The shift toward deglobalization is partially influenced by environmental considerations, and Canada can profit from the transition to greener, cleaner, friendlier economies, according to an executive at Mackenzie Investments.

Benoit Gervais, the senior vice-president of investment management and the portfolio manager and head of Mackenzie Resource Team, identified a “cap on globalization” in an interview with Sustainable Biz Canada. He anticipates globalization will decline in the next five years, accelerated by the Ukraine-Russia war and greater emphasis on domestic production.

Such a flip after decades of economic interdependency and offshoring will play a key role in how countries take on global warming, and shows how environmental factors cannot be ignored, he said.

“We’ve got several things intertwined here. We’ve got climate action, we’ve got onshoring for strategic reasons, not just ESG reasons, and the infrastructure to support all of this.”

Mackenzie is a Toronto-based asset management firm with over $200 billion in assets under management.

How decarbonization could affect trade

Predicting a decline in global trade or at best “going sideways”, Gervais said geopolitical tensions are forcing countries to take sides on trade. He also highlighted how the sustainability of a product is emerging as a major element of trade.

Consider the tariffs on Chinese electric vehicles and steel that were imposed by the Canadian government, as well as the U.S. and European Union. Such actions were enacted in part due to China’s treatment of workers and slack environmental protections, Gervais said.

The lowest cost used to be the dominant factor for a purchase, but now there are other considerations. “Do we focus solely on price, or do we have other standards?”

This will likely mean fewer cheaper goods will be entering the market, a point raised by some organizations that tariffs would slow the pace of decarbonization as cheaper Chinese electric vehicles would now struggle to enter the Canadian market.

To cover the expected gap, nations are turning to their best friends, Gervais said. Friendshoring, hosting manufacturing infrastructure in friendly countries, is becoming more popular. Canadian critical minerals companies in the sustainability field such as Cyclic Materials have emphasized prioritizing investments in the U.S. and Europe because of a more favourable political environment.

How untethered markets could affect Canada

The greatest opportunities to decarbonize come from targeting companies that have the highest emissions. That means taking a closer look at how factories that produce aluminum - which is used to make electric vehicles, solar panels and wind turbines - are powered.

“Either you improve your process or you produce a sustainably better alternative,” Gervais said.

Rules are essential to incentivizing sustainability, he argues. An ideal outcome would be China putting a price on carbon, in Gervais’ view. Otherwise, the next best choice is to tax imports that are carbon intensive (such as Chinese steel) and demand progress on greenhouse gas emissions to incentivize change.

Here, Canada has a large opportunity to help reduce global emissions. The country has the metals, clean electricity and natural gas supplies to transition economies to net-zero, Gervais noted.

“The temptation would be to write them off as industries of the past and focus solely on technology. So investing at home is probably pretty good.”

How onshoring comes at a cost

As onshoring and friendshoring takes place, Gervais said it will mean boosting energy production to meet the needs of newly built factories and facilities. “How will I get more power, but cleaner than before?” he asked as a hypothetical company.

Take data centres for example. As more countries are hosting data centres at home or in friendly nations, it means more power demand. A key question is finding the most efficient gigajoule, Gervais said.

“There is only so much hydropower or nuclear power you can get,” he continued. “Right now we are in this land of compromise.”

New ESG rules must be practical, focused on the next five to 10 years, Gervais argued. That pragmatism means asking how to create incentives for clean technology and recognizing not every company has to transition to an entirely electric vehicle fleet.

Government will need to be involved as well. “If we’re just putting a tax on everything, then we’re losing. Now if there is a much more comprehensive industrial policy, then it starts being practical and possible. People will go for it.”