Environment Committee on May 9th, 2024

[Laurel Collins, NDP, Victoria, BC]

Thank you, Mr. Chair, and thanks again to the commissioner for being here.

I'm curious. Would you agree with the statement that OSFI is compelling firms to quantify and disclose their climate risks without actually taking action to limit the sources of that risk in the first place?

[Jerry V. DeMarco]

We haven't done a follow-up audit yet on how they've implemented our recommendations. I've been given a summary of the steps they've taken, which I summarized very briefly in my opening statement, but I would be hesitant to answer what their current approach is based on the steps they took in response to our audit without having done that follow-up work. I can't say that I can answer that question directly.

[Laurel Collins, NDP, Victoria, BC]

Would that statement have been fair when you did your audit?

[Jerry V. DeMarco]

Can you say the statement again just to make sure?

[Laurel Collins, NDP, Victoria, BC]

Would it be fair to say that OSFI is compelling firms to quantify and disclose their climate risks without actually taking action to limit the sources of that risk in the first place?

[Jerry V. DeMarco]

At the time of our audit, the guideline was still a draft, I think, so they weren't compelling anything new on climate. Climate was always a regular material risk that could be considered under the regular list of risks, so I would say the answer is that they likely were not compelling as of the date of our audit.

I wish I could tell you exactly where they are at now, but I think it would be better to hear it directly from OSFI if they can tell you what progress they've made since two years ago or a year and a half ago.

[Laurel Collins, NDP, Victoria, BC]

Thanks so much.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you.

We'll go to Mr. Kram for four minutes, please.

[Michael Kram, Conservative, Regina—Wascana, SK]

Thank you, Mr. Chair.

Thank you to the witnesses for joining us yet again this week. You're some of our best and most reliable customers, if I can put it that way.

I want to make sure we're on the same page when it comes to some of the terms we're using. Mr. DeMarco, in your opening statement, you used the term “climate risks”. What's the definition of a climate risk?

[Jerry V. DeMarco]

The question is not long enough for me to shuffle through all of my pages to find the definition, but I'll do something easier. We have the two risks, physical risks and transition risks, summarized in our report, and Monsieur Lequain can probably elaborate on that.

[Mathieu Lequain, Principal, Office of the Auditor General]

Physical risk is when, due to a weather event or a climate-related event, there is a disruption in a business model or a disruption in stock, which has an impact because the capability of this company to pay back, for example, its financial commitment, could be jeopardized. This is, really, due to the physical impact of a climate.

There is also what we call the transition risk, which is that, when there is emerging new technology, usually what's happening in the marketplace is there is repricing of some assets. For example, now you see that solar is becoming cheaper, so it's becoming a competitor, in some instances, in producing electricity as compared to a more traditional way of producing electricity. That has an impact on the business model of some companies and, again, it can impact their capability of paying back their financial commitment.

[Michael Kram, Conservative, Regina—Wascana, SK]

Okay, so if you have a business that's at physical risk of an extreme weather event, which is what we're talking about here, is that something...? I think that any investor doing their due diligence would do that, regardless of any environmental policies. If there are checks and balances in place before you build a building that's in an earthquake zone, isn't that already being done by private sector investors, independently of government policies?

[Jerry V. DeMarco]

A self-interested actor is supposed to take in all of those risks, factor them in and make rational decisions. If that always worked, we wouldn't have the tragedy of the commons and we wouldn't have government regulators. OSFI wouldn't be there for any of the traditional risks because they would already be factored in. However, we do have market failures, such as externalities that occur, and usually a regulator or a self-regulating body will come in to try to address those sorts of things. OSFI has been doing that for years, obviously, because banks are important to Canada's economy and we don't want to see them fail, so they're there to stabilize the macroprudential framework.

Climate is just the most recent identifiable risk, along with other things, like cybersecurity and so on, that have surfaced and have to be factored in. Will the market factor them in perfectly efficiently and avoid market failures without a regulator like OSFI? That's an interesting question. You'd have to ask an economist about that, an expert in the field.

[Michael Kram, Conservative, Regina—Wascana, SK]

We're talking about climate-related emissions and exposure data. If you have a company that is going to offer up its climate exposure data, that implies they must have an understanding of how much they're at risk from, say, an extreme weather event. Is that true?

[The Chair, Liberal, Francis Scarpaleggia]

Be brief, please, Commissioner.

[Jerry V. DeMarco]

They would want to disclose their risks associated with physical risks, such as a flood or a storm, and their risks associated with transitional risks in terms of market changes, as Monsieur Lequain just explained.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you.

Go ahead, Mr. van Koeverden.

[Adam van Koeverden, Liberal, Milton, ON]

Thank you.

Welcome back to committee. We appreciate, gentlemen, your returning and providing all of your insights, perspectives and expertise.

I have a really brief question about greenwashing because I'm interested in it as well. My friend and colleague Monsieur Deltell talked about carbon credits. I've purchased carbon credits before. I don't feel like I'm greenwashing. I don't know if they're necessarily a form of greenwashing as much as when a bank suggests that their mutual funds or bonds are so much greener than another's, when they're clearly not.

Can you explain to me the difference, or the definition, between greenwashing on the side of a consumer choosing to offset versus a business tricking consumers?

[Jerry V. DeMarco]

Yes. A poorly constructed carbon offset could be a form of greenwashing if it doesn't have the attributes of additionality and permanence. Not all offsets lack those things, but some do. It could be argued that those that do not have those attributes of additionality and permanence are de facto greenwashing. If you design the offset well, then no, it wouldn't be greenwashing.

[Adam van Koeverden, Liberal, Milton, ON]

Cool. That's super helpful. Thank you.

I have another question about bonds. Government debt is something that I think a lot of Canadians are concerned about, and rightfully so. They ought to be. They ought to have questions about government debt. I count myself among them. However, I also know that when government creates debt, it sells bonds to people. Oftentimes folks will say, “Oh, the payments that governments make on debt go off into the wind”, as if we're shooting interest into the sun or something like that. It doesn't disappear. It goes into people's portfolios. It goes into mutual funds.

I don't know how green bonds really work in that context. I've heard people talk about Canada's new green bonds in the context of our new $5-billion bond. I'd love to hear your reflections on how a green bond works in the economy and how more inclusions, or perhaps more exclusiveness, in the bond would make it more effective.

[Jerry V. DeMarco]

Yes. This relates to taxonomies in terms of what's eligible for a green bond and whether it's affecting the change that you were hoping for in terms of it financing public transit or tree planting or whatever the case may be.

We haven't done a performance audit of the green bond system at the federal level, so I wouldn't be able to conclude how well it's going in the initial stages from a performance audit point of view. Obviously, we have the financial side in terms of whether the numbers add up and so on, but we haven't done any performance auditing of that new system. I can't tell you how well it's designed or how well it's being implemented in the early stage, but it's becoming more and more common across the world, as you know.

[Adam van Koeverden, Liberal, Milton, ON]

Would you say that our step to take on a green bond program as an approach, as we did with the 7.5-year $5-billion green bond, was a good step in the right direction or a good start?

[Jerry V. DeMarco]

That was a policy choice of the government. Not having done any audit of the design of it, I'd be hesitant to say yea or nay on that.

[Adam van Koeverden, Liberal, Milton, ON]

How long would it need to be active in order to provide you with good enough data? I presume that after a year or two of a 7.5-year bond yield, it wouldn't necessarily provide enough data, or am I wrong?

[Jerry V. DeMarco]

It depends on what the bond is being used for. If it's going towards very long-term projects where no results are available, then you would have to wait quite a while for it to be ripe enough to audit from a performance and result-oriented perspective.

We could audit it early on from a design perspective, which we've done with some other areas. It all depends on which performance indicators we want to look at, design ones or implementation ones.