Financing the climate gap

Ottawa needs to leverage the capacity of the private sector to invest in climate solutions

wind energy sustainable finance

You would be forgiven for thinking that the COVID-19 pandemic reduced Canadians’ appetite for climate action. But it didn’t. Canada, the United States and Europe have embraced ambitious new pathways for reducing greenhouse gas (GHG) emissions linked to building back better from the pandemic. To navigate them successfully, Ottawa needs to leverage the capacity of the private sector to invest in climate solutions.

The Institute of Sustainable Finance (ISF) at Queen’s University estimates that Canada needs an annual investment of at least $12.8 billion over the next 10 years to meet our commitment to reducing carbon emissions under the Paris Agreement on climate change. While that may sound like a lot, it represents only 0.6% of Canada’s GDP in 2018 and less than 10% of annual capital expenditures of firms listed on the Toronto Stock Exchange.

In other words, the ISF believes the task is doable – but not by government alone. With the right conditions in place, it predicts that pools of private savings and capital could be mobilized to finance up to 50% of the climate gap while improving prosperity in the process. But what should those conditions look like? And how will Canadian investors – whether large institutional asset managers like pension funds or individual Canadians saving for retirement – react to them?

The Pembina Institute partnered with GlobeScan to put these and other related questions to ordinary Canadians and a group of financial experts in business, industry and the non-profit sector. They told us three things.

First, professional investors and individual Canadians alike have a growing interest in ensuring that companies have policies in place to consider environmental, social and governance (ESG) factors in their strategies and operations. Second, Canadian investors are frustrated by a financial system that does not provide the information they require to determine if their investments advance their climate objectives. Third, six in 10 Canadians want to build back the economy in ways that address climate change and inequality, and eight in 10 think climate change should be addressed with the same urgency as COVID-19.

Expanding investor and public interest in sustainable investment represents a major opportunity to direct capital to solutions that can meet multiple social, economic and environmental objectives. But Canada still needs to define “sustainable investment.” While it is obvious that “green financing” applies to investment in non-emitting technologies like renewable energy or zero-emission vehicles, it is less clear how investments that enable carbon reduction in large carbon-intensive industries should be treated.

In response to a recommendation made by Canada’s 2019 Expert Panel on Sustainable Finance (which included Tiff Macklem, now governor of the Bank of Canada), the CSA Group (formerly the Canadian Standards Association) has been working on a definition of “transition financing” that would apply to emissions-reduction technologies in sectors that will take longer to decarbonize – including fertilizer, chemicals, cement, steel, oil and gas, and heavy-duty transportation.

Meanwhile, the Canadian Securities Administrators and other organizations involved with setting standards for financial reporting are moving to adopt new and more consistent frameworks for corporate disclosure of climate-related risk and opportunity. The experts we talked to told us that such a disclosure regime is critical to facilitate the flow of private capital into investments that are non-emitting or emissions-reducing.

With key pieces of a sustainable financing roadmap for Canada’s clean energy future now on the table, it’s up to Finance Minister Chrystia Freeland to provide guidance on how to align them with Ottawa’s new plan to reduce emissions, which includes a price on carbon emissions that will rise to $170 per tonne by 2030. To achieve its climate goal of net-zero emissions by 2050, Ottawa needs to act on its promise to appoint the private-public Sustainable Finance Action Council to develop “a well-functioning sustainable finance market in Canada.” Adding more urgency to this picture is the new Biden administration in the U.S., which has promised to embrace net-zero emissions and implement policies requiring companies and investors to report on climate risk more rigorously.

A meaningful price on carbon, leadership from the new Sustainable Finance Action Council, a more consistent and regulated framework for corporate climate-related risk disclosure, and new Canadian financial classifications for “green” and “transition” investment would help unlock the private investment needed to transform Canada from an emissions-intensive economy to a net-zero one. Taken together, this would also help meet the changing interests and expectations of Canadian investors – both big and small.

Linda Coady is executive director of the Pembina Institute, a climate and energy think tank headquartered in Alberta.

Chris Coulter is CEO of GlobeScan, an insights and strategy firm, and the co-author of All In: The Future of Business Leadership.

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