Environment Committee on May 30th, 2024

[Peter Routledge, Superintendent, Office of the Superintendent of Financial Institutions]

Mr. Chair and members of the committee, thank you for inviting us to contribute to your study on environment and climate impacts related to the Canadian financial system. I'm joined by my colleague Stéphane Tardif, managing director of OSFI's climate risk division.

Parliament has assigned to OSFI a mandate composed of two basic principles: It asks OSFI to ensure financial institutions are in sound financial condition and to ensure they adequately protect themselves against threats to their integrity or security, including foreign interference. When institutions are at risk of falling short of these principles, we oblige management and boards of directors to take prompt corrective measures.

OSFI operates a principles-based regulatory model in which we articulate broad prudential principles to which we ask financial institutions to adhere. In contrast to many global peers, we do not impose rules on regulated constituents, preferring instead to issue guidelines that articulate sound principles aimed at protecting the creditors, depositors and policyholders. We believe our principles-based model produces better institutional resilience at a lower cost to our regulated constituents.

At OSFI, we see the risks posed by climate change on our regulated constituents as an emerging financial risk with uncertain and non-linear downside costs. As economies adapt to climate change, we also recognize that financial institutions will have opportunities to fund that adaptation and profit from that activity.

In pursuing our mandate, Parliament instructs OSFI to protect the rights of creditors, depositors and policyholders, having due regard to allow financial institutions to compete and take reasonable risks. To support sound management of the financial risks posed by climate change without unduly impairing pathways to profitable investments in adaptation, OSFI has undertaken a number of initiatives to encourage financial institutions to advance their capabilities in measuring and managing climate risk. Through in-depth empirical analysis, Canadian financial institutions can become early beneficiaries of sound climate risk management.

In closing, OSFI has an explicit mandate to contribute to public confidence in the Canadian financial system. This includes ensuring that the financial institutions we regulate are managing appropriately the risks that could impact their safety and soundness. Among these are the physical and transition risks associated with climate change. While OSFI does not have an explicit mandate to advance climate change objectives, our current mandate provides us with ample scope to take action to ensure the financial institutions respond to the opportunities and threats of climate change effectively.

Thank you.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you, Superintendent.

Mr. Leslie, you will begin the first round of questions. You have the floor for six minutes.

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

Thank you, Mr. Chair.

Mr. Pardy, in your opening remarks, you mentioned something along the lines of business leaders not needing to be told to pay attention to risk because, as any good business leader would, they are already doing that.

In your assessment, is there any evidence to suggest that pension funds or financial institutions aren't paying attention to those market dynamics and market risks, and that it is important that the government institute and impose new regulations on them?

[Bruce Pardy]

Not that I'm aware—

[Shafqat Ali, Liberal, Brampton Centre, ON]

I have a point of order, Chair. I can't hear anyone.

[A voice]

Neither can I.

[The Chair, Liberal, Francis Scarpaleggia]

Are you saying that nobody can hear anything in either language, or is it the translation?

[Dr. Ellen Quigley]

The floor audio is muted.

[The Chair, Liberal, Francis Scarpaleggia]

The floor audio is muted.

Is it on now?

[A voice]

No.

[The Chair, Liberal, Francis Scarpaleggia]

Okay, we're going to start from the top.

Let's go. Mr. Leslie, it's your turn.

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

Thank you.

Mr. Pardy, in your opening remarks you alluded to the fact that good business leaders are already paying attention to what is going on in terms of market dynamics and in terms of risk.

Have you found any evidence that pension funds and financial institutions aren't paying attention to that risk or those market dynamics and that the government should or needs to impose new regulations on them?

[Bruce Pardy]

There are none that I'm aware of, no. The test of risk for a pension fund or a company is whether or not they're succeeding in the marketplace. If you are a pension fund and not paying attention to risk and your investments decline in value, then you're not doing very well. You didn't need government regulations to demonstrate that.

I think we're in danger of conflating two different kinds of risk. One is the risk to a company. That is the risk the company is in the business to manage. The other risk is the one you want to impose upon them, which is the risk of global climate change.

I'm not saying that's not a risk; I'm saying that you're trying to internalize it onto the companies instead of being governmental about it and establishing your own rules about it instead of trying to make them do it for you.

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

Do you think it's a risk when you have politicians playing around and meddling with CPP, which is our major pension fund and the biggest safety net that Canadians rely on across this country? Is that also a risk that we should be considering—the fact we are intentionally trying to starve out the financing of energy projects that have major implications for our country?

[Bruce Pardy]

I do, yes.

You're splitting the loyalties of the pension. You're trying to say that you want to provide returns to the people you're going to support in their old age, but you also want it to pay attention to something else. That, as often as not, is going to diminish the returns you produce for that first group of people.

The best policy is a straightforward one, which is that the pension should be able to pursue the best returns available. Those companies they're investing in are acting within the law. Government meddling just messes the whole thing up.

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

We've heard in previous testimony that these ESG investment strategies have broadly underperformed typical portfolios with more diversified strategies by more than about 250 basis points per annum over the past five years.

If this Liberal-NDP coalition decided to impose an ESG mandate on the CPP or any other pension funds in this country, it would cost Canadians potentially tens of billions of dollars in lost income and lost security for their retirement and their futures. In your assessment, is that an accurate portrayal?

[Bruce Pardy]

I don't have those numbers at my fingertips, but let me say this: I am not here to argue against a company deciding to take on certain kinds of priorities, to get certification or to adopt guidelines. I'm not suggesting that at all. As long as they decide to do that in the interest of the company, that's great.

What we're talking about is the government imposing mandatory rules. You're not allowing the company to make the judgment about the risk, about the investment, about the productivity or about the profit. You are making those decisions for them. The division is between voluntary and mandatory.

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

We've heard in previous testimony that rather than divestment, investment is the more prudent approach, particularly given the other nations that will provide these fuel or energy sources if Canada does not.

Is it fair to say that this approach is actually the exact opposite? Should we be investing in new, clean technologies to reduce our emissions of our particular energy sources, while simultaneously keeping that investment in Canada?

[Bruce Pardy]

As I alluded to, Canadian energy is actually a tremendous source of solutions for reducing global carbon emissions. It's not the main source of the problem; it could be a great source of the solution.

The fact is that we are knee-jerk about this and we think we shouldn't develop anything in this country. That is not what other countries are doing. Other countries that have natural resources are digging up lots of coal. In China and India....

I'm sure you've been told this. It's China in particular. China is far and away the largest carbon producer on the planet. Their obligations under the Paris Agreement are essentially non-existent. If we exported natural gas to China, the bang for the buck would be far greater than any of the provisions you are contemplating putting in place.

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

A number of years ago, there was a Supreme Court decision that stated, “directors owe a fiduciary duty to the corporation and only to the corporation”. Could a government-imposed ESG mandate on private companies conflict with their fiduciary duties?

[Bruce Pardy]

Absolutely. What you get are split loyalties, as I alluded to earlier. The way investors are protected in our economy is that the directors and officers—as you allude to—owe a fiduciary duty to the corporation. What the courts have said is that this fiduciary duty means that they must try to maximize the profit of the company for the sake of the shareholders.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you.

[Bruce Pardy]

If instead the government mandates a split loyalty and makes those directors and officers serve another master, then the—

[The Chair, Liberal, Francis Scarpaleggia]

We have to stop—

[Bruce Pardy]

—fortunes of those investors will decline.