Evidence of meeting #110 for Environment and Sustainable Development in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was risk.
A recording is available from Parliament.
Liberal
The Chair Liberal Francis Scarpaleggia
Good afternoon, colleagues and guests.
Fortunately, there are no votes scheduled in the House this afternoon, so we won't be obliged to cancel or interrupt the meeting.
Before we begin, I would like to share some information, especially for the witnesses who are here in person, about how to handle—
Liberal
Lloyd Longfield Liberal Guelph, ON
I have a point of order.
We need interpretation. I'm sorry, Mr. Chair.
A voice
It's not on Zoom. It's only on the [Inaudible—Editor], so I'm not sure what's wrong.
Liberal
The Chair Liberal Francis Scarpaleggia
Is it back? Do we have it?
Mr. Longfield is nodding, so that's good.
These are just some instructions for handling the microphones and the earpieces. If people aren't careful, it can injure the interpreters, so I'm going to read a few guidelines.
Please keep in mind the preventive measures in place to protect the health and safety of all participants, including interpreters.
Use only an approved black earpiece, like the one I have on my ear. The old grey earpieces should no longer be used. That said, I don't see any around here.
Always keep your earpiece away from all microphones. When you're not using your earpiece, put it face down on the round sticker on the table. This will help protect our interpreters' health.
Without further ado, let's welcome our first panel of witnesses.
We have Céline Bak from Deloitte, Faith Goodman from the Goodman Sustainability Group, Daan Van Acker from InfluenceMap, and Renaud Brossard and Krystle Wittevrongel from the Montreal Economic Institute.
We'll start with Madam Bak.
You have five minutes for an opening statement.
Céline Bak Partner, Risk Advisory, Financial Services, ESG & Impact, Deloitte
Thank you, Mr. Chair.
I thank the committee members for the opportunity to appear today.
Before I begin, I would like to acknowledge that this meeting is taking place on the traditional and unceded territory of the Algonquin Anishinabe people, and I am grateful for their thousands of years of stewardship on this land.
On behalf of the team at Deloitte Canada, we are proud to share our perspectives on how we work with organizations across the public and private sectors as they navigate evolving expectations and develop relevant, innovative and sustainable solutions.
Our reputation is built on our credibility, and with more than 175 years of experience as a Canadian firm owned by Canadians, we have grown into who we are today because of the trust that our clients offer us in our people and in our values.
As Canada moves toward achieving a net-zero economy, we work with financial institutions to identify sustainable business opportunities and to establish disclosures that inform capital markets in consistent and comparable ways. We're also beginning to work with financial institutions to assist their clients with transition planning.
Through our work at Deloitte, we believe that collaboration within the financial services industry is key to growing trade and increasing productivity. Many organizations are trying to understand how best to operationalize sustainable finance, and we're here to support them.
I would like to take a moment to present findings from recent original research conducted by Deloitte Canada on how companies making disclosures of their scope 1 and 2 greenhouse gas emissions are investing in sustainable capital expenditures and generating sustainable revenues from these investments. These findings establish a positive correlation between disclosures of scope 1 and 2 greenhouse gas emissions and greater sustainable investment.
Second, I would like to report findings from another stream of research by Deloitte Canada on how global capital markets are valuing the strongest performing companies in terms of GHG intensity compared to their sector peers.
We define GHG intensity simply as company scope 1 and 2 emissions divided by revenue. This stems from a perspective that comparable disclosures and a consensus around the inevitable transition are informing investors' decisions, resulting in greater investment flowing to the most GHG-productive companies globally in several sectors of economic activity.
I'd like to relate two points from this research.
First, our research has found that Canadian companies that are disclosing their GHG emissions are making sustainable capital investments that are six times greater than those made by companies that do not disclose GHG emissions. We also found that these capital investments are followed three years later with the achievement of sustainable revenues close to six times higher than companies that did not disclose GHG emissions. While these findings reflect correlation and not causation, they do tell us that disclosures are associated with much higher sustainable investments that also appear to be productive.
In our second stream of research, when considering how public company valuations are explained by financial and non-financial performance, where GHG intensity is the indicator of non-financial performance, GHG intensity explains more than 5% of company value in close to 60% of North American, 46% of European, and 24% of rest-of-the-world publicly traded firms. The relationship between better GHG intensity, intra-sector performance and higher valuation of public companies is not yet present in all sectors, but it is the case in one-third of sectors in North America and one-quarter of sectors in Europe.
I'd now like to turn my attention to a potential opportunity. As Deloitte works with public sector and industry associations, we see that these groups are actively considering how shared information platforms might be created to lessen the burden of disclosure and increase comparability to enhance more productive and efficient investments. A one-and-done approach to disclosures, particularly for small and medium-sized enterprises, is being discussed.
Recognizing the significant role of the financial industry as a trusted adviser to Canadian businesses, our research points to immense value from enabling the market transparency that permits benchmarking of GHG intensity, as well as sustainable investment, as part of transition planning. Canadian financial institutions have an opportunity, therefore, to engage with publicly traded companies, as well as small and medium-sized enterprises to make disclosures as easy and as efficient as possible. This, in turn, will shape macroeconomic outcomes and improve public outcomes, to the benefit of all Canadians.
Thank you, Mr. Chair and members of the committee, for having me here today.
Liberal
The Chair Liberal Francis Scarpaleggia
Thank you very much.
We'll go now to Ms. Goodman for five minutes.
Faith Goodman Chief Executive Officer, Goodman Sustainability Group Inc.
Mr. Chair and honourable committee members, thank you for the opportunity to provide additional perspectives regarding the upcoming government study on environment and climate policy impacts related to the Canadian financial system.
We all agree that addressing Canada's net zero climate targets will require an economy-wide systems approach that duly expedites action and impact. There is broad consensus that decarbonization investments can be mobilized more effectively if we can unlock a recalibrated approach, one that is risk-balanced for all sizes of businesses and sectors, enabling access to lower cost of capital. This is the engine for growth and competitiveness.
In order to drive the next phase of climate and competitiveness progress, we know from leading sustainability thinkers that there are three pillars of transition policy: to invest strategically, solve market failures and make or incent smarter choices. At issue, then, is how.
Addressing these financial system issues represents only one of the many puzzle pieces. We would liken it, then, to considering or offering the opportunity to consider a triple systems challenge, with both policy and business implications at the core.
One is an opportunity to expand the range and access pathways for financing tool kits, looking at blended financing innovations—that is, engineer solutions that are fit for purpose for all sizes of firms.
Two is to fast-track a digitized AI and democratized enabled set of solutions that keep pace with or exceed global best practices.
Third, reimagine institutional structures, enabling frameworks that can play a key role in how institutions manoeuvre to ably innovate, and provide an expanded agenda for this opportunity, looking at environment, economy and society.
In the global race to net zero, we note that the spotlight has largely been on large multinational corporations and how they engineer sustainability and competitiveness. While that is important and while this federal study will focus on readying the Canadian financial system, let me also suggest the imperative to include a wider lens.
We need to open up specific access to decarbonization funding and tool kits that gives due consideration to materially disadvantaged segments of the economy, like small and medium-sized enterprises and their entrepreneurs. They represent the backbone of supply chains and the engines of growth and competitiveness.
In aggregate, their footprint matters. Canada's 1.2 million SMEs represent about 50% of GDP and about 50% of greenhouse gas business emissions. A recent CME study indicated that only 11% of smaller manufacturers have a decarbonization plan. There is no net zero without SME action. SMEs also are increasingly aware that global rules for sustainability are bearing down on all businesses and that everyone needs to get ready.
What do we do about this triple challenge? We would say that it needs to be considered all at once via a whole-of-government approach. For example, if we focus in on the SME challenge for a minute, there are immediate experimental opportunities that can be garnered from leading jurisdictions, building in clarity, certainty, a level playing field and a principled approach.
To go back to the three-part model I just highlighted, on the issue of financial tool kits, several countries, both in Europe and in Asia, have moved forward over the last several years to implement hugely innovative risk-adjusted tools that are applicable for small and medium-sized business and for entrepreneurs.
Many countries have digitized ID and digitized credentials, and certain countries are more advanced in positioning their small businesses for global trade. We have ample examples from the OECD and the SME Finance Forum, which is part of the World Bank.
Third is reimagining institutional collaborations with lots of work globally on NFPs, enterprise foundations, benefit corporations and recalibrated public-private partnerships, all with a view to beginning to think about fit-for-purpose transition solutions and tool kits that are ready-made for all sizes of business and sectors.
Liberal
The Chair Liberal Francis Scarpaleggia
Thank you very much. We have to stop there, but there will be ample opportunity to share your perspective through answers to questions.
We'll go now to Mr. Van Acker for five minutes.
Daan Van Acker Program Manager, InfluenceMap
Good afternoon, and thank you for the opportunity to address the committee.
I'm the program manager for financial research at InfluenceMap, which is a global climate-change think tank conducting research into how corporations and financial institutions are affecting climate change.
The past few years have seen a significant growth in companies' recognition of the importance of climate change and the risks it poses. Most notably, companies are making top-line climate pledges supporting the Paris Agreement. They're publishing climate-related disclosures, and they're setting net zero by 2050 targets.
InfluenceMap's research seeks to hold companies accountable to these commitments, in line with the UN's guidance on the net zero commitments of non-state entities. The financial sector is no exception to the net-zero target trend, with a wide range of climate alliances being created with significant membership within the sector. Among these is the Net-Zero Banking Alliance, a group of leading global banks committed to financing ambitious climate action to transition the real economy to net-zero greenhouse gas emissions by 2050.
Canada's five largest banks—RBC, TD Bank, Scotiabank, BMO and CIBC—are all members of this alliance. As such, they have committed explicitly to transition the attributable greenhouse gas emissions from their lending and investment activities to align with a net-zero target by 2050 pathway.
InfluenceMap published research in March of this year that assessed the climate-relevant activities of the big five and to what extent these are aligned with our own climate commitments. We found that Canada's largest banks are substantially off track to meet their own net-zero targets. This is primarily explained by their lack of science-aligned transition policies, their increased financing of fossil fuel companies and low financing of green companies, and their opposition to climate-related policy.
While the “big five” banks have all set policies to reduce the emissions linked to their financing activities, we found these to be severely lacking in ambition to be credibly aligned with net zero by 2050. In practice, the banks' policies continue to allow financing to drive increased emissions in climate-critical sectors such as the energy and power sectors.
Meanwhile, Canadian banks far underperformed the largest European and U.S. banks when it comes to setting policies to phase out the financing of coal, oil and gas in alignment with the U.N. intergovernmental panel on climate change's science-based pathways. As a result of these policies, or rather the lack thereof, in 2022, the proportion of fossil fuel companies in the big five's financing deal value was almost three times that of leading U.S. and European banks. In fact, from 2020 to 2022, the big five banks increased their average lending exposure to fossil fuel companies, while their largest U.S. and European counterparts decreased their financing to the sector.
The big five also provided 3.9 times less deal flow to green companies than to fossil fuel companies over this 2020 to 2022 period. This ratio is again significantly higher than the largest U.S. and European banks, which on average respectively financed 2.8 and 2.0 times less to green companies than fossil fuels.
As part of their Net-Zero Banking Alliance membership, the banks have emphasized the importance of a public policy framework to guide the transition. Each of the big five banks has committed to, “engaging on...public policies, to help support a net-zero transition of economic sectors in line with science”.
Our analysis finds that none of the banks have publicly advocated for ambitious climate-related policy in Canada. In fact, the banks are primarily represented in financial policy matters by the Canadian Bankers Association, which emphasizes that Canada does not require climate-related financial regulation and that the transition should be dictated by the real economy.
Meanwhile, all five banks are members of industry associations blocking climate policy in the real economy, both in Canada and globally. These include the Canadian Chamber of Commerce and the Business Council of Canada, which have also advocated the expansion of Canadian fossil fuel production.
In closing, despite claiming to recognize the importance of banks' roles in the transition, it is clear that Canada's big five banks have taken little voluntary action to achieve their own climate commitments in the absence of climate-related financial regulation.
Thank you.
Liberal
The Chair Liberal Francis Scarpaleggia
Thank you, Mr. Van Acker.
For the Montreal Economic Institute, will Mr. Brossard be speaking or will the two of you share the time?
Renaud Brossard Vice-President, Communications, Montreal Economic Institute
I will do the presentation, and then Ms. Wittevrongel and I will take turns answering questions.
Vice-President, Communications, Montreal Economic Institute
Thank you, Mr. Chair.
Good afternoon, everyone.
I would like to start by thanking you for inviting us to discuss such an important topic.
At the Montreal Economic Institute, we are great admirers of a French intellectual named Frédéric Bastiat. He said that what distinguishes a good economist from a bad economist—
Liberal
The Chair Liberal Francis Scarpaleggia
We'll try again.
Can you hear the English interpretation of what I'm saying, Mr. Ali?
Vice-President, Communications, Montreal Economic Institute
Thank you.
According to Frédéric Bastiat, the difference between a good economist and a bad economist is that the latter considers only the visible impacts of public policies, while the former also considers the foreseeable impacts. In the current conversation about climate and the financial sector, the visible things are major financial institutions, such as banks and insurance companies, and large publicly traded companies. Small and medium-sized businesses are less visible, but they will nevertheless experience impacts in a foreseeable way. We are here today to ensure that you, as legislators, do not forget to consider them as you're making your decisions.
Regulatory bodies and consultants are putting a lot of pressure on the financial sector to disclose environmental, social and governance information in the annual reports of publicly traded companies. These are known as ESG reports.
Today we'll focus on one component of these reports, the environmental component, which always includes calculations of scope 1, 2 and 3 emissions. To understand what that means, let's look at an aerospace parts manufacturer at Mirabel. That manufacturer has to start by measuring the direct emissions from their manufacturing process. Those are scope 1 emissions. Then, it has to account for the emissions generated by operating its facilities: heating, cooling, electricity and so on. Basically, what that means is that the manufacturer has to ask Hydro-Québec what the carbon intensity of its electricity production is. Those are scope 2 emissions. Finally, the manufacturer must calculate and report emissions associated with its products for their entire life cycle, from supplier to consumer, until they reach the end of their useful life. That includes all emissions, from the mine where the bauxite was extracted to the use of the plane, to the recycler where the plane ultimately ends up at the end of its useful life. Those are called scope 3 emissions.
We're interested in the fact that scope 2 and 3 emissions are obviously counted twice because they refer to another company's scope 1 emissions, as well as the cost and complexity of the calculations.
Although the Office of the Superintendent of Financial Institutions, OSFI, did not see fit to estimate what this would cost Canadian SMEs, the U.S. Securities and Exchange Commission estimated that it would cost between $490,000 and $640,000 U.S. to implement these processes in SMEs in the first year. I don't know if you know a lot of small business owners, but I can tell you that the ones we talk to don't have that kind of money sitting in their bank accounts to pay an army of ESG consultants.
Some people say that small businesses would not be affected, because these requirements would only apply to publicly traded companies. The thing is, hundreds of SMEs are listed on the Toronto Stock Exchange, so they would be affected, and a number of other businesses would be indirectly affected.
To fully understand how these companies would be affected, let's revisit our aerospace parts manufacturer. This company might be an SME, but it's more likely to be a large manufacturer, such as Bombardier. The company's business relationships depend on the price, quality and reliability of its products. That's how it stays competitive. However, when Bombardier has to report on its scope 3 emissions, it will have to obtain that data from its suppliers, who will then have to request it from their own suppliers. As a result, even if SMEs are not directly targeted by these regulatory requirements, they may still have to pay the price and comply in order to keep their corporate customers.
As you study the relationship between finance and climate, we encourage you to keep in mind how many of the restrictions meant for big business end up having an indirect and disproportionate impact on SMEs, despite your best intentions as legislators.
Thank you.
Liberal
The Chair Liberal Francis Scarpaleggia
Thank you very much.
Mr. Deltell, you're going to start us off today. You have the floor for six minutes.
Conservative
Gérard Deltell Conservative Louis-Saint-Laurent, QC
Thank you very much, Mr. Chair.
Colleagues, it's always good to see you.
Ladies and gentlemen, welcome to your Canadian Parliament.
We all know climate change has real consequences that we have to deal with. Our common goal is to reduce pollution and emissions to ensure a better future for our children. We each have our own ideas about how to achieve that objective.
I want to start with Ms. Bak.
You delivered the first words of your speech in impeccable French, so allow me to speak to you in French.
You said that companies that disclose their information are six times more efficient and generate six times more sustainable revenue than those that do not. I would just like to know how you came up with that figure.
Do you look at all industries and all companies of all kinds, or do you categorize them? I would imagine that a high-tech company is likely to have a much lighter environmental footprint than a company that produces, say, iron for very specific parts. Did you distinguish between those types of companies?
Partner, Risk Advisory, Financial Services, ESG & Impact, Deloitte
We use a database that includes data on sustainable investments from all sectors of the economy. What we see across all sectors is that the sustainable investments made by companies that disclose their scope 1 and 2 emissions are six times greater than the sustainable investments made by companies that don't disclose their scope 1 and 2 emissions.
