We already knew the transition to a low-carbon economy was necessary. Now we have the data that show how to finance it.
Last week, the Speech from the Throne confirmed that, as we mobilize every national effort to recover our economy in the face of COVID-19, Canada will not flag in its ambition to achieve our 2030 climate target. Moreover, we will pursue that target with increased momentum, not despite, but because of the imperatives to create sustainable jobs, build resilient local economies and stimulate innovation that enables Canadian companies to compete.
However, ambition alone will not be enough. As the old axiom goes, what gets financed gets built. If we want to evolve our industries and infrastructure to seize the substantial opportunities (and avoid the even more substantial risks) of a global low-carbon transition, we’re going to have to invest in that evolution. In other words, we need a capital plan.
This was the starting place for the Institute for Sustainable Finance’s new research, released Tuesday, that shows, for the first time, how and where capital must be invested to set Canada’s economy on the low-carbon path.
The report makes two conclusions abundantly clear. First, the scale of investment required – in the range of $12.8-billion annually over the next 10 years – is eminently affordable. For context: It’s the equivalent of 0.6 per cent of Canada’s 2018 GDP and less than 10 per cent of annual capital expenditures of companies listed on the TSX.
Second, private capital sources can and will play as much a role as public investment in achieving this ambition. In fact, existing structures such as Canada’s Infrastructure Bank are designed precisely for this purpose: to leverage public dollars in ways that draw in multiple amounts of private financing. As well, sustainable finance mechanisms, including transition bonds and green investment trusts, empower private investors to channel capital toward the most promising low-carbon business models and technologies.
This is already happening, and the trend line will only go up over the next decade. Green-bond issuance in the second quarter of 2020 totalled US$49.5 billion – the third highest quarterly total on record. This summer, Citigroup launched a five-year, $250-billion fund to finance low-carbon solutions and to reduce climate-related financial risk. Last week, Ford Motor Co. of Canada and Ontario brokered a landmark partnership to retool local factories to meet the growing demand for electric vehicles. The move came in fortuitous timing with California’s commitment to ban new combustion engine vehicles by 2035.
All of this suggests that mobilizing the capital required to invest in Canada’s low-carbon transition is doable. That does not mean it is easy. In fact, part of the value of our research is it sheds light on the challenges that must be overcome. Transportation is a key example. As the key driver of greenhouse gas emissions in most regions across Canada, big reductions in this sector will have a massive impact on our overall success. But getting those reductions means addressing vast amounts of locked-in capital that is tied up in existing, and expensive to abandon, carbon-intensive infrastructure. Progress will require an all-hands-on-deck public-private financing approach.
Another big bet that Canada must get right is the transition of our oil and gas sector. Our research found the average cost of reducing one tonne of greenhouse gas emissions in the oil and gas sector is relatively cheap. It’s the carbon intensity of the sector that pushes the required investment to the higher (though not highest) end of the spectrum.
This is precisely where focused investment in technological innovation can – and already is – playing a significant role. The race to commercialize carbon-reducing tech in the resource sector is accelerating. In the past month, global oil giants Shell and BP have joined forces with Microsoft to advance ambitious net-zero goals geared to reduce the carbon intensity of operations while scaling up renewable alternatives. In Canada, homegrown innovations in hydrogen energy and carbon capture and utilization can become world-leading solutions that would enable Alberta’s energy sector to align its value proposition and competitive advantage with goals that strengthen our economy’s resilience to climate change.
As fires rage on North America’s West Coast, we are reminded that the scale of investment required to address climate change is nothing compared with the cost of inaction – costs that will only grow higher the longer we wait.
Over the next few months, governments and private enterprise will make generation-defining decisions about how and where to invest in our economy’s future. What the Institute for Sustainable Finance’s report offers is a blueprint. More research is needed to bring the financing opportunities in each sector into greater relief. But what is certain is that the tools of sustainable finance will be critical to unite public, private and financial sectors behind one Canadian goal: to not just survive, but thrive through 2030 and beyond.
Jim Leech is chancellor of Queen’s University, former president and CEO of the Ontario Teachers' Pension Plan, and chair of the advisory board for the Institute for Sustainable Finance.
Ryan Riordan is the associate professor and distinguished professor of finance at Smith School of Business at Queen’s University, and the director of research at the Institute for Sustainable Finance.
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