisions, aiming for long-term sustainable value and real-world impact. Whether this trend continues remains to be seen, with potential influences from the changing political regime in the U.S. and a continued focus on responsible investing in Europe.

Three topics are likely to be top of mind for responsible investors as the year progresses: the imminent approach of more comprehensive standards, regulations and disclosure; potential policy changes due to the federal election; and greater urgency around governance of artificial intelligence applications.

Better disclosure, more informed decisions

While we may read plenty of articles with opposing viewpoints on environmental, social and governance topics, if we step back for a minute to look at the big picture, we can see that we really have come a long way.

Investors’ ability to evaluate companies’ non-financial performance has improved substantially. We have better data. Companies are acknowledging the materiality of a broader array of operational risks. Global and regional disclosure frameworks are becoming more established, and regulators are increasingly involved. The systemic risk of climate change and its potential impact on business strategy is finding its way into traditional financial reporting.

The bottom line is this: decision-useful information is getting into the hands of investors, helping them better manage risks and seize opportunities to achieve long-term, sustainable investment growth.  The momentum in standards, regulation, and disclosure is expected to continue in 2025, particularly in Canada.

Canada’s adoption of these changes had been slower compared to Europe. However, this allows us to learn from and incorporate best practices and lessons from others into our upcoming standards and regulations. It also allows more time for stakeholders to create or adapt their internal processes for meeting new requirements. This is no small task, but it’s our expectation that Canada will get the big-ticket items right, such as maintaining a focus on the materiality of relevant business issues.

Here are three things we will be watching in 2025:

• Industry response to the soon-to-be-released Canadian Sustainability Disclosure Standards, especially that of the Canadian Securities Administrators.
• Large financial institutions reporting their climate-related risks as required by the Office of the Superintendent of Financial Institutions.
• Federal government clarity on climate-related risks for large, federally incorporated firms.

Policy upheaval ahead for Canada?

Canada is approaching a federal election. Whether that happens imminently due to a successful non-confidence vote (there have been two attempts already) or later in 2025 according to schedule, there is no doubt that environmental and social issues like the carbon tax and rising home prices will be top of mind for leaders and voters alike. The CBC News Poll Tracker¹ indicates that, as of late November 2024, the Conservative party had a strong lead over the incumbent Liberals and would have likely secured a majority government if the election were to have taken place then. One of the most glaring social inequality challenges facing Canada’s policymakers today is housing, connected in part to an inflationary period that has pushed up the cost of living generally. Housing has become less affordable, with Statistics Canada data showing that the percentage of households living in unaffordable housing in 2022 had climbed to 22%, matching pre-pandemic levels.² Perhaps more worrying, the percentage of households that said they were dissatisfied with their affordability in 2022 rose to 14.5% from 11.1% in 2018, with renters significantly more concerned than owners.³

Another report from Statistics Canada shows that owning a home (versus renting) was a major contributor to growth in household net worth from 2019 to 2023, especially for young families.⁴ In that time, the median net worth of young families who owned their principal residence surged 220% to $457,100, while the median net worth of families without a principal residence rose 65% to $44,000. Lack of a principal residence is putting some families further behind.

When consumers become more financially pressed and dissatisfied with their situation, the likelihood of a change in government rises. The implications for domestic policy are significant, and policy changes have the potential to impact near- to long-term business strategy, influencing companies’ capital allocation decisions. This could in turn provide investment opportunities for some companies while putting others at risk.

Pushing for stronger oversight of AI

The increasing use of artificial intelligence applications across industries is driving an urgent need for robust data governance and ethical controls, alongside regulatory considerations. As companies handle more user data in the name of innovation and efficiency, the critical balancing act that requires benefits to be weighed against harms will grow increasingly complicated.

NEI’s engagements with companies on these challenging topics are growing in frequency and import. Conversations about certain areas of digital rights, such as privacy, child online safety, and targeted advertising have been on our agenda for some time. But the rapid rise of AI has introduced a new set of talking points. For example, we are asking companies how they are integrating AI ethics policies into their strategies and governance models. We also continue to encourage more companies to conduct human rights impact assessments.

We see headwinds facing companies that have been highly valued by investors for their connection to AI: increased regulation with the potential for anti-trust reviews, reputational damage due to irresponsible or unethical use of the technology, and growth challenges that are by now familiar to the technology sector. These challenges warrant investors’ attention.

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