Environment Committee on May 23rd, 2024

[The Chair, Liberal, Francis Scarpaleggia]

That's perfect.

Thanks.

Go ahead, Ms. Pauzé.

[Monique Pauzé, Bloc, Repentigny, QC]

Thank you very much, Mr. Chair.

I'd also like to thank all the witnesses.

My questions are for Mr. Senécal and Mr. Rhéaume.

It's undeniable that your company stood out from the crowd by launching the first managed green bond fund in Canada. The investments you select have to meet very strict criteria, based among other things on compliance with the Climate Bonds Taxonomy.

My first question is: Are you familiar with Bill S-243, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts, sponsored by Senator Rosa Galvez?

You're indicating that you are.

Given the market you work in, do you think this bill would have a positive impact on the stability of Canadian financial markets?

[Simon Senécal]

The Climate-Aligned Finance Act sponsored by the senator provides a legislative framework for disclosure that would go beyond the Office of the Superintendent of Financial Institutions' guideline B-15, and even farther beyond what is coming from the International Sustainability Standards Board.

If the banks are required to provide a higher level of disclosure about their investment and loan portfolios in terms of financial risks resulting from climate change, then of course they would be required to disclose their investments in, and loans to, the fossil energy industry.

Here again, connections were made between disclosure and disinvestment. I believe that disclosure is to be commended because it offers investors a choice.

As for pressure being applied to achieve our goals, whether through disinvestment, commitment or personal decisions, we need all of these tools to make a change in an economy that has numerous stakeholders.

When all is said and done, AlphaFixe Capital supports the bill to enact the Climate-Aligned Finance Act, because we believe in more disclosure.

[Monique Pauzé, Bloc, Repentigny, QC]

So it's better to have more transparency.

Do you feel that the Canadian financial system is ready at this time to face the risks involved in climate change?

[Simon Senécal]

With respect to the risks related to climate change, it's like seeing the Canadian market as—

[Sébastien Rhéaume]

Basically, I think the Canadian financial system is healthy and adequately capitalized. It's difficult to accurately quantify the risks you're alluding to. But a lot of work still needs to be done, including in terms of disclosure, as you mentioned. We, the investors, are continually monitoring and assessing risks. The more information we have, the better prepared we are to quantify risks and achieve sound performance.

As to whether the Canadian system has the tools it needs now, I'd say yes, but—

[Monique Pauzé, Bloc, Repentigny, QC]

Well, at our first meeting on the topic, another witness said that the Canadian economy wouldn't do as well as we would like, and that our GDP and productivity were either at a standstill or tanking, with no improvement in sight. Clearly, you don't read the situation that way.

[Sébastien Rhéaume]

I wouldn't necessarily link that to climate change. There are challenges in Canada, including productivity issues, but our financial system is very robust. On that side of things, we're not particularly worried.

[Monique Pauzé, Bloc, Repentigny, QC]

I'd like to hear more about your green bond fund, which helped to finance renewable energy projects. Which approach do you think would decarbonize electricity production in Canada most quickly?

[Simon Senécal]

While it's true that green commitments can help fund renewable energy projects, there are places in Canada where the price of electricity can't be set in advance because it's determined by the market, and that increases the risk level for funding such projects. There are mechanisms like power purchase agreements that can establish the price in advance and make projects economically viable, with the capital allocated afterwards.

For example, in those parts of Canada with the greatest potential for solar energy production, provincial regulations disallow funding for such projects for the time being, because they are not economically viable in comparison to other projects that do not promote clean energy.

In these instances, regulating the price of electricity would be incredibly beneficial.

[Monique Pauzé, Bloc, Repentigny, QC]

I'd like to return to the issue of financing. You were saying that the financial system appeared to be relatively sound. And yet OECD documents on biodiversity point to poor capital allocation. We all know that climate change is harmful to biodiversity. The OECD also mentions the exposure of the financial sector to biodiversity-related risks, and harmful impacts on nature that can also negatively affect social well-being.

When I asked you earlier whether the system was ready to cope with climate change, I was thinking of what the OECD was saying.

[Simon Senécal]

For biodiversity-related risks, I'll refer to what the insurance industry has to say about them, because they know all about physical risks. Climate risks are more readily quantifiable than the potential domino effect of these events on biodiversity, not to mention the impact of human and corporate behaviour on the environment. The domino effect on biodiversity is infinite. I believe these risks are much more difficult for scientists to quantify than climate risks—

[The Chair, Liberal, Francis Scarpaleggia]

I'm sorry, but Ms. Pauzé's speaking time has run out.

It's over to Ms. Collins now.

[Laurel Collins, NDP, Victoria, BC]

Thank you, Mr. Chair.

I guess I want to start off by addressing one of the comments that was made by the witnesses around climate hysterics.

Hysteria refers to something that is wildly emotional. It comes from the Greek word for womb—of the womb. It is used in ancient Greek to refer to things associated with women. I hope you'll forgive me if I get emotional. Climate emergencies are not gender-neutral. The degradation of ecosystems disproportionally impacts women and girls, and I am wildly emotional. This is the existential crisis of our time. To hear that asking for high ambition is climate hysteria makes we wildly emotional—absolutely.

When I think about my womb, the two children I bore from that womb and what future we are leaving them, I am wildly emotional. It's not surprising to hear this from someone who has written articles that are pro-life. I think that we need to think about the intersection of gender and the climate crisis. I hope that the people around this table and the people listening will refrain from using language like “climate hysteria”. We are facing a “climate emergency”.

I'm going to start off my questions with Mr. Clark. I appreciated your comments about the existential crisis that we're facing. A handful of insurance companies are already setting net-zero goals and climate transition plans. I'm curious how legislative and regulatory mechanisms support insurance companies already doing this work.

How do we get the ones who aren't—the majority, who haven't committed to net-zero goals—headed in that direction?

[Jason Clark]

When we look at our members and we look at, in particular, the work we have been doing with OSFI on climate risk disclosure, which I think is incredibly important.... In March 2023, OSFI finalized its draft guideline on B-15, and it established its expectations for climate-related risk disclosures.

In terms of where we are right now, our members are currently undertaking, and we're finalizing—they'll be conducting it later this year—climate risk analyses on their full operations. It is incredibly important for us in order to ensure the soundness of our business so that we're delivering effectively on that.

The one thing I want to mention is that, when we think about net zero and the investment portfolio of property and casualty insurers, which is slightly different, we have various restrictions in terms of investment concentration. When you look at, let's say, last year, 2023, you'll see that our invested assets equalled $139 billion, and 72% of that was bonds. OSFI puts additional limitations on us to not overly invest in a single company or a single-industry series of companies in order to ensure that we have the reserves available to pay out to policyholders.

I would say that it's incredibly important. We are very seized with climate change, particularly the physical-risk side of things that we're already seeing.

[Laurel Collins, NDP, Victoria, BC]

The climate crisis poses an existential threat to our society, but it also poses an existential threat to insurance companies because this is becoming more and more high risk. We're seeing devastating wildfires, flooding and communities impacted so severely by extreme weather. It feels as if those costs are being off-loaded to consumers. It feels as if there are communities that are going to become uninsurable. That really concerns me. At the same time, insurance companies are also investing in and underwriting fossil fuel projects.

At what point does investing in and underwriting fossil fuels violate insurers' fiduciary obligations to their policyholders, especially those who are facing increased risk due to the climate crisis?

[Jason Clark]

I'm not able to speak to any specific investment or any specific policy that's been underwritten by our members. That's under the Competition Act. I can't speak to that.

However, when you're talking about the focus on, in particular, the physical risk and the threat and the challenge that we face from a pricing perspective, I think that's very real. We've seen it quite clearly in the last few years. StatsCan has just released updated, new data on the impact that is having directly on insurers. Ultimately, it is also having an impact on consumers in this country.

The rationale for that is what I mentioned in my remarks. The country is becoming a riskier place. Essentially, policies are priced on risk, and as community or household risk rises without corresponding investments to make sure that we're mitigating that risk, which is incredibly important—

[The Chair, Liberal, Francis Scarpaleggia]

I have to stop you there.

In the next round, I'm going to have to reduce the time by 20%, so it will be four minutes and two minutes. I'd go longer, but we didn't get an extension of resources today. We did ask.

Mr. Leslie, you have four minutes.

[Branden Leslie, Conservative, Portage—Lisgar, MB]

Thank you, Mr. Chair.

Mr. Keeley, in your opening statement, you mentioned that ESG investment strategies have broadly underperformed more diversified strategies by a specific number of 250 basis points per annum over the past five years.

I'm curious. In terms of real dollar values, what does that actually look like? If there were to be a Liberal-NDP-Bloc imposed ESG mandate, how many billions of dollars would you expect the Canada pension plan, the most important safety net for Canadians, to potentially lose in the coming years?

[Terrence Keeley]

Right now, the Canada pension plan, if I understand it, is worth about $650 billion Canadian. You can take 2.5% of that per year and subtract it from what it would otherwise be, if you continue in the ESG strategies. That, of course, amounts to tens of billions of dollars in less than a decade. It's quite a meaningful sum of money.

[Branden Leslie, Conservative, Portage—Lisgar, MB]

Thank you.

Globally speaking, are there examples of other nations that have tried to achieve environmental targets via financial systems, and what have the results of those been?

[Terrence Keeley]

Thankfully, no....

There has been a renewed focus on fiduciary rules. I was asking one of my Canadian friends whether or not Canada has the same fiduciary rule as they do in the United States. Fiduciary rules, largely speaking, preclude investment strategies that are suboptimal—that is to say, achieve poor risk-adjusted returns. I'm not exactly sure what the Canadian equivalent is of a fiduciary rule. However, if you have one, it solves a lot of your problems.

[Branden Leslie, Conservative, Portage—Lisgar, MB]

Thank you.

You mentioned in your opening remarks that “energy security is part of national security”. Obviously, we've had many nations come to Canada looking for clean, Canadian liquefied natural gas, for which our government has decided there is no business case, as we've made it so difficult for projects to move forward.

In your view, would imposing an ESG mandate on financial institutions or pension funds make it even more difficult for Canadian energy projects to access funding, potentially?

[Terrence Keeley]

It almost certainly would be counterproductive in the extreme. That is to say, if you want to create a greener world—which I do—you need to turn brown companies green. You need to stop consuming fossil fuels and switch to a much cleaner energy mix. In Canada's case, that would be more nuclear.

Climate change is a huge challenge, but describing it as an existential threat is an excellent example—I won't use the word “hysterical”—of gross exaggeration that actually clouds clear thinking on the matter.

[Branden Leslie, Conservative, Portage—Lisgar, MB]

Thank you.

I recognize that Canada has some of the most stringent environmental and labour regulations in the world. I'm a believer that we should be exporting our bounty of natural resources around the world, rather than having things produced in countries such as—as you mentioned—Russia, China, India, Iran or Venezuela.

Is it preferable, in your view, to produce more in this country versus the countries I just listed or others around the world?