Trends of the market: diversity and climate change.

As the world evolves , financial institutions have to evelve as well. Most importantly they have to reconsider their strategies towards benefiting society in order for profit to come along. Some important issues that they have to consider are inclusion and climate change.

First of all, the Canadian Government has adopted the Canada Business Corporations Act (CBCA) diversity requirements for FRFIs and this year has started consultation on potential financial sector corporate governance reforms, including measures to improve diversity at federally regulated financial firms. Although certain corporations currently have to adhere to requirements set by the Canadian Securities Administrators (CSA) in accordance with provincial securities law, there are no particular diversity disclosure requirements in federal financial sector laws. Others must adhere to guidelines that were just added to the Canada Business Corporations.

The results about diversity in the financial workplace, especially in directory posititons prove that there is space for imporvement. Some financial sectors are more progressive than others. Regarding gender diversity, the boards of directors of Canada’s six largest banks constitute, on average, 43% women (2022), ahead of the goal set. At the same time in the Private Equity sector only 9% of the partners were women, and on the Venture Capital sector only 19.4% were women. Regarding ethnic and minority diversity there has been a 67% increase in the Private Equity sector from 6 to 10%. Bank of Canada has established a two year plan for enhancing Equity, Diversity and Inclusion, as it is clear that the financial services sector has a long way to go to step up diversity, equity, and inclusion.

Climate change and ESG reporting is also an important issue that the financial actors have to take into consideration, as the results of climate change can have a significant negative impact on financial stability as well. In general, lack of knowledge regarding the effects of climate change can prevent them from being completely taken into account in financial instrument prices. Due to this mispricing, investors may be vulnerable to unexpected drops in the value of carbon-intensive assets when the economy shifts to one with fewer carbon emissions. Additionally, it postpones spending on the low-carbon infrastructure necessary to meet climate goals.

There are two types of risks from climate change, physical and transition risks. Physical risks are the direct financial losses brought on by rising global temperatures on average and altering weather patterns. For instance, weather-related catastrophes like forest fires, which nowadays are very common in Canada too, can cause direct harm to infrastructure assets, and a region’s designation as a floodplain can have an impact on real estate values. The effects on the financial system can be compounded when natural catastrophes hit homes with significant financial vulnerability. As the financial system transitions to a low-carbon economy and changes in climate policy and regulation, technology, and consumer and investor attitudes, transition risks start to appear. If such changes are unanticipated, both in carbon-intensive sectors and in sectors linked to them via supply chains, they may result in a sudden devaluation of assets and reassessment of predicted profitability.

As a result the consideration of climate impact in in the finance of companies should be considered. Some investors have completely stopped investing in carbon-intensive assets, while others are advocating for the inclusion of environmental, social, and governance (ESG) factors in their investment decisions. For instance, major asset managers are promoting ESG disclosure from the businesses they invest in, including the eight largest pension funds in Canada. 49 In 2020, there was nearly twice as much money flowing into ESG funds as there was in 2019, which was roughly three times as much as in 2018. The issue of ESG-related Canadian bonds is also increasing quickly, increasing from less than $2 billion in 2017 to over $13 billion in 2020. This is still far short of what will be required to finance the switch to net zero emissions by 2050, though.

Technological advances and Fintech. 

Despite investing more than $100 billion in technology since the 2008 financial crisis, Canada’s top banks are only now, after years of pleading with clients to try their newest technologies, witnessing record shifts toward digital banking. The pandemic contributed to the acceleration of cashless transactions and hence digitalization of the banking system.

The financial sector has managed to modernize over the past few years offering a wide range of digital services like online banking, online trading platforms, digital loans, and digital payments. The contribution of the fintech industry was also a very important contributor to this direction. The Fintech industry in Canada is believed to be now in its maturing phase. There has been a huge number of investments especially during the last years of the past decade. Now the industry is introduced to its new phase, meaning that companies with strong product proposals are going to be the ones that will stand out. Canada is among the strongest players in the fintech industry after the US and the UK, as it is the home of big players like Apollo, Conexiom, Horizon, Q4 and many more.

Fintech companies in Canada are active in multiple segments of the industry but the most important ones are payments (21%), Lending (14%), and Back Office (12%). Cryptocurrencies have also started to gain the interest of the Canadian investor. At the beginning of 2020, their market value was over $200 billion, but by May 2021, it had increased to more than $2 trillion. Nevertheless, for the time being, despite their growing popularity, these markets are not of systemic importance in Canada, neither as an asset class nor as a payment instrument.

Cybersecurity is also a crucial segment of the Canadian Financial sector as cyber attacks have been identified among the top concerns in the undustry. Among firms in the finance and insurance industry, 95 percent use at least one cyber risk management arrangement—more than in any other industry. This is done not only internally but also by cooperating with third-party companies. It has been recognized as an important precondition the collaboration between the institutions and between the different actors in order to reassure an agile financial sector.