When Tiff Macklem took over as Bank of Canada governor in June he brought the requisite credentials in government and academia, including a past stint as deputy governor of the central bank.
But more important to some are his ‘green’ credentials, particularly his chairing of the federal Expert Panel on Sustainable Finance, which in 2019 recommended Canadian financial institutions revamp their business practices to address the challenges of climate change.
Nine months into the job, and despite the dominance the pandemic is having on the economic agenda, there are signs that the hoped-for sustainability shift is happening at the Bank of Canada.
“I would say that he’s spoken more about climate change in seven months than the previous governor did in seven years,” Kevin Quinlan, senior adviser with climate consulting firm Manifest Climate says of Mr. Macklem. “He has spoken about wanting to have the bank play a bigger role internationally in terms of the organizations that are working on climate finance.”
BoC focusing on climate risks
Viewing climate change as a risk to the financial system began under previous Bank of Canada governor Stephen Poloz in 2019, but experts say Mr. Macklem appears to have moved the issue front and centre.
For instance, the bank recently announced a pilot with the Office of the Superintendent of Financial Institutions (OFSI) to examine how various climate change scenarios would impact the country’s banks and insurers. Some companies that have signed on include major industry players such as the Royal Bank of Canada, Toronto-Dominion Bank, Manulife Financial Corp and Sun Life Financial Corp. A progress report is expected later this year.
The Bank of Canada also recently joined the steering committee of the Network for Greening the Financial System, a climate-focused group of more than 80 central banks.
“(Mr. Macklem) has very clearly declared that climate change and the transition to a net-zero economy presents a systemic risk to Canada’s financial system and it’s going to have profound effects on every sector across the economy,” says Joanna Kyriazis, a senior policy advisor at Clean Energy Canada. “Looking at his record, I think he’s off to a pretty strong start.”
The financial risk of falling behind.
In remarks at the Public Policy Forum in November, Mr. Macklem acknowledged Canadian companies need to “pick up the pace” on disclosing climate-related risks to investors. The urgency comes alongside the growing popularity of sustainable investing, in particular the tracking of a company’s environmental, social and governance (ESG) performance. Falling behind on ESG issues puts Canadian companies at risk of being left out of investment funds and portfolios.
In his latest annual letter to chief executive officers, Larry Fink, head of top global asset manager BlackRock Inc., said his firm would turn away from fossil fuel-oriented stocks going forward and make environmental sustainability a core goal. Mr. Fink also noted that investors in mutual funds and exchange-traded funds invested US$288-billion globally in sustainable assets from Jan. to Nov. 2020, nearly double than all of 2019.
“What we’re seeing globally is the movement behind climate finance to decarbonize to net zero is happening — and I think a lot faster than people expected,” Mr. Quinlan says. “I expect you’re going to see a lot of movement around the issue of central banks and climate change and climate finance disclosures and a lot more efforts around international momentum around that.”
One growing area of focus is green bonds, or fixed-income instruments that raise money for climate-friendly initiatives. The investments are gaining popularity and regulators are trying to set a standard for what qualifies as ‘green.’ For instance, can a fossil-fuel company issue green bonds to fund a climate-friendly initiative, such as a wind project?
Ottawa is expected to establish a Sustainable Finance Action Council this year that will determine standards for these investments — and Mr. Macklem should be able to play a role in influencing this, says Linda Coady, executive director of the Pembina Institute.
“While it is obvious that green financing applies to investment in non-emitting technologies like renewable or zero-emissions energy, it is less clear how to treat investments that enable carbon reduction in large emissions-intensive sectors that are going to take longer to decarbonize,” Ms. Coady says.
Looking for climate leadership
While Mr. Macklem has yet to “put his stamp” on the Bank of Canada in terms of climate change, Mr. Quinlan acknowledges it has few tools to force companies to make changes given Canada’s fragmented regulatory system. It’s why the central bank needs to work with regulators, such as OSFI, to make progress.
And with carbon emissions a politically fraught issue in Canada given the economic reliance on oil, gas and mineral extraction, Mr. Macklem also has the benefit of speaking from a politically neutral position.
The new, more environmentally friendly Joe Biden administration in the United States is also expected to speed up investment in the sector and the global transition to a low-carbon economy.
“This is the year that I expect that as the economy starts to recover, there could be some more high-profile things on the climate front,” Mr. Quinlan says.
The expectations are high, Ms. Coady adds. “Those of us who follow climate issues in Canada are betting that sustainable finance is now part of his DNA, and are eagerly anticipating Bank of Canada leadership in this area,” she says.