Environment Committee on May 23rd, 2024

[The Chair, Liberal, Francis Scarpaleggia]

Good afternoon, everyone.

Before we get started, I have a couple of housekeeping items.

Number one is probably more for the benefit of the witnesses, since the members have heard this many times before.

In order to protect the hearing of the interpreters, please only use an approved earpiece, which is the black one. If you have a grey one, it's not an approved type. Keep your earpiece a good distance from the microphone, so don't get up too close to the microphone with your earpiece on. If your earpiece is off, please put it face down on the coaster-like sticker that you see there on the desk. That's basically it.

There's also a little card in front of you that explains a little further some of the procedures we should keep in mind to protect the hearing of our wonderful interpreters, who work so very hard to make sure we can all understand each other. Please don't hit your microphone with your finger, because that creates a pretty loud noise for the interpreters.

I have more housekeeping business, and this is for the members. At the last meeting, we had the minister, and it turned out we had many votes while the minister was here. There was unanimous consent that we would continue the meeting and pause briefly for a minute or two every time there was a vote. In fact, even the minister voted with us on his phone app, and it worked very well. I was going to do that today, because we are expecting 11 votes, and I didn't want to cancel the meeting. All the parties agreed that we could proceed the same way, voting as we went along.

There are no votes this afternoon, but apparently there could be a number of votes Tuesday. I would like the consent of the committee for this coming Tuesday, when the minister will appear again, that if there are votes, we do as we did the last time. When there's a vote, we will pause for a couple of minutes, vote on our phones and keep going. That way we don't have to cancel or prolong meetings. I see there's consent around that, and I'll go with it. That's perfect.

In the first hour, we have with us today four witness groups who will be speaking to us. Each witness group will have five minutes for opening statements, and then we'll go to two rounds of questioning.

From AlphaFixe Capital, we have Sébastien Rhéaume, managing director, and Simon Senécal, portfolio manager responsible for investment.

We also have two Canadian Chamber of Commerce representatives, Ms. Jessica Brandon‑Jepp, senior director, fiscal and financial services policy, and Mr. Bryan Detchou, senior director, natural resources, environment and sustainability.

Also with us is Terrence Keeley, chairman of Impact Evaluation Lab.

Finally, we have two representatives from the Insurance Bureau of Canada, Jason Clark, national director, climate change advocacy, and Rachel Barry, manager, government relations.

We'll begin with AlphaFixe Capital. I believe Mr. Rhéaume will be giving the opening address.

Welcome to the committee, Mr. Rhéaume. You have the floor for five minutes.

[Sébastien Rhéaume, Managing Director, AlphaFixe Capital]

Thank you, Mr. Chair.

I'm the co-founder of AlphaFixe Capital, a portfolio management company that specializes in bond markets. We are headquartered in Montreal, Quebec. We are accordingly regulated by the Autorité des marchés financiers.

In 2017, we launched Canada's first green bond fund. The main objective of that fund was to facilitate the financing of projects that would have a positive impact in terms of the environment, such as renewable energy, public transportation or green buildings.

I'm very proud that, since 2017, we have financed more than $10 billion of such projects; however, we have had very limited success in terms of helping to decarbonize the energy infrastructure industry, which is the reason we're here today. If, all together, Canada doesn't rise to this challenge, there's a good chance part of this industry might appear to disappear. When we look at the success we've had with our green bond fund, we're here to express some ideas in terms of how we could recreate that success and help the oil and gas industry decarbonize to meet Canada's objectives.

I'm joined here with Simon Senécal, who's going to walk you through some ideas in terms of what the missing pieces are that might be helpful to decarbonize the energy infrastructure sector.

Simon.

[Simon Senécal, Portfolio Manager, Responsible Investment, Partner, AlphaFixe Capital]

Thank you, Mr. Rhéaume.

Good afternoon.

We have been focusing on the International Energy Agency's net-zero scenario. According to the agency, 23% of the energy mix in 2050 will still be fossil fuels.

In Canada, 31% of decarbonization efforts would have to come from the oil and gas industry for us to achieve the net-zero emissions objective by 2050.

For electricity production, the figure is 16%. Effort is therefore also required from that standpoint. I'm not going to say any more about it now, but you're welcome to ask us questions later if you'd like to know more about electricity production.

But it's important not to forget that the challenge is enormous. In order to provide guidance, the federal government prepared a road map for the transition. I was about to say that this was recent, but the truth is that it's been around for quite a while. The road map includes strict requirements for emitters, and that's fine as far as it goes. What we really want is to decarbonize the industry. The road map also includes guidelines for projects for which companies want funding to decarbonize their activities. However, there's no clear and ironclad list of eligible projects. The road map helps companies to adopt a transition or decarbonization strategy. Here, the emphasis should probably be on decarbonization to avoid getting lost in a multitude of definitions, failing to agree on what is meant by a transition, and getting bogged down in minor details. It's best to remain pragmatic.

At AlphaFixe Capital, we have a list of exclusions, and the list includes extraction companies. Moreover, by signing the net-zero asset managers initiative, we committed ourselves to ensuring that by 2030, 100% of our portfolio assets would be aligned with a science-based net-zero plan in order to comply with the 1.5°C climate warming limit. What we have now are middle-market and extraction fossil energy companies. These include Enbridge and Suncor. I have specifically mentioned these two, but they're no worse than the others. Some companies are making considerable effort. If nothing changes, all these companies would have to be removed from our portfolios by 2030. The important thing to remember is that we are not alone in thinking that way. But if everyone tried to leave by the same door at the same time, it would represent a serious financial market stability risk for Canada.

Not only that, but we think the taxonomy would not only help companies understand what types of projects are consistent with a science-based transition or decarbonization strategy, but also help investors dialogue with these emitters by using concrete examples of the kinds of behaviour they should adopt as socially responsible companies.

I'm now going to return more specifically to our own activities.

While 23% of companies listed in the Canadian corporate bond index are directly linked to fossil fuels, these same companies account for 84% of the carbon intensity of this index. It's therefore obvious where the leverage lies in our market in terms of dialoguing with and influencing these companies.

One of our recommendations is to establish a clear and strict taxonomy to help fossil energy sector companies to adopt a credible and science-based net-zero or transition policy. We also suggest introducing regulations requiring a minimum percentage of Canadian pension fund assets to be invested in Canada. As Canadians, we are all concerned about this challenge and we all need this capital to decarbonize our economy.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much.

I am now going to go to Ms. Brandon‑Jepp. Am I right in assuming that she is going to give the opening address?

[Bryan Detchou, Senior Director, Natural Resources, Environment and Sustainability, Canadian Chamber of Commerce]

We will share our time.

[The Chair, Liberal, Francis Scarpaleggia]

Go ahead.

[Bryan Detchou]

Thank you, Mr. Chair and honourable members.

Thank you, on behalf of the Canadian Chamber of Commerce, for this opportunity to take part in today's discussion about the impacts of the environment and climate on Canada's financial system.

It's a pleasure to appear before you on behalf of 400 chambers of commerce and boards of trade and more than 200,000 businesses of all sizes from all sectors of the economy and from every part of our country.

I'd like to begin by pointing out that the Canadian Chamber of Commerce and its members across Canada recognize the crucial importance of achieving Canada's net-zero objectives and are committed to contributing to the collective effort to combat climate change.

It's important for our members to make a successful transition to clean energy because we represent not only those sectors and companies that are most closely involved in this transformation, but also the communities they support across the country.

It is broadly acknowledged that climate change poses a significant challenge to business, from the high cost of disruptive events to increased uncertainty for companies in what and how they should invest. Our financial system is, of course, also exposed to these risks. According to the SFAC secretariat, Canada faces an annual investment gap of $115 billion to achieve its net-zero transition goals. Even with federal investment in decarbonization, a significant gap persists. With the federal government nearing its fiscal capacity, provinces and municipalities will also face increased climate-related expenses.

Business capital investments in climate and clean tech reached $14 billion Canadian last year, as reported by RBC. However, business capital investments need to increase, as do contributions from public markets, private equity and venture capital. To fund, scale and support innovative green technologies, a collaborative effort between government, industry and investors is essential. This co-operation will equip the Canadian economy with the necessary tools and support to realize its net-zero ambitions.

[Jessica Brandon-Jepp, Senior Director, Fiscal and Financial Services Policy, Canadian Chamber of Commerce]

However, before we can talk about Canada's broad investment in net zero across government and the private sector, we first need to ensure that Canada is a competitive environment for investment writ large. New tax increases that foster uncertainty and phase-outs of incentives that stifle investment and signal to the world's innovators to look elsewhere are not helping to attract or retain the kinds of entrepreneurs and investors that are going to advance bleeding-edge, made-in-Canada net-zero solutions.

Additionally, investors require clarity, guidance and data about opportunities to invest in Canada's net-zero transition in order to accelerate capital flows, create the jobs of tomorrow and grow our economy. Without access to this information and these tools, Canada cannot be globally competitive in fuelling net-zero investment.

Canada should adopt a common definition for what constitutes investment that supports net zero. Greater transparency on Canada's transition plans would help track progress, help facilitate accountability and help the private sector plan investment strategies. In addition, the development and standardization of climate-related transition and physical risk disclosures—ideally with as much harmonization as possible while accounting for Canada's unique challenges and opportunities—will enable organizations to track and accelerate their progress and provide information and confidence to investors. Initial guidance issued by the OSFI is a positive step.

It is worth noting that many of Canada's largest federally regulated financial institutions participated on the government's sustainable finance action council, which has made a variety of recommendations to advance progress towards developing and building a strong and successful sustainable finance marketplace. These recommendations have not yet advanced. In the absence of standardized Canadian-specific guidance, a patchwork of various standards and guidance has emerged within Canada and around the world, leaving businesses and investors frustrated and confused as they plan and navigate their net-zero ambitions.

All the while, Canada gets farther from achieving its goals and attracting the kind of investment that will grow and sustain our economy for generations to come. The Canadian Chamber's green transition finance council and net-zero council are ready and willing to support.

My colleague, Bryan, and I will be pleased to answer your questions. Thank you.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much.

We'll go now to Mr. Keeley for five minutes.

[Terrence Keeley, Chairman, Impact Evaluation Lab]

Thank you, Mr. Chairman.

Thank you all for the opportunity to speak today.

Business and finance have crucial roles to play in forging national and transnational outcomes, including greater social inclusivity and environmental sustainability, but their most appropriate roles are increasingly maligned and misunderstood as climate hysterics have become commonplace. Understanding the optimal role of business and finance in forging the social, environmental and economic outcomes we all desire requires a sober analysis of the challenge of climate change itself, as well as a deeper appreciation of essential fiduciary rules, the determinant roles of consumers and regulators, and the ancillary role of commerce.

Financiers and businesses have no special powers nor any innate responsibility to right others' wrongs or turn the carbon clock backwards. Achieving a more inclusive and sustainable economic growth model requires that regulators, public policies, civic society and individuals coalesce, along with corporations, around very specific patterns of behaviour.

Let me state this more plainly. If consumers continue to demand ever-rising quantities of fossil fuels, it is the responsibility of fossil fuel producers to provide those resources as cleanly and as cheaply as possible—full stop.

The challenge of climate change is daunting. It consists of two intractable problems wrapped into one.

The first is a collective action problem. Today, three countries—China, India and Russia—account for more than twice the greenhouse gas emissions generated by the European Union and the North American continent combined. Unless and until China, India and Russia adopt equally ambitious targets for emissions, as this body and much of the rest of the western world already have, the prospects for achieving the goals of the Paris accord—namely, net zero by 2050—are zero.

Aligning one's financial system to an outcome that is highly unlikely to be achieved guarantees financial and macroeconomic underperformance. 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. Imposing a wrongly conceived paradigm upon your financial system would serve no useful purpose.

Given that ESG investment strategies have underperformed broader, more diversified strategies by more than 250 basis points per annum over just the last five years, the cost to individual Canadian pensioners over time would almost certainly amount to tens of billions of dollars of lost income.

The second dimension of our climate challenge is a multivariable optimization problem. Canada, like every other country, is duty-bound to have a national energy policy that is clean, affordable, reliable and, ideally, abundant. After all, energy security is part of national security. Canada is blessed with abundant choices between oil and gas, nuclear, hydro, wind and, to a lesser extent, solar. Exploit your advantages. Most other nations are not as fortunately situated.

China and India continue to rely upon coal for more than half of their electricity supply. Given their needs for economic growth, it is wholly unreasonable to expect that India, Nigeria, Indonesia and dozens of other countries, which collectively account for two-thirds of the global population, will dramatically alter their production and use of fossil fuels in manners consistent with Paris-mandated objectives.

Pope Francis wrote in his encyclical Laudato Si' that we are not faced with separate crises—one environmental and another economic—but, rather, one complex crisis with multiple challenges. Solutions demand an integrated approach. We must combat poverty, restore dignity to the excluded and protect nature all at the same time.

I am not a climate-denier. The evidence for anthropomorphic impacts on our land, air and water is in plain sight, available for everyone to see. Given our collective action failures and multivariable needs, however, global temperatures are heading higher. This means, in the mitigation versus adaptation debate, that public policy should lean more heavily toward adaptation. The globe has never had to sustain 10 billion souls simultaneously. It will soon have no choice. How 10 billion souls sustainably occupy our planet in the centuries to come remains among humanity's most significant challenges, and climate risk certainly portends significant economic and financial risk, as everyone on this panel will say.

All this said, government regulations that force Canadian pension plans to restrict their investments into climate-aligned indices or strategies will not help create a climate-aligned world. Canadians can divest their way to a green portfolio, but they cannot divest their way to a green globe. Decarbonizing industrial production requires massive amounts of investment, not divestment.

Moreover, divestiture does not stop companies from making unwanted decisions. It merely impacts their cost of capital and transfers ownership from those who don't support a given management team and strategic direction to those who more broadly do.

Responsible investors allocate capital most wisely when they properly anticipate the world that will be, not some imagined, hopeful world that has a very low probability of bearing out. In practice, this requires investing in a very broad range of companies, industries and real assets, including many brown ones with significant prospects of becoming more green.

It also involves the provision of patient capital to the most promising technologies that lower what Microsoft founder Bill Gates has called the “green premium”, which is the difference between existing practice and less carbon—

[The Chair, Liberal, Francis Scarpaleggia]

Unfortunately, we're going to have to stop there. I'm sure there will be many questions, so whatever points were upcoming—

[Terrence Keeley]

I was just going to say something nice about green bonds.

[The Chair, Liberal, Francis Scarpaleggia]

That's good. We're a nice committee and we like to hear nice stuff like that.

We'll go now to Mr. Clark.

Go ahead, Mr. Clark.

[Jason Clark, National Director, Climate Change Advocacy, Insurance Bureau of Canada]

Thank you, Chair.

I'm pleased to be here today on behalf of the Insurance Bureau of Canada and its members to speak about our advocacy on climate change as it relates to the impacts on the Canadian financial system.

IBC is the national industry association representing home, auto and business insurers. Our members make up the vast majority of the property and casualty insurance market in the country. For 60 years, IBC has worked with governments and insurance regulators across the country to help make home, auto and business insurance available and affordable for Canadians.

The reality is that Canada is becoming a riskier place to live, work and insure due to the level of risk we face from extreme weather events as a result of climate change. To date, regulatory discussions concerning climate risk disclosure, and ongoing work to establish a green taxonomy, inadequately consider physical risk and have overemphasized transition risk in relative terms. For a country where natural disasters have consistently disrupted economic activity, this emphasis should be reversed.

Last summer, as wildfire smoke from Quebec blanketed Ottawa and parts of the eastern seaboard, I walked outside with my four-and-a-half-year-old son, who said, “Dada, it smells like camping.” In 2023, Canada faced the worst wildfire season in its history, with over 6,600 fires that burned more than 18.5 million hectares, forcing the evacuation of at least 155,000 people from their homes, all at a cost of more than $1.4 billion just to fight these fires. These wildfires led to the cumulative release of CO2 equivalent to the global airline industry's emissions in a year. The challenge we are faced with right now is that 2024 could be even worse.

We are also seeing that flooding events are becoming more severe. As of today, 1.5 million households in Canada are built in areas with a high risk of coastal, riverfront or urban flooding. These households lack affordable and adequate home insurance. Over the past eight years, IBC has advocated, in partnership with our industry, for a low-cost national flood insurance program for high-risk households in order to close this protection gap. Budget 2024 confirmed that the government intends to launch such a program in 2025.

Last year, severe weather events in communities across Canada cost $3.5 billion in insured damage alone, one of the highest annual totals in the previous four decades. However, unlike in 2016, when a huge wildfire ravaged Fort McMurray and caused a quarterly contraction in national GDP, the losses last year weren't attributed primarily to a single catastrophe. Instead, climate-related disasters affected almost every part of Canada.

Because of the threat of more frequent and intense natural disasters in all parts of the country, we support the federal government's commitment in budget 2024 to develop a green taxonomy, which represents an opportunity to catalyze new investments. However, our industry believes the greatest challenges in this country are the physical risks we face from climate change, and that greater efforts are needed to focus on driving capital to enhance resilience.

Canada's P and C insurers have been at the front lines of climate change for many years, sounding the alarm with governments and regulators, proposing policy solutions, and pricing and managing climate risks. In fact, OSFI recently highlighted the industry's leadership in the “what we heard” report following their survey of financial institutions' readiness to implement guideline B-15 on climate risk management.

The report notes that P and C insurers are further ahead than other financial institutions in establishing climate-related risk reporting and metrics, and it recognizes P and C insurers' experience in managing physical risks, such as weather-related and natural catastrophe risks. The report also found that P and C insurers are further ahead than others on formalizing climate-related roles and responsibilities for board members and senior management.

As we reduce our emissions, Canada must also urgently improve its climate defences. This includes investing in new infrastructure to protect communities from floods and fires, improving building codes, ensuring better land-use planning and increasingly creating incentives to shift the development of homes and businesses away from high-risk areas.

Further, to rapidly advance resilience measures, IBC co-founded Climate Proof Canada, a national coalition that I am fortunate enough to chair, which has played an important advisory role in helping establish the country's first national adaptation strategy.

For more than a decade, IBC has been warning governments about the need to be better prepared for severe weather events as a result of climate change. We believe Canada must play both offence and defence when it comes to climate change and take action today to protect Canadians from the growing threats to their homes and well-being.

We look forward to this committee's continuing study of the environment and climate-related impacts on the Canadian financial sector, and the role that property and casualty insurers are already playing.

Thank you for the invitation to speak, and we look forward to your questions.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much.

We will now begin the first round of questions. As usual, Mr. Mazier will get the ball rolling.

[Dan Mazier, Conservative, Dauphin—Swan River—Neepawa, MB]

Thank you, Mr. Chair.

Thank you to the witnesses who have come out this afternoon.

Mr. Keeley, my questions will be for you. Can a government meet their environmental targets by regulating the financial system or mandating climate risk disclosures?

[Terrence Keeley]

I think, as I said in my opening remarks, for us to achieve the net-zero world we want to see, it's going to take individuals, public policies and a wide range of other forms of taxes. Businesses are in an ancillary position, not in a leading position, so to say that we can actually regulate business and finance to a greener world is, I think, misguided.

[Dan Mazier, Conservative, Dauphin—Swan River—Neepawa, MB]

The Office of the Superintendent of Financial Institutions has introduced mandatory climate-related financial disclosure expectations for financial institutions in Canada. What are the risks associated with climate-related disclosures or ESG scores?

[Terrence Keeley]

Any good financier will tell you that having more information is better and having more disclosures is better, but it's a question of how that information would be utilized. The best example would be that there would be a requirement to report scope 1, scope 2 and ideally scope 3 emissions.

However, what would be done with that information is particularly dangerous. To the extent that the result would be a situation in which we'd be merely divesting from brown companies and from brown buildings and starving them of capital, we would have exactly the wrong answer to our climate problems. We actually need to invest in those industries and not divest.

[Dan Mazier, Conservative, Dauphin—Swan River—Neepawa, MB]

Is there a financial risk to the retirement savings of individual Canadians if a government attempts to meet environmental targets through pension and investment funds?

[Terrence Keeley]

That particular risk is huge and daunting and would almost certainly result in the loss of hundreds of billions of dollars of income to Canadian pensioners over many years. We need to invest in the world that will be and not some imagined world.

As we all know, there is $45 trillion in ESG strategies. It's not that these strategies are underfunded, dear friends; it's that they simply don't work. They have been underperforming markets by 250 basis points for the last five years. That's going to result, if we continue along that path, in underfunded pensions and people who cannot support themselves in their old age.

[Dan Mazier, Conservative, Dauphin—Swan River—Neepawa, MB]

I forgot to actually expand on the divestment part of this. Will divestment achieve environmental objectives, and should Canadians be concerned with this approach?

[Terrence Keeley]

I think everyone should be concerned and not just Canadians. There was a recent episode with ExxonMobil, in which we all saw a number of investors vote that they would remain shareholders and put in new board members. Right now, ExxonMobil is one of the leading investors in carbon capture. Thank god investors stayed engaged with ExxonMobil to help move them in the right direction.

Divestiture is almost certainly the exact opposite of what we require right now to create the world we want.

[Dan Mazier, Conservative, Dauphin—Swan River—Neepawa, MB]

How do you turn that tide? What else can you advise this committee? A common theme in this talk is that, if you get out them, the businesses will die. Is there anything else we can think about divestment and actually maybe something else we should consider there?

[Terrence Keeley]

I think that debate is now raging on college campuses across the United States. As we all know, everybody's calling for the divestiture of Amazon and of companies, which they think will somehow end fighting in Gaza. We have to understand how limited divestiture is as a tool for solving our problems. Divestiture is not the way to go if you're actually trying to influence a corporation's behaviour or effect an economic outcome.