“Green finance is a major opportunity.”
– Mark Carney, governor, Bank of England, 2016
In 1972, governments around the world recognized their role in protecting the environment and its critical link to poverty alleviation at the United Nations Conference on the Human Environment in Stockholm, Sweden. Twenty years later, the global business community recognized its role with the launch of the World Business Council for Sustainable Development at the Rio Earth Summit. In 2015, the global financial community had its coming-out party with the $24 trillion-strong Institutional Investors Group on Climate Change coming together in support of an ambitious Paris Agreement.
This is a good thing, as the world cannot afford for the financial system to be on the sidelines of sustainable development or, worse, working at cross purposes. For too long, we took for granted that if business and government were dedicated to sustainable development, finance would be too. Even when the economics make sense, there are powerful cognitive biases that can prevent and delay finance from showing up.
The first issue is that people tend to overestimate the importance of information that is available to them (availability heuristic). Relative to the ocean of financial data, there is a paucity of quality corporate sustainability data available in places like the Bloomberg Terminal, so it’s not surprising that most financial professionals discount sustainability risks and undervalue sustainable opportunities. When you combine this with a herding mentality, it adds up to a massive misallocation of capital. Consider, for example, how many institutional investors believe fossil fuel stocks will underperform the market over the long term but still hold them in their long-term passive portfolios.
While finance is still looking in the same narrow rear-view mirror as the rest of the traffic jam, the good news is that as soon as they see an off-ramp to a route that is moving more quickly, the direction of travel can change in a hurry.
It is in that spirit that Mark Carney initiated the Financial Stability Board Task Force on Climate-related Financial Disclosures (FSB TCFD), that the G20 formed a Green Finance Study Group and that the G7 has decided to examine the role of financial centres for sustainability in 2017.
The transition to a low-carbon sustainable economy presents a huge opportunity for Canada’s already substantial financial sector to leapfrog past Paris and Tokyo to number two in the OECD, after New York. Achieving the 2030 Agenda for Sustainable Development (often referred to as the UN Sustainable Development Goals) and the Paris Agreement requires an unprecedented mobilization of both public and private finance amounting to $90 trillion or so over the next 15 years.
While it’s true that Canada has a significant fossil fuel sector (20 per cent of the TSX), it also has a more significant financial sector (33 per cent), is number one in the world for cleantech company listings, has a growing green bond market anchored by Ontario and Quebec and is home to the Maple Revolutionaries, 10 of the largest and most sophisticated long-term investors in the world. Combine this with a federal government hitched to a clean growth agenda with big infrastructure plans, and you can see the opportunity for the maple leaf to become synonymous with green finance.
It will take leadership to make it happen. The mainstream financial authorities in Paris and London smell the opportunity and have launched specific green and sustainable finance initiatives, with the aim of increasing green finance flows.
Seizing the moment
If Canada wants to move into pole position, it would be wise to articulate a strategy or a sustainable finance road map that hits on three points:
- Improve information by leveraging the opportunity presented by the Review of the Federal Financial Sector Framework to ensure that our financial sector provides world-class disclosure pertaining to the alignment of financial flows to our climate commitments and implementing the FSB TCFD recommendations.
- Devise standards for green debt and green revenue tagging, designed to be fintech-friendly.
- Replace a modest portion of regular federal debt with strategic issues of federal green bonds (as little as $2 billion per year would send a strong signal) to finance a pipeline of sustainable infrastructure projects which would raise awareness and pump liquidity into the green debt market.
This April, financial leaders gathered at Globe Capital to discuss the country’s green finance opportunity. There is no reason why Canada cannot be a global hub for the burgeoning multitrillion-dollar green debt, cleantech equity financing and green fintech space.
Next year’s G7 will be hosted by Canada. It would be an ideal spot to showcase our leadership and help accelerate the momentum for green and sustainable finance globally.
The Council of Clean Capitalism is a group of forward-thinking companies that seeks public policies in support of an economic system in which prices incorporate social, economic and ecological benefits and costs, and people know the full impacts of their marketplace actions.