Canada is lagging in its efforts to drive private capital into sustainable investments to finance solutions on climate change and other environmental challenges.
At a forum on sustainable finance in Ottawa this week, a parade of speakers, including Environment Minister Steven Guilbeault, warned that Canada is falling behind global competitors in the race to attract the investment needed to fuel the transition to a net-zero economy. “Canada is playing catch-up,” he acknowledged. “We need more clarity and more direction.”
In remarks to the forum, Finance Minister Chrystia Freeland promised a greater push from Ottawa to align the country’s financial system with sustainability goals, including action on climate change. Freeland indicated she would be moving on two key planks in a proposed sustainable finance framework: a taxonomy that guides what types of investments are deemed to be aligned with Canada’s net-zero commitments and greater clarity for corporations on disclosure rules for climate-related financial risks.
Freeland was attending the Sustainable Finance Forum, which was organized by Liberal MP Ryan Turnbull and featured a half dozen of her cabinet colleagues.
The finance minister, in particular, has come under criticism for her slow response to recommendations that would establish a “transition taxonomy” – essentially, a menu of climate-friendly investments – as well as details of promised tax credits that would spur private funding for clean energy investments.
In remarks, Freeland acknowledged the critical importance of climate action, not only to reduce greenhouse gas emissions but also to allow Canada to compete in the zero-carbon economy of the future. “Climate action is about saving the planet, of course,” she said. Moreover, she added, having a climate plan is “synonymous with having an economic plan; it is synonymous with having a jobs plan.”
The minister commended the work of the Sustainable Finance Action Council (SFAC), a body comprising the country’s largest banks, pension funds and insurance companies that has recommended that Canadian corporations be required to disclose their climate-related risks and have a transition plan for addressing them.
SFAC also recommended nearly a year ago that Ottawa establish a “transition taxonomy,” which would lay out the types of investments considered to be consistent with Canada’s international climate commitments. International investors are increasingly looking to such taxonomies to guide capital decisions and help meet their own commitments to reduce the carbon intensity of their portfolios.
“The taxonomy is really critical because it is a tool for how we can allocate capital to activities and have credibility that the activities are sustainable,” said Andrea Moffat, senior director with Addenda Capital Inc., a Canadian investment manager.
SFAC suggested that investment in new fossil fuel infrastructure would lay outside that scope, though spending to reduce emissions from existing oil and gas production would be included.
The minister promised action on those recommendations “later this month” – likely a reference to her fall economic statement, which she is expected to deliver as early as next week.
Freeland vows to focus on fiscal responsibility as Conservative MPs and some economists blame the government’s rising spending for fuelling a higher cost of living for Canadians. Providing greater clarity and regulatory incentives for sustainable finance would be a way to drive private-sector investment in climate action without increasing federal spending.
Natural Resources Minister Jonathan Wilkinson told the conference that there is wide agreement that governments alone cannot provide all the investment required to meet Canada’s target of net-zero carbon emissions by 2050. “The volume of the capital needed will require a major, major role on the part of the private sector,” he said.
Guilbeault noted that the United States is moving aggressively with guidance for investors, both through the U.S. Treasury Department and the Securities and Exchange Commission, which regulates capital markets.
“We are interested in sustainability not because we are environmentalists, but because we are capitalists and fiduciaries to our clients.”
Who said that? Larry Fink, the CEO of Blackrock pic.twitter.com/74a7wJCyLl
— Steven Guilbeault (@s_guilbeault) November 2, 2023
Indeed, international analysts have rated Canada poorly when it comes to sustainable finance policies and regulations. German-based consortium Climate Action Tracker rates Canada’s climate-finance policies as “highly insufficient” – essentially a D grade.
Key jurisdictions, including the European Union, the United Kingdom, Australia, Japan and China, are moving forward with taxonomies that will guide green investment decisions and help avoid greenwashing.
On disclosure, the EU has established rules that require companies to lay out not only the risks they face from climate change but how they will manage the transition in their own businesses. That includes the percentage of revenue that a firm derives from green sources and the percentage of its capital expenditures that is aimed at low-carbon projects. Some 1,300 Canadian companies that do business in the EU or with major EU companies will have to comply, according to one estimate.
The goal is to drive investment in energy efficiency, electrification, expanded clean power grids, and other transition technologies – including carbon removal – that will allow the world to avert the catastrophic impacts of climate change. At the same time, all countries must increase investment in resilience in order to adapt to extreme heat waves, floods, fires and drought that are already happening and will worsen.
For greenhouse gas reductions alone, the scale of capital required is enormous. Corporate Knights has calculated that investments in climate solutions from all sectors should be in the region of $126 billion annually between 2023 and 2030 to meet Canada’s international climate commitments.
The good news: the world is seeing exponential growth in spending on solutions, Corporate Knights research director Ralph Torrie told the forum. However, it is tough to keep up with the growing urgency of the climate crisis.
Torrie noted that the required investments are less than what the federal government spent on COVID response per year and would be equivalent to roughly 6% of gross domestic product (a third of that from government and two-thirds from the private sector). They would also drive economic growth and lower energy costs for businesses and consumers.
“We all need to remember this is an emergency,” Torrie said. “We need to respond to it as an emergency.”
