Evidence of meeting #121 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 taxonomy.
A recording is available from Parliament.
Conservative
Michael Kram Conservative Regina—Wascana, SK
Okay. Thank you.
Maybe I'll switch gears to Mr. Arnold from the Canadian Climate Institute.
Mr. Arnold, what would happen to the rates of return on pension funds and mutual funds if chartered banks focused less on rates of return and more on complying with the taxonomy system provided by the Bank of Canada?
Acting Director, Clean Growth, Canadian Climate Institute
Some of the research we've done in this area suggests that financial institutions may be investing in green and transition assets at a lower level than what they would otherwise because of the lack of standardized information.
This is actually not about changing or modifying the mandate of financial institutions, like pension plans, which are still going to have a fiduciary duty to the customers they represent.
Liberal
The Chair Liberal Francis Scarpaleggia
Thank you. We'll have to stop there.
Mr. van Koeverden, go ahead.
Liberal
Adam van Koeverden Liberal Milton, ON
Thank you very much, Mr. Chair.
Thank you to the witnesses for joining us. We're always so grateful for expertise and for people who do this research for a living and come to our committee to provide us with wisdom and insight.
My first question will be for Professor Dietsch.
Professor Dietsch, earlier this year, our government brought forth Bill C-59, which contains a truth in advertising amendment that requires corporations to provide evidence to support their environmental claims. Subsequent to that, the Pathways Alliance, a group of oil sands companies, removed all of their website and social media content from the Internet.
The Competition Bureau defines greenwashing as false or misleading environmental ads or claims, or environmental claims that seem vague, exaggerated or not accompanied by supporting statements. It's fairly clear that we've seen that type of behaviour or conduct from the oil and gas sector in Canada, but in your view, are there financial institutions in Canada that are also greenwashing when they use broad terms like “sustainable finance” without backing them up with data?
Professor, University of Victoria, As an Individual
I think I would agree that there is—
NDP
Laurel Collins NDP Victoria, BC
Mr. Chair, I have a point of order.
I'm sorry to interrupt. Did we miss one of the witnesses?
Liberal
The Chair Liberal Francis Scarpaleggia
Yes, we did. I was going to bring that up after Mr. van Koeverden.
I apologize, Mr. Coffin.
NDP
Laurel Collins NDP Victoria, BC
I just think, to give all of the MPs the opportunity to ask questions of all of the witnesses, maybe we could allow him to have his five minutes before Mr. van Koeverden.
Liberal
The Chair Liberal Francis Scarpaleggia
Okay.
I apologize, Mr. Coffin. I'm really sorry about that. Go ahead for your five minutes and we'll pick up after. It's a tough one. Sometimes you don't see somebody in front of you. Anyway, I apologize.
Go ahead, please, Mr. Coffin.
Michael Coffin Head of Oil, Gas and Mining, Carbon Tracker Initiative
Good morning, and thank you for the opportunity to speak.
Climate change is absolutely the defining challenge of the century and will give rise to increasingly severe financial risks unless we accelerate climate action. Risks include not only the cost of adapting to physical impacts, for example, increased fire and hurricane intensity, but also those related to transitioning businesses as policy-makers act to attempt to avert the worst physical aspects. Transition risks include both policy and regulatory-related transition risks, predominantly focused on decarbonizing activities, and technology-related transition risks related to changing demand patterns and consumer preferences.
Individual sectors are impacted differently by these climate-related financial risks. They are, however, all interrelated. Policy action to reduce the physical impacts on sectors such as agriculture drives policy action to decarbonize others, such as transport—for example, mandates to shift to electric vehicles. In turn, this reduces demand for oil products for transport fuels via substitution. Coal and gas are similarly impacted as electricity is increasingly generated from renewables.
Climate risks are felt by businesses across all sectors and, by extension, their investors. This is particularly so for investors with long-term liabilities invested across a broad cross-section of the market—universal owners—including defined benefit pension schemes. Given many such schemes—including four of the five largest Canadian funds by assets under management—are state-backed, climate risk is ultimately held by governments and taxpayers. Climate change must be viewed as a systemic financial risk to markets, and politicians who dismiss climate risk as a woke concern do so at their own peril.
From the Canadian economic perspective, agriculture is a big sector, highly exposed to physical impacts, while also a major fossil fuel extractor and exporting economy. As European banks increasingly turn away from fossil fuel lending, these risks are becoming concentrated within the Canadian financial system. Lower long-term demand for oil and gas exports will also impact our system.
Investors must consider the impacts of these climate-related financial risks on portfolios and use appropriate climate models and scenario analyses to do so. Pension funds should keep the methods they use to assess risks current and keep members informed on how they are managed.
Current practices in the investment industry have major shortcomings, however. A range of key players, from investment consultants to pension funds and banks, rely on economists' flawed research to map warming to future GDP damages, informing investment decisions as well as supervisory stress tests. Such economists' work is generally self-referential, generally ignoring critical feedback from climate science.
Invalid assumptions within one such model, the DICE integrated assessment model from William Nordhaus, include, one, that industries not exposed to weather will be unaffected by global warming, which also ignores the two types of transition risks I described earlier, and two, a quadratic function is appropriate to extrapolate damages, despite other functions—for example, an exponential function—equally fitting our historical data but projecting far greater climate impacts.
Such damages are likely greater for a given temperature and occur sooner in time. They will likely have a greater cost in present value terms—i.e., the financial costs are less discounted—so the benefit of climate action is underestimated within the financial system.
Carbon Tracker's report “Loading the DICE” warned that, “Following the advice of investment consultants, pension funds have informed their members that global warming of 2-4.3°C will have only a minimal impact upon their portfolios.” Another study looking at economists' projections suggested a 5°C world would lower GDP by 10% and a 7°C world by just 20%, which cannot conceivably be reconciled with climate scientists' warnings that such temperature rises will be an “existential threat” to human civilization.
Ultimately, financial institutions, central banks, regulators and governments have all been misled by such models, underestimating the dangerous and likely economic damages of climate change.
While that report was focused on U.K. pensions, it featured in the Canadian press and findings were applied to a number of Canadian pension funds including AIMCo, PSP, IMCO and others, where a “lack of disclosure leaves plan members [ultimately] in the dark about the pension risks of climate change”.
Furthermore, a review of 2023 Task Force on Climate-related Financial Disclosures reports of leading pension funds found many others were lacking in terms of their climate disclosures, particularly around client choice of scenarios and climate risks being presented.
We see a number of areas for potential regulatory interventions. These focus on investors, investment consultants, the economist community and a consideration to require corporates to publish transition plans—as, for example, the U.K.'s transition plan task force and the EFRAG guidance in the European Union.
Liberal
The Chair Liberal Francis Scarpaleggia
Thank you, Mr. Coffin. We have to stop there. Again, my apologies for missing you before.
We'll pick it up again at Mr. van Koeverden.
Liberal
Adam van Koeverden Liberal Milton, ON
Thanks, Mr. Chair.
I'd like to thank all our witnesses, including Mr. Coffin, for coming today to share their insights.
Professor Dietsch, do you need me to repeat any part of the question I asked earlier?
Professor, University of Victoria, As an Individual
No, that's fine. I've had some time to think about it now. The question was on whether or not greenwashing is more widely spread than the fossil fuel sector.
I'd say two things. I'd say that there is greenwashing going on in the financial sector too, but there's an explanation for this. As Mark Carney, who you want to invite, I think rightly, to your committee, keeps repeating, financial institutions are very bad at evaluating climate risk. They might actually believe that something is sustainable when it isn't.
That leads me to the second point, which is that we need a paradigm shift about what's going on. Blaming commercial banks alone would be short-sighted. It's the Bank of Canada that supervises what they do. They lend to fossil fuels. Who gives the Bank of Canada the mandate? The government does. Who elects the government? We do. In a way, we're all in this together. We have to realize that these are political choices that we're making. What's happening in the financial sector is in a way a huge implicit subsidy to the fossil fuel sector. That is not discussed as such.That's what we need to focus on.
Liberal
Adam van Koeverden Liberal Milton, ON
Thank you. I couldn't agree more with the notion that we're all in this together. Climate change doesn't care what colour your lawn signs are. It affects us all—but I won't say equally. It certainly does affect already more vulnerable people more than it does others.
This question is for all three of you, with perhaps Professor Dietsch going first. Most people agree with the notion that runaway carbon emissions are largely responsible for climate change and extreme weather, and understand that oil and gas producing nations like Canada need to reduce our emissions. All industries in Canada have demonstrated some progress except Canada's oil and gas sector. Higher emissions are being driven primarily by oil sands and bitumen production in Alberta. Despite that, Conservatives seem to be of the opinion that Canadian emissions are somehow exceptional, more ethical or less damaging to our environment.
Is that compatible with the science? Do you believe pricing pollution is one way to reduce our emissions?
Professor Dietsch, I'll start with you.
Professor, University of Victoria, As an Individual
To answer the simple part of the question first, yes, that is what the science shows. Carbon emissions are causing harms, from health outcomes to premature deaths in Canada, etc., and climate events. The economics show that this is already more costly than profitable. It's just a question of who bears the costs.
I agree with you that a first best solution would be to internalize those externalities and have higher prices on carbon-emitting activities, but I think we also need to work on the financial system. That's why I tried to outline what's going on there in terms of the bank lending.
Acting Director, Clean Growth, Canadian Climate Institute
Thanks for the question.
To start with the last part first, yes, carbon pricing is fundamental. The research of the institute has shown that the industrial carbon pricing system in Canada has driven the bulk of emissions reductions in the country. That would include emissions reductions from such industrial sectors as oil and gas, although, as you mentioned, emissions continue to go up. Carbon pricing plays a role there, certainly, but there are other complementary policies as well that we've looked at. Those include more stringent methane regulations, a cap on oil and gas emissions and other market-based policies.
I think this gets back to the idea of a taxonomy. We've laid out a framework for how investments in oil and gas might meet the label of transition under very stringent requirements. We put out a paper on that last year. Essentially, it would require commitments at a corporate level to net zero with clear, credible transition plans as well as having, at the asset level, an emissions curve that aligns with net zero. It's a high bar but not impossible. That's the type of policy that we see as necessary to bend the curve.
Liberal
Adam van Koeverden Liberal Milton, ON
Mr. Coffin, if you'd like me to repeat the question, I'd be happy to.
Head of Oil, Gas and Mining, Carbon Tracker Initiative
I missed the first part. The audio cut out. I'd be happy to hear the question.
Liberal
Adam van Koeverden Liberal Milton, ON
The preface of the question was about how most industries in Canada have demonstrated progress in lowering their emissions. I gather from your intervention that you would agree that carbon emissions are driving climate change and extreme weather.
My question was about whether or not Canadian emissions from Canadian industry are somehow exceptional or more ethical or less damaging, thereby leading to the very common Conservative notion that we ought to drive industry oil and gas in Canada because our emissions are somehow better than those of other countries. Does science back that up?
Head of Oil, Gas and Mining, Carbon Tracker Initiative
I'd support the comments of the other two witnesses. No, Canadian emissions are in no way exceptional in that regard.
I think I'd make another point. Ultimately, the energy transition is about moving away from oil and gas. In some ways, decarbonizing it doesn't really make sense. It's about reducing the volume of production and the consumption over time.
You need to decarbonize consumption sectors, but the energy supply sector needs to move away from oil and gas.
Bloc
Monique Pauzé Bloc Repentigny, QC
Thank you, Mr. Chair.
I'd like to thank the witnesses. Their presentations were very interesting, but I didn't have their notes. I would like them to send them to us.
I'll start with you, Mr. Arnold, from the Canadian Climate Institute.
We often talk about clean growth. It irritates me to see these two words used together. Mr. Coffin has just touched on this point, saying that we must first move towards reduction. Growth in a decarbonized economy means prioritizing carbon-neutral energy sources—
Liberal
The Chair Liberal Francis Scarpaleggia
I apologize for interrupting, Ms. Pauzé, but I'm told there's no interpretation.
Are we back to normal?
All right, everything's working now.
You may continue, Ms. Pauzé.
Monique Pauzé Bloc Repentigny, QC
I imagine you're going to reset the clock to zero, Mr. Chair.
As I was saying, the words “growth” and “clean” are often lumped together, and that really upsets me. Mr. Coffin just mentioned it. We must first move towards reduction. Growth in a decarbonized economy means prioritizing energy sources that are carbon-neutral and those that are the least harmful to the environment and human health.
When the financial system, faced with a lack of regulation, fails to adjust, it's the whole of society that pays for the damage caused by the climate crisis. Just think of the enormous damage in Montreal this summer, in August.
Mr. Arnold, your organization has a lot of credibility, and I think the federal government is listening carefully. Will you unambiguously support the climate-aligned finance bill? I imagine you're very familiar with Bill S‑243, which is being considered by the Senate. I'd love to hear your comments on it.