While Canadian institutional investors have not been immune to the U.S. backlash against corporate environmental responsibility, research suggests Canada’s legal system appears to have shielded them from some of the movement’s most aggressive actions.

Last week, the Institute for Sustainable Finance and the Canada Climate Law Initiative released Climate Governance Under Pressure. The report examines how Canadian institutional investors have been impacted by the resistance to environmental, social and governance (ESG) initiatives in the U.S.

ESG, which incorporates environmental and social impacts into a company’s operations, has been heavily challenged by some governments in the U.S., which have been pushing against its use.

Research from Pleiades Strategy found hundreds of anti-ESG bills were submitted to state legislatures between 2021 and 2024, with one notable example being Texas’s ban on financial institutions boycotting fossil fuel companies.

The largest U.S. asset managers, including BlackRock, Vanguard and State Street, demonstrated less support for climate proposals during the same period.

Despite fears Canada would be influenced by a spillover from its southern neighbour, the report tells another tale.

“The first thing I wanted to do was really debunk that myth that we were in the same situation as the U.S.,” Julie Bernard, a research fellow at the Institute for Sustainable Finance and co-author of the report, said in an interview with Sustainable Biz Canada. While not suggesting that Canada is “bulletproof” to the trend, she said the country is navigating the storm “fairly well.”

How the U.S. anti-ESG movement could affect Canada

Canadian pension funds have billions of dollars of investments in the U.S., which could spark conflicts due to their sustainability targets. For example, Canadian asset owners that delegate some decision-making to U.S. managers could experience tensions over policies and fiduciary duties.

Another possibility is a U.S. asset manager with a stake in Canadian companies that could apply its anti-ESG proxy voting guidelines to Canadian securities.

Bernard suspects some investors may feel uneasy about investing in environmentally oriented businesses because of this pressure. “I think some of them would be confident enough, if they felt it matches their values,” she said. “But maybe some investors wouldn’t feel, with the current political climate, at ease with doing so.”

Canadian investors may look home or to ESG-friendly markets like Europe, Bernard said. Alternatively, they could take the quiet route by holding private negotiations in “a little bit more shadow, a little bit less visibility” to avoid the attention of anti-ESG voices, she added.

The headwinds against ESG in the U.S. have already likely affected Canada, the report found. The Canadian Securities Administrators paused work on development of mandatory climate-related disclosures, shortly after the U.S. Securities and Exchange Commission withdrew its own climate disclosure rules following the re-election of U.S. President Donald Trump, who has been opposed to ESG principles.

Duty of care, duty of loyalty

Despite Canada's close economic ties to the U.S., the report’s authors found Canada's laws and regulations for ESG diverge significantly from the U.S., which provides protection for institutional investors.

Unlike the U.S., where a director’s main duty under corporate law has often been interpreted as maximizing shareholder value, fiduciary duty in Canada includes a duty of care and duty of loyalty. This creates “a broader understanding of what it means to be in the beneficiary’s best interest,” Bernard said, which shields directors against anti-ESG proposals and is amenable to some sustainability principles. Additionally, Canada has legal protections for ESG, such as an anti-greenwashing law.

Canada’s regulatory framework also backs ESG, such as a climate risk management guideline which sets expectations for federally regulated financial institutions on managing physical and transition climate risks. This, the report states, “offers Canadian institutional investors a principled basis for climate reporting that is distinct from the contested U.S. ESG debate.”

Currently, Canada has "almost all the tools to weather the storm,” Bernard said.

To Canadian institutional investors worried about the rapidly shifting, unpredictable ESG landscape in the U.S., Bernard hopes her research can provide the knowledge they can continue their corporate sustainability efforts at home, but with the message of assessing risks differently in the U.S.

The report’s authors recommend Canadian asset owners strengthen oversight of external managers, ensure proxy voting aligns with their policies and fiduciary obligations, and clearly communicate the financial rationale for climate-risk oversight.