In contrast with the top five banks in the United States, which hold just over a third of the market, Canada’s Big Five famously dominate around 90% of the market for financial services. They’re also some of the most profitable on the planet, with their Canadian personal and commercial banking services regularly notching profit margins north of 30%.

This is the basic unwritten structure of the arrangement: in exchange for offering economic stability (largely avoiding the agony of this century’s financial crisis), Canadian banks are allowed to occupy an unchallenged position in our economy. 

But what do average Canadians get out of this bargain, and where do those world-leading profits come from? Amid a once-in-a-generation cost-of-living crisis, there is heightened scrutiny of the ways Canadians’ lives are made more expensive, big and small. Despite signs that inflation is dropping, and with the Bank of Canada expected to cut interest rates by the end of the year, many Canadians are still struggling. All the while, Canadian banks are quietly pulling in billions a year on a yawning gap between the rates paid to savers and charged to borrowers. 

The joy of fees

Banks essentially make money in two ways: interest income and non-interest income. Interest income is the interest made on a dollar loaned to you minus the interest paid on the dollars you loan the bank – your hard-earned deposits. Non-interest income is a broader category, but to everyday Canadians the most common instance of non-interest income is fees.

There is no interacting with Canada’s financial system without the ever-present joy of fees. There are fees to open accounts, fees to close accounts, fees to keep accounts open, fees to send and even to receive money, and the adding-insult-to-injury fees for not having enough money in your account. Fees are serious business for the banks, with non-interest income for the Big Five topping more than $17 billion in Canada last year, according to public financial statements. Not only have the average total fees Canadians pay on an inflation-adjusted basis over the past decade increased, but so too has the portion of Canadian bank earnings coming from non-interest income.

In a comparison with the U.K. banking sector, Canadian economic consulting firm North Economics estimated that Canadians are overpaying to the tune of $8.5 billion more in fees annually than the equivalent fees of our British counterparts. North Economics blames coordination between major banks and a lack of competition for these higher fees, as well as relatively lower quality of banking product offerings. Looking at non-sufficient-funds (NSF) fees, the charges incurred when a chequing account is overdrawn, North Economics sees in the divorce between fees and the cost to deliver the service “a clear example of sustained oligopolistic coordination.” 

If banks are coordinating, even tacitly, on how they earn non-interest income, the same behaviour could be shaping what’s on offer for Canadian savers and borrowers when it comes to interest income, too.

Interest galore

Those who have shopped around for a line of credit would likely be familiar with the phrase “prime plus X,” while potential homeowners might be more accustomed to “prime minus Y.” The “prime rate” for bank lending products is based on the overnight lending rate of the Bank of Canada. Historically, the Big Five have all maintained the same prime rate, moving in lockstep in the days following a Bank of Canada interest rate announcement, with some level of differentiation in the posted rates for individual products like mortgages. 

One critical detail that has changed is the spread between the Bank of Canada’s overnight interest rate and the prime rate used by the banks to set the rate for lending products. Since the early 2000s, that distance has quietly grown from 175 basis points (a basis point is a percent of a percent, with 175 basis points translating to 1.75%) to 220. Most average loan seekers wouldn’t have noticed that widening distance between the rate charged on lending from the Bank of Canada and the rates at which the banks lend to Canadians. While the Bank of Canada lowered its rates to historic lows during this time, we didn’t see a proportional shrinking of these spreads. In fact, they grew. This represents an almost imperceptible squeeze on Canadians as our savings do less work for us while the rates at which we borrow money rise.

After nearly 15 years of rock-bottom interest rates since the financial crisis and the COVID-19 pandemic, the rising rates of the past two years provide a useful example of how those interest rate changes are passed on to consumers. When it comes to lending rates, the banks are quick to pass on the full cost of rate rises without delay. Take the last rate hike in July of 2023, where each of the Big Five banks passed on the full 25-basis-point raise to their posted five-year variable mortgages the day after the hike. Since early 2022, the Bank of Canada has raised interest rates by 475 basis points, rates for five-year variable mortgages have risen by more than 500 basis points, and rates for five-year fixed mortgages have risen by approximately 300 basis points on average.

Canadians are overpaying to the tune of $8.5 billion more in fees annually than the equivalent fees of our British counterparts.

Personal savings accounts, on the other hand, have not seen similar increases from their pandemic lows, with regular savings rates stubbornly stuck below 2%. That growing spread between lending and savings rates, known as net interest margins (NIM), is driving net interest income, with some banks growing their margins by as much as 15%. Though banks deal in percents of percents, when applied to their trillion-dollar asset bases these small moves translate into billions more of interest income flowing into banks annually. Those growing margins accounted for another $1.4 billion in interest income for the Big Five in just the first quarter of 2024 and more than $5 billion since rates started rising in early 2022, according to analysis of financial statements.

The structure of Canada’s oligopoly markets also affects how customers are treated on an individual basis. In a recent CBC Marketplace report, the broadcaster found a systematic pattern of Big Five bank employees being pushed to mislead customers into purchasing financial products they didn’t need to meet corporate performance targets. CBC conducted a similar investigation in 2017 and received more than 3,000 testimonies from TD Bank employees about aggressive and misleading sales practices. Customers upset about being misled by their banks are faced with the annoyance of manually shifting their financial lives to another oligopoly player who may already be pushing its own staff to act in a similarly cavalier way.

Unfortunately, we are headed in the wrong direction on banking competition in Canada. RBC, by several measures Canada’s largest financial institution and corporate entity, was allowed to purchase HSBC Canada after the British-based international banking conglomerate put several of its global outposts on sale. In approving the transaction, the federal government allowed the takeover of a competitor that had differentiated itself in the market for mortgages and international banking, according to the Competition Bureau. That kind of competition could have exerted pressure on expanding interest margins while Canadians shop around more aggressively as monthly mortgage payments rise.

Most average loan seekers wouldn’t have noticed that widening distance between the rate charged on lending from the Bank of Canada and the rates at which the banks lend to Canadians.

Recognizing that the banks made outsized profits during the pandemic, the government introduced a one-time tax on the average profits above $1 billion for the 2020 and 2021 fiscal years. But while fair taxation is a cornerstone of a fair society, the move does nothing to change the conditions for Canadians’ everyday navigation of the financial system.

Thankfully this focus appears to be shifting toward opening up competition in the financial sector. In the most recent fall economic statement, the federal government committed to introducing legislation to give consumers greater control over their financial data, making the process of switching to competing banks easier. Neither of these changes represent groundbreaking shifts in Canada’s approach to its banks, but they create the foundation to rebalance the relationship between them and Canadian savers and borrowers.

Canada’s monopoly problem is not limited to the banking sector, but improvements here will ripple throughout the economy. In the landmark 1960s Philadelphia National Bank case before the U.S. Supreme Court, Justice William Brennan noted that concentration in the financial sector is a recipe for concentration in the broader economy. Looking across our economy, there are few markets that refute this proposition. If Canada wishes to break from the economic path that has led to less competition and fewer options across the economy, we should start with a hard look at the sector at the foundation of our economy.

Keldon Bester is the executive director of the Canadian Anti-Monopoly Project, a fellow at the Centre for International Governance Innovation, and a former special advisor at the Competition Bureau.

Photo illustration by Jack Dylan.

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 The 67-year-old accountant is a trailblazer: after three and a half decades in financial management (including 11 years as chief executive officer at the First Nations Finance Authority), Daniels became the first First Nations person appointed to the Bank of Canada’s board of directors in January. His appointment comes at a critical time for the bank, which is currently reviewing its policies and processes to assess how it can contribute to economic reconciliation with Indigenous communities. 

The move is both a testament to Daniels’s business chops and a signal of the emergence of a generation of Indigenous finance leaders who are investing in major energy and infrastructure projects in their communities and on traditional territories.   

“I just focused on doing the job that I had in front of me to the best of my ability,” Daniels says in a telephone interview from his home in Kelowna, B.C. “I followed other people who blazed a trail.” 

Daniels is a member of the Salt River First Nation, a mix of Cree and Chipewyan people centred in Fort Smith, Northwest Territories, where he fondly recalls joining the fall hunt with his father. Life took a turn when his parents sent him to a government-run residential school for high school in Yellowknife, where corporal punishment and suppression of Indigenous culture was the norm. He escaped the worst of residential school abuses, in part, he believes, because he entered as an older boy who was able to fend for himself. The federal government opened that school, Akaitcho Hall, in 1958 and in 1969 transferred it to the territorial government, which operated it until 1994. 

“Missing your family, not being around your family, was very difficult. But I learned to look after myself pretty quickly and became pretty disciplined,” Daniels recalls. “I was big enough that I could handle myself.” 

Upon graduating, he was offered a job with Environment Canada as a hydrometric survey technician monitoring water levels and flows in northern lakes and rivers. In school and in his work, he discovered he had an aptitude for math and pursued accounting, first at Aurora College in the Northwest Territories and then at the Northern Alberta Institute of Technology in Edmonton. 

When he became a certified general accountant in 1991, he was one of a few First NationsIndigenous people in Canada to have done so. “It just wasn’t a profession that Aboriginal people got involved in,” he says. “But I have always been willing to take the opportunities that were put in front of me.” 

Daniels went on to work in private accounting firms and from there took on management positions at Indigenous organizations such as the Aboriginal Financial Officers Association and the Aboriginal Healing Foundation. 

Leading First Nations finance 

But it is at the First Nations Finance Authority (FNFA) that he has really made a mark on the financial opportunities available to First Nations.  

The FNFA was formed in 2012 as part of a Harper government effort to encourage better fiscal management on reserves.   

As CEO of FNFA, Daniels is focused on closing the gaping infrastructure gap – estimated at $350 billion – that exists between Indigenous communities and the rest of Canada. That includes everything from energy supply and clean water to healthcare infrastructure, access to digital networks and the banking system. Under the First Nations Fiscal Management Act, First Nations can qualify for FNFA access to capital by adopting a series of measures that demonstrate sound management, including third-party validation of financial practices and auditing of the nation’s books. 

Roughly half of the 630 First Nations in Canada are members – or “scheduled” under the First Nations Fiscal Management Act, which gives them access to FNFA’s borrowing ability. 

Daniels and the FNFA board have long urged Ottawa to open up new tools to financing, such as leveraging future government transfers for current borrowing. Such a measure would help communities access the significant capital they need to be able to carry out big infrastructure projects on their territories that are critical to their well-being, and it is long overdue.  

To emphasize the urgency, Daniels led a delegation of some 30 First Nations leaders to Ottawa last winter to lobby the Liberal government to include a mechanism in this year’s budget that would allow greater borrowing power for their communities. Although it had broad support, including from the House of Commons finance committee, the measure did not make it into Finance Minister Chrystia Freeland’s March 28 budget, much to their disappointment. 

I followed other people who blazed a trail. 

“I don’t see it as a hard ‘no,’” Daniels says. “We will continue with whatever means we have available to pursue this.” He notes that the Liberal government has vowed to close the infrastructure gap by 2030 but that federal revenues alone won’t accomplish that goal. Conservative Party MPs have endorsed the borrowing concept. 

Under Daniels’s guidance, FNFA has also participated in some of the largest Indigenous-led business deals in the country. That includes the acquisition by the Membertou First Nation and other East Coast Mi’kmaq communities of a 50% interest in Clearwater Seafood along with the fishing licences held by the corporation. Clearwater Seafood is one of the biggest shellfish operations in North America, and the inclusion of licences in the deal has led to expansion of First Nations’ fishing fleets.   

In addition, FNFA provided financing for Henvey Inlet Wind, a partnership between the Henvey Inlet First Nation and Pattern Energy. The project on the northeast shores of Georgian Bay has 300 megawatts of capacity plus transmission and is billed as the largest First Nation wind energy partnership in Canada. 

Daniels and the FNFA stepped in when the Henvey Inlet project was experiencing a $100-million cost overrun and secured a loan that kept financing costs at a reasonable level. 

Daniels “was a quick study,” says John Beaucage, vice-president of Nigig Power Corporation, a wholly owned subsidiary of Henvey Inlet First Nation. “He understood what we needed and found a way to solve the problem that allowed benefits to continue to flow to the community.”   

Bank of Canada mandate 

As a Bank of Canada director, Daniels has a broad mandate to ensure that the central bank is managed in a manner that benefits all of Canadian society. Directors have no input into monetary policy. And indeed, the banks’ setting of interest rates and other policy tools use broad brushstrokes to reflect national conditions. 

However, senior bank officials have acknowledged that in both setting of monetary policy and provision of financial services, impacts on Indigenous communities must be considered. In a May 2022 speech to the National Aboriginal Capital Corporations Association, then-deputy governor Lawrence Schembri said that “economic reconciliation” is part of the bank’s responsibility. “Fostering Indigenous inclusion falls squarely within the bank’s mandate to promote the economic and financial well-being of our country and all the peoples within it,” said Schembri, who has since retired from the central bank. 

He noted that lack of access to credit and capital for Indigenous communities remains a barrier to their economic progress. That includes the lack of banking infrastructure, whether branches, automated teller machines or online services for the more remote communities. 

The Bank of Canada is developing a reconciliation action plan to address its areas of jurisdiction and to recommend other actions needed to bring financial capacity to Indigenous communities. A draft plan will be released for consultation “in due course,” bank spokesman Alex Paterson said in an email. 

However, like federal promises to close the infrastructure gap, addressing the financial-capacity gap will take pragmatic, long-term solutions and a change in the paternalistic attitudes that have long dogged Canada’s relations with First Nations. 

As for Daniels, he likes to focus on getting results rather than revisiting history. “Once you can understand what the issue is, it’s easier to find a solution,” he says. “If you tell me I can’t do something, I’ll say, ‘I can find a way.’” 

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They have also rejected a call for rules that would require public companies to set diversity targets for their boards of directors.

The province’s Capital Markets Modernization Taskforce published a discussion document last summer in which it proposed mandatory disclosure of material environmental, social and governance (ESG) information in a format consistent with international standards bodies.

In submissions filed last fall, the Canadian Bankers Association (CBA) said that, while it supports the principle of heightened climate-related disclosure, it would be premature to mandate a specific framework as there are several that are still under development.

Blake, Cassels & Graydon LLC filed a submission on behalf of major Canadian corporations opposing what it characterized as a “one size fits all” approach to climate-related disclosures. The submission was signed by top legal officers from a dozen companies, including Power Corporation of Canada, George Weston Ltd. (Loblaw’s parent company), Onex Corp., Fairfax Financial Holdings Ltd. and Corus Entertainment Inc.

The task force’s recommendations are now in the hands of Ontario Finance Minister Peter Bethlenfalvy, who has deep experience in capital markets. The Ontario government is reviewing the task force’s report amid growing evidence of the cost of global inaction on climate change. Canadian insurers last year paid out $2.4 billion in losses due to extreme weather events, one of the highest totals on record.

Canadian banks are already facing a move by the Office of the Superintendent of Financial Institutions to require more robust assessing and reporting on the risks they face from worsening climate change. The Bank of Canada has warned that the climate crisis represents a systemic risk to the country’s economy.

While many companies already provide ESG disclosures, the task force noted that “both issuers and investors have expressed concerns about the lack of a standardized framework for this disclosure.” It added that enhanced ESG disclosure can “set the basis for improved access to global capital markets and enable an equal playing field for all issuers.”

SHARE – a non-profit research group that works with institutional investors, including some of the banks’ investment arms – argued in a submission that mandatory climate-risk disclosure and adherence to international standards is essential for Canada to “remain an attractive market for global investors.”

In its letter filed to the task force, the CBA said further work needs to be done before decisions can be made on what framework should be adopted. The bankers’ group also said any Canadian disclosure standard “must consider the importance of oil, gas and other resource-heavy industries to the Canadian economy.”

CBA spokesman Mathieu Labrèche said January 18 that all large banks are working on implementing the climate-related disclosures developed by the Task Force on Climate-Related Financial Disclosures (TCFD), an international group that was headed by former New York City mayor Michael Bloomberg.

The TCFD proposes that companies should not only disclose material risks, but also include analysis as to how they will manage those risks and what impact a successful transition to a zero-carbon economy would have on their businesses.

The CBA position contrasts with the stand taken by asset management operations owned by Royal Bank, the Bank of Montreal and the Bank of Nova Scotia. They signed off on a submission by SHARE that supports the task force’s proposal to mandate adherence to disclosure standards set by the TCFD and the Sustainability Accounting Standards Board.

In the Blakes letter, the companies said they support increased corporate focus on ESG issues and agreed there is a growing interest among investors in those matters. However, they noted that companies are already required under Ontario law to disclose material ESG information: “Accordingly, we do not think it is necessary to incrementally mandate such material disclosures.”

Former Bank of England and Bank of Canada governor Mark Carney – who is currently a special envoy for the United Nations on climate action and finance – is also urging a mandatory approach to climate-risk disclosure.

On the diversity issue, the task force noted that TSX-listed companies are already required to disclose their policies and progress on adding women to their boards and senior executive ranks. However, progress has been slow, it said. According to an Ontario Securities Commission survey, total board seats of a sample group of companies rose to 17% in 2019 from 11% in 2015.

The task force proposed amending the Ontario Securities Act to require companies to set targets for women and Black, Indigenous and people of colour (BIPOCs) and to annually report on progress in meeting those targets.

In the Blakes letter, the corporate legal counsels say they are “mindful” of the need to increase representation among historically under-represented groups. But, they added, the mandating of targets “serves as a blunt instrument to address a myriad of nuanced issues that should instead be tackled within a flexible system” managed by a company’s board and its senior officers.

“One-size-fits-all regulatory directives are problematic and companies should have the freedom to adopt an approach to diversity that is appropriate for their particular context,” the letter said.

Shawn McCarthy writes on sustainable finance and climate for Corporate Knights. He is also senior counsel for Sussex Strategy Group.

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As evidence, take Tiff Macklem. Appointed last June as the 10th governor of the Bank of Canada, his job is to ensure the stability of Canada’s financial system. With the bank’s tradition of political independence, and most of his seven-year term still to come, Macklem can afford to confront the climate threat head-on. 

In a November speech, Macklem declared that “climate change and the transition to low-carbon growth will have profound impacts on virtually every sector of the economy … so we need to understand the implications of climate change for economic growth and inflation.”

Politicians can trade barbs about climate issues, but financial institutions, as stewards of other people’s money, work hard to mitigate financial risks. “Transition risks are often mispriced, and physical risks are generally underappreciated,” Macklem noted. By filling in that knowledge gap, we could save billions in damage and eliminate an existential threat to Canada’s financial stability. 

The 2008 financial crisis pushed climate issues into the background. But the current pandemic, says Macklem, has “focused the public’s attention on extreme global risks and the value of resilience.” A key indicator is the flow of money into ESG funds – portfolios of equities or bonds that prize environmental, social and governance goals equally with profit. According to Macklem, ESG funds in 2020 raised twice as much money as in 2019, which itself tripled the 2018 amount. Canadian ESG issuance has also jumped, Macklem noted, from less than $2 billion in 2017 to almost $13 billion by mid-November.

To get ahead of the climate crisis, Macklem says the Bank of Canada is developing a multi-year research plan focused on climate risks to the macroeconomy and the financial system. It’s also collaborating on transition-mitigation strategies and sustainable finance with global partners such as the International Monetary Fund, the Financial Stability Board, and the Paris-based Network for Greening the Financial System. It’s essential, says Macklem, to be “in the room where it happens.”

And finally, the BoC is “working to bring this analysis home to Canada,” Macklem notes. In November, the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) announced a pilot project working with a few bank and insurance company volunteers, such as TD, RBC, Manulife and The Co-operators. They’ll be developing climate scenarios that will help financial institutions better understand their climate risks under changing conditions. The Bank and OSFI will publish a report, planned for the end of 2021, sharing details on the specific scenarios, methodology, assumptions and key sensitivities.

In a statement, Jeremy Rudin, superintendent of OSFI, said, “Everyone, including the financial sector, will have to adjust to the new reality of climate change. The shape of that new reality will depend on many complex issues and on much that remains uncertain. This pilot project will allow us to refine our focus on the prudential aspects of climate change.”

Knowledge and transparency are power tools, Macklem says: “Scenario analysis will help financial institutions better understand their exposures to transition risks, and this will increase their confidence in their ability to disclose them.”

Then even the politicians will have to pay attention.

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In 2015, the Alberta government announced a phase-out of coal, eliminating coal-powered electricity generation by 2029. This means a lot of energy generation coming off in the next decade, which needs to be rapidly replaced. Over the last few years, surprisingly, utilities have outpaced the regulations in announcing the early retirements of old coal plants and the conversion of many newer plants to natural gas. Recognizing the risk of utilities engaging in a “dash to gas,” Rachel Notley’s NDP government instituted a 30% renewable energy requirement by 2030.

Why worry about a shift to natural gas? The concerns are twofold. First, even though its combustion produces about 50% fewer greenhouse gases (GHGs) than coal, it still produces GHGs. The push for net-zero emissions is happening at all levels of the economy. The Government of Canada has announced that Canada’s entire economy will be net-zero by 2050. In the U.S., Joe Biden’s platform has called for a net-zero electricity sector by 2035 – a mere 15 years away. The projected lifespan of a gas plant is at least 35 years, putting the forecasted closure of the Cascade project in 2058 – incompatible with a climate-transitioning world.

But CO2 is not the only GHG that results from building a gas plant. Natural gas has one main ingredient: methane, which also happens to be a potent GHG. And methane leaks: from the wellhead, from pipelines, from storage facilities. Everywhere. So if the leakage rate is more than 3% of the total methane produced, a gas plant is just as bad for the climate as a coal plant. Alberta has a major methane leakage problem, and recent studies suggest it is grossly underestimated. 

Second, as major GHG emitters, gas plants are subject to a carbon price. At the moment, this expense is zero, since the price is offset by the exact amount of GHGs produced by an efficient gas plant (a full carbon-price exemption for natural gas plants, in effect). Federally, over the next 10 years, this offset drops to zero, so the Cascade plant will likely be exposed to the full impact of a very high carbon price. This makes such an investment risky, at best.

Investors, and in particular pension funds, around the world are increasingly wary of this type of investment. This isn’t just a bad bet for the future; it’s been a horrific bet in the past. A recent study compared returns on fossil fuels versus renewables over the last five years. And surprise! Renewable energy paid back handsomely compared to fossil fuels, and was less volatile. As investors wake to the reality of the carbon transition, this difference will be only more apparent. Mark Carney, former head of the Bank of Canada and the Bank of England, has stated that pension funds that ignore these investment realities risk ending up with portfolios full of worthless assets. And he’s pretty smart.

So not investing in fossil fuels is not only the moral thing to do, it is also the financially wise thing to do.

The people at OPTrust have begun to recognize this. They’ve created multiple reports, with pretty graphs and rosy statements about supporting the Paris Agreement. But this statement rings out: “Emission reduction targets are not today’s objective.” Like many other organizations, they are unwilling to walk the talk.

Ontarian pensioners deserve better, and they should demand it. They deserve investments they can be proud of, that support their growing grandchildren, and that support a survivable planet.

Joe Vipond is an emergency physician in Calgary and the president of the Canadian Association of Physicians for the Environment.

Adam Scott is director of Shift Action for Pension Wealth and Planet Health – an initiative working to protect pensions and the climate by bringing together beneficiaries and their pension funds to engage on the climate crisis. 

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The Large Employer Emergency Financing Facility (LEEFF) program had some notable strings attached: to access $60 million or more in loans, companies would have to agree to restrictions on executive pay and contentious share buybacks. One of the most forward-looking conditions included a requirement that in exchange for financing, companies would have to deliver annual reports on the financial risks and opportunities they face related to the climate crisis, including how the company plans to align with the government’s net-zero greenhouse gas emissions target for 2050.

Why does this matter? Since LEEFF was launched, we’ve seen a number of major announcements related to climate, particularly in Canada’s energy sector. In late July, Deutsche Bank became the latest bank to announce it will not finance any more oil sands projects. France’s Total took a US$8 billion write-down largely on its carbon-heavy Canadian oil sands assets and announced it would stop investing in capacity expansion projects in the oil sands.

Pressure on Canada’s energy sector to decarbonize and chart a credible path into a low-carbon future is only going to grow. COVID-19 has not slowed this down; if anything, it has ratcheted it up.

The federal government’s push for climate disclosure is critical because global investors are increasingly calling for climate-related financial information. Transparency on climate risk is vital for making sound business decisions in light of the climate crisis. Doing so can set companies and sectors up for success in a climate-adjusted future. However, there are still too many companies that don’t recognize the opportunity it presents.

The LEEFF requirement for climate disclosure has faced pushback from some parts of the oil and gas sector, with organizations like the Canadian Association of Petroleum Producers calling the LEEFF climate requirement “exceptionally onerous” and claiming its members won’t use it “due to the nature of the restrictions.” Pundits like John Ivison at the National Post dismissed it as “airing grievances over the oil and gas sector.”

That’s unfortunate, because the idea that climate disclosure is an unnecessary or onerous exercise demonstrates a lack of understanding of what a credible climate risk disclosure is, what global investors and regulators are looking for, and how it can usefully inform business strategy in the coming carbon-constrained economy.

At a time when Canada’s energy sector is under growing investor scrutiny for its climate impact, Canadian companies should be embracing, not attacking, climate disclosure.

Last year, the Bank of Canada warned of the lack of climate risk disclosure in Canada and urged widespread adoption of a framework developed by the Task Force on Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg. The TCFD framework sets out a path for companies to disclose the financial implications of climate change on their businesses, and to do so in a way that is comparable across companies. The framework has emerged as the global standard for corporate climate disclosure.

Since the launch of TCFD in 2017, more than 1,000 companies have signed on as supporters, including well-known Canadian companies like RBC, Manulife and Suncor. Momentum continues to grow. The world’s largest asset manager, BlackRock, says it now expects its portfolio companies to disclose in alignment with TCFD.

As governments around the world, including Canada, commit to net-zero greenhouse gas emission targets by 2050, it’s becoming increasingly imperative for businesses to articulate how they fit into a low-carbon future. Failure to do so puts shareholder value at risk as investors seek to mitigate climate risk and exit carbon-intensive businesses. TCFD-aligned reporting enables companies to make the case for why they are worthy of investment despite the risk of climate change. As former Bank of Canada/Bank of England Governor Mark Carney said earlier this year, “the transition to net-zero is creating the greatest commercial opportunity of our time.”

Companies are often already doing a number of actions that could be disclosed in TCFD-aligned reporting but that are not explicitly highlighted in existing reporting. Whether it’s a board committee that includes climate risk in its mandate, a management team that has responsibility for climate issues, or product development focused on “green” or low-carbon products – these are all actions that TCFD is designed to highlight.

Another opportunity presented by the LEEFF requirement is that by virtue of operating in Canada, businesses have climate advantages they may not even realize. A regulatory environment that includes carbon pricing, or access to low-carbon electricity in provinces like B.C., Ontario or Quebec, helps limit the transition risk the climate crisis presents for business in the shift to a low-carbon economy. These are made-in-Canada climate advantages that businesses should be highlighting more forcefully. TCFD reporting brings that to the forefront.

This isn’t just about the energy sector. We need far greater disclosure across all aspects of the Canadian economy. Disclosing on climate change should be seen not as a burden but as an opportunity to prepare for the future – one that companies and investors around the world are increasingly adopting.

As difficult as things may seem now, the impact and disruption that climate change will bring far outstrips anything COVID-19 can do. The climate crisis is an all-hands-on-deck challenge, and the federal government is right to use any and all opportunities to get Canadian businesses to enhance their climate disclosure. Canadian companies should get behind the push for greater climate disclosure and recognize the opportunity it presents for them.

Kevin Quinlan is a senior advisor with Mantle314, a Toronto-based consulting firm dedicated to climate change.

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Australia is the latest country to move forward with climate stress tests. It follows the lead of the Bank of England, which released a detailed discussion paper in December outlining how it intends to run its own tests on banks and insurers.

Canada’s financial industry should take notice. The Bank of Canada announced last year that it intends to run climate stress tests in the future – although when exactly, we don’t know. What could Canadian banks and insurers expect?

We can look to the UK to get an idea.

The UK’s proposed scenarios are by far the most detailed of any central bank and provide important insights into how financial regulators view climate risk. The goal of the UK climate stress test is to understand the financial exposure of banks and insurers to climate-related risks. The test covers both physical risks, such as droughts, floods and extreme weather events, and transition risks, such as sharp increases in carbon prices or changes in unemployment or corporate bond yields resulting from market or technological disruptions.

The Bank of England’s framework consists of three scenarios. The first two involve pathways whereby the world, over a 30-year period, reduces greenhouse gas emissions to limit global warming to below 2C.

The first scenario is an orderly one, where government policies move in a clear direction and firms have time to adapt and manage the transition.

The second scenario is “late policy action.” After a decade of delay, governments are compelled to act. They rapidly implement sweeping policy changes in an effort to dramatically reduce emissions. Asset prices see a sudden, sharp re-pricing.

In the third scenario, the world fails to take steps to limit warming below 2C, resulting in devastating impacts: extreme heat, droughts, floods, forest fires and storms at a level we have not seen before, all with horrific implications for the health and well-being of our economy and natural environment.

UK banks and insurers must run their balance sheets through the lens of each scenario, assess its financial impact and aggregate it across their various portfolios. Following the first phase, the Bank of England will look for areas where banks and insurers diverge in their forecasts and go back to them with adjusted information. If insurers disclose that they expect to phase out certain types of insurance, for example, banks need to revise their lending plans accordingly.

There are also qualitative aspects to the stress test. Participants need to outline what management actions they would take to mitigate risk and position their businesses to thrive in the transition to a carbon-neutral economy. The stress test recommends that companies use the Task Force on Climate-related Financial Disclosures (TCFD) framework to explain how climate change will affect them.

Climate scenarios can’t be predicted based on historical patterns; they are constantly evolving, and there is no one “right” answer. Evaluating the disclosure of climate risks is challenging because businesses often use different data sets.

The Bank of England aims to overcome this barrier by laying out scenarios with specific data points, allowing for a much closer apples-to-apples comparison. The direct nature of the stress test means firms are forced to confront – and disclose – what extreme but plausible climate scenarios could mean for their balance sheets, making it easier for the Bank of England to identify systemic risk.

As the bank’s governor, Mark Carney, said at the launch of the COP26 Private Finance Agenda this week, corporate disclosures need to move beyond the static (current emissions) to the strategic (plans to reduce emissions).

As pressure builds on businesses to disclose what they’re doing about climate change, the UK’s stress test provides a glimpse into the types of climate-risk questions Canadian banks and insurers need to be able to answer. Canada’s economy is far more carbon-intensive than most, and scrutiny from investors and regulators about climate risk is only going to grow.

Companies that can articulate how their business models will support – and thrive – in a low-carbon economy will prosper. Those that can’t coherently explain their plans for a climate-adjusted future can expect to be punished by investors.

In a research note on climate change published in November, the Bank of Canada said its first step is to evaluate the exposures of Canadian financial institutions to climate-related risks. The Bank of England is sharing its stress test findings with the Network for Greening the Financial System – of which the Bank of Canada is a member. There’s no reason Canada’s banks and insurers can’t get ahead of the curve.

It’s not a matter of if, but when: climate stress tests are coming to Canada. For banks that want to demonstrate leadership and understand what climate change could mean for them, the UK’s climate stress test is a good place to start.

Kevin Quinlan is a senior advisor with Mantle314, a Toronto-based climate change consulting firm.

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But with the Liberals preparing for their first minority-government budget, Morneau is under growing pressure to act on the panel’s call for better data and clearer rules on climate-related finance and other incentives to drive capital into emerging low-carbon technologies.

The government remains committed to acting on sustainable finance and will “consider the [panel’s] recommendations very closely,” Morneau’s spokesperson, Pierre-Olivier Herbert, said in an interview. He would not comment on what measures are being considered for the budget.

The Liberals have embraced the aim of “net zero” carbon emissions by 2050 and plan to enshrine that goal in legislation with a series of five-year interim targets. Environment Minister Jonathan Wilkinson said sustainable finance is an important component of the government’s commitment to reach net-zero greenhouse gas emissions by 2050, and that he and Morneau “will have more to say on [the panel’s] recommendations in the coming months.”

“The right finance and investment structures can help Canadians and governments fight climate change and transition to a low carbon economy,” Wilkinson said in an emailed response.

“Globally, we are seeing significant movement to consider climate impacts in investment decision-making and in the mobilization of capital.”

Sources in government and the private sector say they expect the budget will provide discussion of the government’s approach to climate-related finance, though it remains unclear the degree to which it will include concrete measures.

In June 2019, a federally appointed expert panel on sustainable finance issued a report with 15 recommendations that would put climate change considerations in the mainstream of the country’s financial system.

The panel was chaired by former Bank of Canada deputy governor Tiff Macklem and included senior executives from the Canada Pension Plan Investment Board and Quebec’s Caisse de dépôt et placement, as well as a member of the Royal Bank of Canada’s board of directors.

Wilkinson met on January 22 with some members of the expert panel and recommitted to action, though he did not provide specifics.

There remains considerable resistance in some quarters of the financial community to the notion that asset managers and financial institutions must take into account long-term environmental considerations when making their investment decisions. Former Conservative finance minister Joe Oliver, writing in the Financial Post, criticized the Macklem panel, saying its proposals would “undermine a fundamental underpinning of the market economy, with negative consequences for profitability, capital formation and wealth creation.”

In a pre-budget submission, the national Chartered Professional Accountants (CPA) association urged the government to implement the recommendations of the expert panel that fall within federal jurisdiction and to encourage the private sector and provinces to act.

CPA highlighted two key recommendations from the Macklem panel: that the government map a long-term plan to achieve a low-carbon economy, sector by sector, complete with the amount of investment that would be required to achieve it; and that Ottawa establish an information and analytics centre to provide data on a broad range of climate-related issues, including private-sector targets, actions, risks and opportunities.

The two measures would give businesses and investors greater certainty and confidence in making decisions about climate-related risks and opportunities, Rosemary McGuire, CPA’s director for external reporting and capital markets, said in an interview.

Sean Cleary, executive director of the newly launched Institute for Sustainable Finance, housed at Queen’s University, said the federal government should also take up the Macklem panel’s recommendation to clarify the concept of fiduciary duty for pension funds, corporate boards and finance industry players.

The Macklem panel noted that many people in the financial sector regard environmental issues such as climate change as “non-financial” and therefore outside the scope of their fiduciary responsibility to achieve the best risk-adjusted returns.

Cleary said the notion is inconsistent with clear warnings from the Bank of Canada and global bodies like the Bank for International Settlements (BIS) – the global association of central banks – that climate change represents a major risk to corporate balance sheets and national economies.

The BIS issued a report on January 20 warning that climate change could have seismic impacts on the world’s financial systems.

Since the Macklem panel reported last June, there has been increased attention paid to sustainable finance, including a statement from the world’s largest asset manager, BlackRock, that it would screen all investments for climate-related financial risk.

However, on a panel at the World Economic Forum in Davos in January, Morneau talked about a “balanced approach” to budget-making but did not address one of the conference’s more prevalent themes: the risks that climate change poses to business and national economies.

His silence on the subject of sustainable finance is a “little discouraging,” Cleary said. “It’s a really important part of the process” for meeting Canada’s climate goals.

Shawn McCarthy writes on sustainable finance and climate. He is also senior counsel for Sussex Strategy Group.

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Shadowy figures who monitor inflation and money supply, operating at arm’s-length from the politicians, central bankers are best known for deciding whether interest rates should go up or down. But with their “buck stops here” responsibility for economic oversight, they are also beginning to take responsibility for the long-term risks of climate change. And their autonomy allows them to make tough policy pronouncements that most politicians would rather avoid.

In November, Sweden’s central bank ruffled feathers around the planet when it announced it had sold off its bond holdings from Alberta and two Australian states, Queensland and Western Australia, because their greenhouse-gas emissions are too high.

Previously, Sweden’s Riksbank had invested a hefty 8% of its foreign-exchange reserves in Australian and Canadian government bonds, “as they give a relatively high yield and a good diversification of risk,” said Deputy Governor Martin Floden. But now, in a country that generates more than half of its energy through renewable sources, that mercenary attitude is no longer good enough.

Describing the climate crisis as “one of the greatest challenges of our time,” Floden said, “We can contribute to the climate work to some extent by giving consideration to sustainability aspects when investing. We are now doing this by rejecting issuers who have a large climate footprint.”

Floden noted that greenhouse gas emissions rates often vary between different parts of a country. The fact that GHG intensity is three times higher in oil-producing Alberta than in Ontario or Quebec convinced the Riksbank to sell off its Alberta bond holdings.

Of course, Alberta pushed back against Floden’s announcement. A spokeswoman for Premier Jason Kenney declared that “if the Swedish central bank is really concerned with making a difference on climate change, they need to be investing more in ethical producers such as Alberta which have shown dramatic gains in reducing emissions.”

When Moody’s credit-rating service downgraded Alberta’s credit rating for similar reasons this week, Kenney called the agency “completely factually wrong” for singling out Alberta’s oil and gas as carbon intensive.

But the pressure on carbon-producing regions is likely to grow. The Bank of Canada recently released a research paper that declared climate change poses numerous “physical risks to Canadians and the Canadian economy.” These threats include socio-economic changes such as disruption of household budgets and labour supply, economic transition risks, and stranded assets such as oil and gas fields, coal plants, transportation assets, real estate, and heavy industry.

Basically an economist’s version of climate striker Greta Thunberg’s warning, “Our house is on fire,” the report indicates the bank will be paying increasing attention to understanding these risks and finding ways to mitigate them.

Meanwhile, the world’s most prominent central banker has just joined the climate wars. Former Bank of Canada governor Mark Carney, who has championed low-carbon policies in his recent role as governor of the Bank of England, is taking on a new job this year as the United Nations’ special envoy on climate action and climate finance.

Carney’s mission: push the financial sector to take proper account of the risks posed by climate change. “The disclosures of climate risk must become comprehensive,” he says, “climate-risk management must be transformed, and investing for a net-zero world must go mainstream.”

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When asked about institutional investors’ growing focus on climate change, Premier Kenney brushed it off. “Flavour of the day,” he told the Globe. There are more important things for investors to look at.

If the financial risk from climate change is a flavour of the day, the Premier of Alberta should prepare himself for one very long day.

The threat of climate change to the stability of the world’s financial system is increasingly a top concern for investors around the world. What was once considered a niche issue is now regularly cited by central bankers and CEOs of the world’s biggest companies as a major threat—not in the future, but today.

With national governments failing to move at the speed necessary to address the climate crisis, the financial sector is driving the shift towards a low-carbon economy. Sustainable finance is directing billions of dollars towards cleaner, greener businesses—and those who ignore or deny what’s happening will lose out on new business opportunities.

For a ‘flavour of the day,’ climate risk has made a lot of appearances amongst the most powerful banking and investment institutions around the world. Consider that in the first six months of this year:

● The Bank of Canada declared, for the first time, climate change to be one of six significant vulnerabilities to the stability of Canada’s financial system in its annual Financial System Review.

● The Bank of England announced a series of climate stress tests for insurers.

● 477 investors managing more than US $34 trillion in assets signed an open letter calling on G20 leaders to price carbon, rapidly decarbonize and end support for thermal coal.

● BlackRock, the largest asset manager in the world, released research showing investors are underpricing climate risk in US bonds, commercial real estate and utility investments.

● New York State’s Common Retirement Fund, the third-largest public pension fund in the US, will increase its contribution to a Sustainable Investment-Climate Solutions Program from $10 billion to $20 billion.

These are professional economists and money managers who, when presented with the evidence, are making the calculated decision to shift money out of industries linked to climate change. Are we to believe that Premier Kenney knows something they don’t?

Even leaders in some of the most carbon-intensive industries in the world are speaking out. Shell CEO Ben van Beurden said a ‘net zero’ target on emissions is the only way to go. BP’s head of strategy told Bloomberg News that some of its oil assets “won’t see the light of day” due to the threat of climate change and the demand from investors for lower-emission projects.

In case you think these statements are simply the musings from investors outside of Canada who don’t understand our economy or the importance of the energy sector, think again. Alberta’s very own AIMco, which is responsible for investing the pensions of Albertans and has more than $100 billion in assets, signed an open letter calling for an acceleration of investment into the low-carbon economy and scaling up efforts to meet the Paris Agreement climate targets.

There is an enormous opportunity for Alberta, and by extension Canada, in embracing sustainable finance. The move to create transition bonds, whereby investors can put their money into businesses seeking to reduce emissions in high-intensity industries, stands to be of huge benefit to Canada’s oil and gas sector. Rather than dismissing sustainable finance, Premier Kenney should be championing these types of new financial tools.

In 2019, the market signals around climate risk are undeniable, and the global shift towards low-carbon industries can’t be ignored. Climate risk is a flavour of the day? If that’s the case, Premier Kenney should brace himself for a very long 24 hours. This flavour is not going anywhere.

Kevin Quinlan is a senior advisor with Mantle314, a climate risk management consulting firm.

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