A flare stack lights the sky from an oil refinery in Edmonton on Dec. 28, 2018.JASON FRANSON/The Canadian Press
Ottawa and regulators have been too slow to implement rules for integrating climate objectives into the financial system, and now Canada is forced to play catch up with its European allies, says a report on the country’s progress in meeting sustainable finance goals.
Canada must speed up efforts to improve disclosure of greenhouse-gas emissions to stay competitive, and many business leaders have called for standardized reporting, said the report by the Institute for Sustainable Finance (ISF) at Queen’s University’s Smith School of Business. But, so far, the government has held off mandating the use of a globally accepted program for measuring and assessing climate-related risks.
As a result, corporate data on carbon emissions and climate-related risks remain “piecemeal” as the world moves to more standardization, said Margaret Childe, head of ESG, Canada, at Manulife Investment Management and a contributor to the assessment.
“It’s become quite clear that providers of capital really do want to participate in a meaningful way in terms of mitigating physical risks and transition risks, and in order to do that we need proper information, the right types of disclosure, to make those decisions. So I think the urgency is coming from there,” Ms. Childe said.
The research includes input from Bank of Canada Governor Tiff Macklem; top executives of the country’s big banks, pension funds and insurers; portfolio managers; lawyers and others. It is essentially a report card on progress in meeting the goals of Ottawa’s Expert Panel on Sustainable Finance. In 2019, that panel set out a series of recommendations for transforming market activities and structures so climate considerations become part of the financial mainstream.
The ISF report said the need to act on climate change has only become more urgent since the panel issued its final report two years ago recommending such measures as embedding climate risk in monitoring and regulating the financial system. It also recommended mapping a sector-by-sector path to a low-carbon economy, while developing associated capital plans.
“The most frequent comment made by interviewees was that Europe and the U.K. have been setting the tone in terms of discussions and actions related to sustainable finance issues, and that Canada has fallen behind,” the report said. “This leaves us playing catch up, and it is becoming clear that the Biden administration will be moving very quickly.”
Britain and New Zealand have mandated the use of the reporting framework established by the international Task Force on Climate-Related Financial Disclosures, a gold standard for reporting emissions and assessing risks. Canadian regulators have yet to do so, despite calls from business leaders and recommendations from an Ontario task force that studied modernizing the securities industry.
“We’re a little bit behind, but the private sector is already recognizing the fact that it is part of their fiduciary duty,” said Sean Cleary, the ISF’s chairman and co-author of the report. “A lot of companies are doing better with disclosure, recognizing that they need to do so because their suppliers of capital are demanding that information.”
Meanwhile, more Canadian executives and directors must become familiar with how climate considerations figure into fiduciary duty, the report said. That is, understanding the legal implications of integrating such risks into financial decisions.
Ms. Childe said part of this is to address concerns among investors over greenwashing, or making false claims about environmental impact. One way to help improve knowledge is to establish a made-in-Canada stewardship code, she said.
The report is being published Thursday, three weeks before world leaders prepare to meet in Glasgow for the COP26 climate talks. The global finance industry is set to play a major role there.
But this week, government-funded research revealed that Canada is on pace to fall well short of its emissions goals. The Montreal-based Trottier Energy Institute said current strategies will reduce greenhouse-gas output by only 16 per cent, relative to 2005 levels, by 2030 – well below the recently toughened 40-per-cent reduction target.
Still, any financial changes meant to address climate impact must take into account Canada’s resource-dependent economy, the ISF report said. That means developing sector-specific solutions for reducing CO2 emissions and making the transition to clean energy.
Sustainable finance goals must also take into account social factors such as the economic fallout from the COVID-19 pandemic as well as the need for reconciliation with Indigenous people. “Climate change itself disproportionately impacts society’s most vulnerable populations, and it is important that we provide the tools and infrastructure to ensure all of Canada reaps the benefits of a resilient and sustainable economy,” the report said.
In addition, cleantech opportunities such as carbon capture and hydrogen fuels require more financial support, as the slow progress to date “is of utmost concern.”
Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at jeffjones@globeandmail.com.
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Jeffrey Jones