Kevin Quinlan is a senior advisor with Mantle314, a Toronto-based consulting firm focused on climate change
With the announcement of Tiff Macklem as the next governor of the Bank of Canada, the federal government chose someone with deep knowledge of the nation’s economy and the risks and opportunities of climate change. He is a good choice at a time when Canada is facing duelling crises of a cratering economy and a warming planet.
Mr. Macklem will have to navigate the issue of climate change in a way no previous Bank of Canada governor has had to, both at home and abroad.
Some will argue that climate change is outside of the Bank of Canada’s mandate. But if the bank’s role is to support the stability of Canada’s financial system, it cannot ignore a crisis that poses physical risks to our country, such as increasing floods and forest fires disrupting supply chains and business operations. Nor can the bank turn a blind eye to the transition risk of global efforts to dramatically reduce emissions, leading to declining market demand for carbon-intensive products and in the process, stranding assets.
Mr. Macklem’s work on climate change is well documented. As chair of the federal government’s Expert Panel on Sustainable Finance, he helped develop recommendations for Canada’s financial system to support a transition to a low-carbon economy. The recommendations included RRSP incentives for green investments, enhanced corporate disclosure of climate risks, and scaled-up investments in building retrofits and clean energy.
The panel’s report received a favorable response from the government but to date, little has happened. The new governor has an opportunity to spur the government to move the recommendations forward.
One climate issue Mr. Macklem will have to address is the bank’s $10-billion corporate-bond purchase program. Many of the companies urgently in need of liquidity are the ones most impacted by the drop in demand for fossil fuels—and most at risk in a climate-adjusted future. The fallout from the Russian-Saudi oil price war and COVID-19 has compounded these risks. By purchasing corporate bonds of these companies, the Bank of Canada is providing a short-term boost, but potentially loading up on longer-term climate risk.
Climate change won’t just be a domestic issue for the bank. Central banks such as the U.S. Federal Reserve are under growing scrutiny from politicians about how their policies contribute to climate change. Canada is a member of the Network for Greening the Financial System (NGFS), where central banks are discussing ways to align the financial system with the Paris Agreement climate goals. Mr. Macklem will need to navigate debates such as whether central banks should change their purchasing programs so as to shift capital away from high-carbon assets, as well as different ways to conduct climate stress tests.
As the next governor, Tiff Macklem has an opportunity, if he chooses, to chart a course for the bank that supports economic recovery while positioning Canada for success in a low-carbon economy. What could that look like?
It starts with the tone at the top. As we saw with Mr. Macklem’s former boss Mark Carney when he became governor at the Bank of England, a clear, public commitment early in the mandate that climate change is a priority will send a signal to markets and throughout the bank itself. In his new UN climate finance role, Mr. Carney will surely be keeping an eye on Mr. Macklem’s moves. At the same time, Mr. Macklem can expect political and industry pressure from those who think high-carbon energy production is Canada’s only path out of recession.
Mr. Macklem will have to push the federal government to implement the Expert Panel’s recommendations, particularly those that mobilize private capital behind transitioning Canada’s oil and gas sector to lower carbon operations. He could make clear he intends to follow through on the bank’s 2019 commitment to run climate stress tests. He could use his platform to make the case that corporate Canada needs to dramatically improve its disclosure and reporting of climate risk.
With credible actions at home, Mr. Macklem could push the bank towards a more active role at the NGFS, urging faster adoption of Task Force on Climate-related Financial Disclosure (TCFD) reporting and adding a voice to other central banks calling for a green economic recovery.
The economic impact of COVID-19 may be the immediate priority, but climate change won’t go away just because we are standing six feet apart. The challenge facing Mr. Macklem is not should the Bank of Canada address climate change now, but how to do so during an economic collapse.
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