Dramatic progress on greening the financial system cannot come too soon

Vast pools of private capital must be harnessed to finance the transition and Canada is lagging, says groundbreaking report

Canada has made only modest progress to date when it comes to embedding climate-change concerns within its financial sector. But an effort to adopt sustainable finance practices is revving up.

The return of the Liberal minority government after September’s federal election sets the stage for heightened activity by two recently established advisory bodies: the Sustainable Finance Action Council (SFAC), which comprises key financial institutions, and the Official Sector Coordinating Group (OSCG), a federal–provincial body made up of departmental officials and regulators.

Together, those groups will drive government action on key financial-sector issues to encourage and, in some cases, require Canadian companies to pay more heed to climate-related risks and opportunities.

In an interview last week, SFAC chair Kathy Bardswick told Corporate Knights that the council – which was formed in May – has identified a work plan that is awaiting sign-off from the federal government once Prime Minister Justin Trudeau appoints his cabinet.

Dramatic progress on greening the financial system cannot come too soon. Broadly adopting the principles of sustainable finance is a critical part of the country’s effort to decarbonize our economy and achieve net-zero greenhouse gas (GHG) emissions by 2050. Vast pools of private capital must be harnessed to finance the transition.

The financial system will come under the spotlight at the United Nations’ COP26 climate summit in Glasgow next month. At the request of British Prime Minister Boris Johnson, former Bank of England governor Mark Carney has been rallying the world’s financial companies to make ambitious climate commitments, including net-zero-emission targets by 2050.

Canadian financial firms have notably been absent in Carney’s “net zero alliance,” though they insist that they are committed to its underlying goals. Vancity is the first and only Canadian financial institution to sign on.

Still, there has been a lack of urgency in Canada to date, and that has to change – both within government and among the banks, insurance companies, pension funds and other players in the financial sector.

It’s been more than two years since an expert panel on sustainable finance issued 15 recommendations on how to embed climate change and other environmental issues into the mainstream of Canada’s financial system. That panel was led by Tiff Macklem, who has since been appointed governor of the Bank of Canada.

In a report issued last week, the Institute for Sustainable Finance (ISF) noted that “progress has been too slow” in acting on the expert panel’s groundbreaking report and that there is an “urgent need for execution.”

Of the 15 recommendations, only one – establishing the Sustainable Finance Action Council – has seen significant progress. Eight recommendations have seen minimum or marginal action, while there was “modest” progress on six.

If you were assigning a grade based on the ISF report, the government and industry together would be unlikely to rate above a D, avoiding a failing grade only in recognition of the complications presented over the past 18 months by the COVID-19 pandemic.

There remains resistance in the Canadian financial sector, which is conservative by nature and heavily exposed to the oil and gas sector. And the shortsightedness of financial sector players in Canada has been compounded by the uncertainties associated with climate-related risks and opportunities, expert panel member Andy Chisholm noted in a forward to the ISF report. 

“Our near-term risk aversion may underestimate the price for sluggish action, both environmentally and commercially, that might later be paid,” wrote Chisholm, who is also a Royal Bank of Canada board member. “Likewise, new opportunities for growth appear to be too heavily discounted in the face of uncertainty, notwithstanding what has been dubbed by many leading commentators ‘one of the greatest commercial opportunities of our time.’”

The work of the SFAC and the OSCG could help alleviate some of that uncertainty. 

Bardswick says the SFAC will tackle three key areas of concern. 

It will make recommendations regarding mandatory disclosure by publicly traded companies of their climate-related risks. The EU and U.K. have said they will require mandatory disclosure, and the U.S. government has also indicated support for the idea. “The world is moving to mandatory disclosure, and we need to go there too,” Bardswick says. However, provincial securities commissions regulate corporate disclosure, and the issue will also be front and centre with the official-sector group.

Perhaps even more fundamental than the disclosure issue will be the council’s advice on how Canada can provide consistent and transparent data that companies can use to assess the risks and opportunities they face as a result of the climate crisis. Such information is critical for the analysis needed in support of operating decisions and long-term strategies, as well as disclosure to investors.

And finally, the council will grapple with how Canadian companies can fund emission-reduction investments in high-carbon industries, and what role the government should play in setting the ground rules for this. 

The world is moving to mandatory disclosure, and we need to go there too.
Kathy Bardswick, chair of the Sustainable Finance Action Council

There is currently a private-sector effort to define a “transition taxonomy” – the rules that would determine how carbon-intensive companies could issue investment products to finance emissions reductions.

The issue is a thorny one. The voluntary group is working with the CSA Group – formerly the Canadian Standards Association – and its report has been delayed several times, in part over disagreements about what types of investments in industries, such as oil and gas, should be considered transitional.

Transforming the financial ecosystem is just one part of the enormous task facing the government, and indeed all Canadians, as we look to meet the Liberal government’s commitment to reduce GHGs by at least 40% from 2005 levels by 2030. That pledge, which the government made before the election, is part of a COP26 effort to extract more ambitious targets from national governments to meet the goal of limiting the increase in average global temperatures to well below 2°C.

A report last week from the Trottier Energy Institute in Montreal said Canada requires a whole host of new measures to meet the 40% target. With the policies implemented so far, the country would achieve only a 16% reduction in GHGs by 2030, it said. 

The Liberals are gearing up for further action. On the weekend, Environment Minister Jonathan Wilkinson announced Canada’s commitment to develop a plan to reduce methane emissions across the broader economy. And he pledged regulations aimed at reducing oil and gas methane emissions by at least 75% below 2012 levels by 2030. 

A rising carbon price and targeted regulations are critical tools for achieving Canada’s zero-carbon transition. Driving changes in the financial sector to prioritize sustainable investment is just as important. 

Latest from Responsible Investing

current issue