Environment Committee on May 23rd, 2024

[Bryan Detchou]

If I may jump in very quickly, one thing we've been advocating for very consistently is that certainty and predictability. We've seen a number of projects put on hold for a number of different reasons, and I think one of the main reasons for many is that lack of certainty and predictability.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much.

We have Mr. Kram for four minutes.

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

Thank you very much, Mr. Chair.

I would like to introduce the witnesses from AlphaFixe Capital to our witnesses from the Chamber of Commerce. I would like our witnesses from the Chamber of Commerce to meet our witnesses from AlphaFixe Capital.

It seems that AlphaFixe Capital is a very successful green investment firm with billions of dollars in green bonds and green investment funds. It seems that the Canadian Chamber of Commerce has many good green investment opportunities.

I can't help but wonder why you guys are spending your afternoon talking with a room full of politicians instead of talking to each other about all of these investment opportunities that you could work together on, instead of asking for more government regulations. Wouldn't it be better if politicians stepped back and let you guys do your thing, and we could have a greener, better economy as a result?

[Sébastien Rhéaume]

We're here to try to advance some of the challenges we are facing. As successful as we were in our green bonds, the transition has been a much tougher challenge, and we are trying to replicate the success factors in the green bond to the transition world.

That's why we're here. It's just to say there's a piece missing, and that piece is the taxonomy for the transition. I'm glad to come here to chat—I do have other things to do—but at the same time, I think it's important. There are some very low-hanging fruits, and that's one of them.

What's holding back the taxonomy? I'm not sure, but it's holding back investments. As long as companies do not know the rules of the game or where the goalposts are, it's very difficult for them to allocate capital.

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

For the Chamber of Commerce, why does the government have to be the one providing the taxonomy? Why can't you guys communicate with each other?

[Jessica Brandon-Jepp]

I'm pleased to say that we do regularly communicate with our members. In fact, Bryan and I both have councils that do a great, inordinate amount of work in this area. What our members are telling us is that greater certainty and clarity is required.

That being said, our members are trying to drive forward a number of innovative solutions, and they're excited to do so. They're looking to attract more capital to be able to let business be business and to innovate and come up with those bleeding-edge solutions that are going to drive our net-zero ambitions.

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

Let's come back to Mr. Keeley.

Mr. Keeley, in your opening statement, you said, “If I have one piece of advice for this committee, it is this: Avoid a great deal of economic and financial sacrifice for no apparent gain.”

Could you elaborate on what you meant by that?

[Terrence Keeley]

Sure. We got into a lot of it in the course of the discussion, which is divestiture. All of these issues about greater disclosures almost certainly lead back to the divestiture question. People would end up divesting from those dirtier industries, and that's not going to solve things.

I would strongly say that if we're going to decarbonize our industries, if we're going to make the grid greener, if we're going to have an effective carbon tax, I would recommend a carbon border adjustment tax, which has been recommended by Paul Ryan.

Those would be far more sensible approaches than to impose a net-zero portfolio restriction on your pensioners. We're all concerned about the climate. It's a horrible situation, and the world is outliving its resources—there's no question. However, we need to ask this: What can Canadian pensioners actually do about that? I thought that was the question.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you—

[Terrence Keeley]

Canadian pensioners do not solve the crisis by divesting.

[The Chair, Liberal, Francis Scarpaleggia]

We'll have to stop there.

We'll go to Ms. Taylor-Roy, please.

[Leah Taylor Roy, Liberal, Aurora—Oak Ridges—Richmond Hill, ON]

Thank you very much, Mr. Chair.

I'd like to extend my thanks to all the witnesses for taking their valuable time to speak to our committee. As we know, as representatives, we cannot do our jobs without speaking to the people on the front lines, so your being here is very important to our committee's deliberations on this matter.

Mr. Keeley, you've received a lot of questions today. I will not be asking you one, but I did want to thank you because several times you have emphasized that the most important thing we can do is have consumers stop consuming fossil fuels. That is exactly what the price on pollution program is designed to do. It's to incorporate the environmental costs of consuming fuels into the price signal so that people will in fact consume less. I appreciate your endorsement of those programs.

I would like to talk to the Chamber of Commerce because there seems to be some confusion about the impact of capital flows on businesses and what that does, not only to the businesses and their ability to invest but also to share prices.

I think about the example of Reddit and when they shorted GameStop. It was really interesting. The supply and demand, in terms of people investing in certain stocks or disinvesting from certain stocks, actually has a great impact on the economic performance of that company in the stock market, though perhaps not fundamentally. This idea that somehow we cannot make any difference by directing the flow of capital to those companies that are in green pursuit seems to me to be misguided.

I was wondering, Jessica, if you could talk a little bit about the importance of having investment flows come into companies. You mentioned earlier that it has to be very clear to investors what the parameters are. Obviously, that is so they feel comfortable investing in these companies.

What is the importance to your membership of having investment in these green and transitional companies?

[Jessica Brandon-Jepp]

Thank you for the question.

I think we know from SFAC that there is a large gap in investment. I think it's been clear that Canada is struggling with its productivity and its economic growth, so I would go back to that.

We have a $115-billion-a-year investment gap that Canada has to fill in order to deliver on our net-zero and transition commitments. When we speak to our members, what they're asking for is additional partnership with government to promote investment in innovative technologies and for the clarity that investors are seeking to invest in these kinds of technologies.

Bryan.

[Bryan Detchou]

If I may jump in very quickly, I just want to note that the large majority of businesses in Canada are small and medium-sized enterprises. They also need a lot of support as they try to green their operations.

We were happy to see in recent months and in the last budget that some of the money that was owed to small and medium-sized businesses through the carbon rebate program actually flowed towards those businesses. That's another key pillar of our advocacy and that of many of our members who are much closer to their communities across Canada.

[Leah Taylor Roy, Liberal, Aurora—Oak Ridges—Richmond Hill, ON]

Closing that $115-billion gap, I think, and having some guidelines of clear taxonomy and disclosure will help direct the flow of capital to companies that are meeting those guidelines.

Thank you for the work you're doing at the chamber.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you.

That brings this panel to an end. I really want to thank all the witnesses for an excellent exchange.

We're going to pause briefly to onboard the two witnesses for the second panel, who are both on video conferencing.

Thank you again. It's nice to see everybody. Have a good afternoon.

[The Chair, Liberal, Francis Scarpaleggia]

Resuming the meeting.

We have two witnesses: Mr. Eric Usher, head of the United Nations Environment Programme, or UNEP, finance initiative, who is appearing as an individual, and Mr. Hugh Miller, who is an analyst at the OECD, the Organization for Economic Co-operation and Development.

We'll begin with you, Mr. Usher. You have five minutes.

[Eric Usher, Head of UNEP Finance Initiative, As an Individual]

Thank you very much. It's a pleasure to address the committee.

As presented, I'm with the UN. I'm with the part of the UN that works with the finance sector to develop norms for sustainable finance and responsible investment. Most relevant to this session is that we convene several of the net-zero alliances, including the net-zero banking alliance and the net-zero asset owner alliance, which many Canadian financial institutions have signed on to as a means of setting credible, science-based net-zero targets.

As well documented by the Basel committee on banking supervision and many others, climate change poses risks to the financial system. Just last month, the Basel committee formally incorporated climate risks into its core principles, which set out the overarching standards for regulations to keep the global financial system stable. It's increasingly acknowledged that misalignment of capital flows with the global climate objectives may result in short-, medium- and long-term financial risks for financial institutions individually, as well as affect financial stability overall.

The financial industry is largely aware of these risks. In fact, voluntary industry action has been a key driver of sustainable finance around the world, including in Canada, and that is reflected in many financial institutions integrating sustainability considerations into their operations. For example, they identify sustainability as a key priority within their business strategy and reflect this in their governance and compensation policies. They establish systems to analyze climate risks and the impact of their financing. They're big on making sustainability disclosures, and many are setting net-zero targets on a voluntary basis.

However, the pace of progress is uneven. Therefore, in recent years, regulatory initiatives have increased substantially across jurisdictions. The UN Environment Programme has documented over 750 sustainable and green finance regulations established globally since the Paris Agreement was signed. These aim at, for example, increasing transparency of sustainability information, addressing greenwashing, strengthening climate-related risk management practices and starting to mandate transition planning. These developments are an important prerequisite for intensified net-zero alignment across the financial system and the entire economy.

Now, financial regulation can build on voluntary industry commitments to incentivize financing for Canada's economic transition towards a sound and sustainable economy. For instance, OSFI's new B-15 climate risk management guidance is an important step in this direction. Reporting is needed to enhance the transparency, credibility and effectiveness of net-zero commitments across the economy and, ultimately, to ensure the integrity of the transition. The development of international disclosure standards, including through the ISSB—the international sustainability standards board—should be advanced so as to ensure optimal allocation of capital to the net-zero economy. Work by the Canadian sustainability standards board to develop reporting standards aligned to the ISSB is very welcome in this context. Also, there is potential for a Canadian taxonomy to be used as a forward-looking tool to accelerate the net-zero transition.

Over 40 countries today have developed, or are in the process of developing, sustainability taxonomies. Europe already has two years of company reporting whereby companies must disclose the share of their revenues, their capital expenditures and their operating expenditures that are aligned with the EU taxonomy criteria. Results show that many sectors in the EU are investing heavily in the transition now with capex alignments—capital expenditures—consistently higher than revenues.

Way out front in this are utilities whose revenues are already 40% sustainability-aligned, but they're investing almost two-thirds, 63%, of their capex in sustainability-aligned assets. Real estate is another example. It is investing 27% of its capex in sustainability-aligned building stock.

It's important to highlight that finance cannot in itself fill a policy void. Therefore, financial regulation can only truly incentivize transition finance if mirrored by a whole-of-government approach to meaningful action and commitments in the real economy. In addition, voluntary and regulatory action must work hand in hand, giving financial institutions the necessary room to innovate and, at the same time, signalling towards stronger market uptake, learning and ever-increasing ambition and innovation.

Finally, the potential for regulatory fragmentation is serious, and the Canadian economy risks getting left behind if regulatory developments do not keep up with what's happening today in other regions. Without interoperable regulatory frameworks, sustainable finance can become disjointed and primarily compliance-driven, which is a missed opportunity for financial institutions to play their part in enabling the transition. Banks and investors need globally consistent regulatory standards and definitions in order to focus on the transition challenges ahead.

As described, banks and other financial institutions have gone a long way to commit to and implement voluntary commitments. As far as possible—

[The Chair, Liberal, Francis Scarpaleggia]

Thank you, we're going to have to stop there.

[Eric Usher]

—regulatory developments should be aligned with voluntary principles for greater consistency.

[The Chair, Liberal, Francis Scarpaleggia]

Excuse me, Mr. Usher—

[Eric Usher]

Voluntary initiatives can provide leadership and best practice.

Thank you.

[The Chair, Liberal, Francis Scarpaleggia]

We're going to have to stop there and go to Mr. Miller now.

[Hugh Miller, Analyst, Organisation for Economic Co-operation and Development]

Thank you very much.

Good afternoon, Chair and members. My name is Hugh Miller. I'm a sustainable finance analyst at the Organisation for Economic Co-operation and Development, where I work on climate and broader environmentally related financial risks.

It is well recognized, both internationally and in Canada, that climate change and environmental issues pose risks to the financial system through physical and transition risk channels. Moreover, the financial system will play a crucial role in financing the necessary activities to achieve regional and global decarbonization targets to mitigate future fiscal risks from climate change.

However, there is a misalignment between when the majority of climate-related financial risks will materialize and when the necessary financing of low-carbon activities needs to occur. To meet regional and global net-zero targets, significant and urgent upscaling of finance is necessary to fund the energy transition and the shift towards low-carbon technologies, with $125 billion to $140 billion needed per year for Canada to achieve its 2050 target.

Conversely, the financial risks stemming from climate change and other environmental issues are only starting to materialize and may only become significantly material later on in the transition. Hence, there is a potential timing mismatch between the materialization of financial risks and the investment required to mitigate the risks from climate change.

To help overcome the long-time horizon of climate-related financial risks, we need to bring these risks forward into the time frame that impacts the investment decisions of market participants. This will require transitioning from a point-in-time assessment of climate risks towards a forward-looking assessment.

Indeed, the Canadian financial system has already started to embark on a forward-looking assessment of these risks with the joint climate transition scenario analysis pilot project between the Bank of Canada and the Office of the Superintendent of Financial Institutions.

However, there are limitations to the currently available scenarios and their ability to analyze the potential risks from climate change, thereby limiting the ability of financial institutions to account for these risks in their decision-making functions. There are several actions that would advance the ability to assess the materiality of these forward-looking risks and capture them within time frames relevant for financial actors.

First is the development of transition plan standards, akin to those developed under the U.K. Transition Plan Taskforce, UKTPT, as well as others, and the implementation of credible, comparable and transparent transition plans to help financial market participants more accurately identify and manage climate-related financial risks. Financial institutions may incorporate forward-looking information, such as company-level emission targets, into their risk management functions. Moreover, these plans may provide input into the narrative of climate transition scenarios and help develop more realistic assumptions.

Second is a clear classification system to identify both green and transitioning activities for which financing can be clearly earmarked in the form of a taxonomy, which I'm aware that Canada is already in the process of developing. This should clearly outline the economic activities that qualify for financing earmarked by either green or transition labels whilst avoiding carbon lock-in. This should be complemented with clear guidelines on how funds should be classified as green, based on the definitions in the taxonomy.

Finally, environmental risks are broader than just climate change. Recently, we have seen several central banks, including the Dutch, French, Mexican, Brazilian and Malaysian central banks all publish initial impact and dependency studies related to nature-related financial risks. The global economy—and, by extension, the financial system—is dependent upon the ecosystem services provided by biodiversity and broader natural capital.

Currently, we are seeing a rapid decline in biodiversity and natural capital, which may exacerbate the risks presented by climate change. Hence, to assess the potential impacts of climate, a broader scope is required to understand how different environmental risks may interact and magnify one another.

An initial step for the Canadian financial system on this front would be to undertake a similar impacts and dependencies assessment, similar to the work done in other jurisdictions. Here, the OECD can help provide support for this technical analysis with a supervisory framework, which offers a four-step guide to central banks and financial supervisors on how to technically assess nature-related financial risks.

Thank you very much for your time and interest. I look forward to your questions.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you, Mr. Miller.

We'll start our first round, the six-minute round, with Mr. Deltell.