Environment Committee on Sept. 23rd, 2024

[Michael Coffin]

I think there are a number of reasons. First, carbon capture and storage has been around for a while, but it's not been proven to be commercially viable at scale and actually this total sum of CO2 captured and fully sequestered on geological time frames is very limited.

The second part is this. What is the cost of doing that? Would it actually be cheaper to substitute that coal power generation with renewables, whether that's wind, solar or other forms of generation, particularly if then that CCS is being subsidized through state or public funds? Actually, by either economic diversification or helping support the transition towards a greener system, that money would be better spent rather than just in CCS.

[The Chair, Liberal, Francis Scarpaleggia]

We have Mr. Ali for three minutes.

[Shafqat Ali, Liberal, Brampton Centre, ON]

Thank you, Chair.

Thank you to the witnesses for appearing before the committee.

My question is for Mr. Arnold. What measures should be taken to prevent greenwashing in the financial sector?

[Jonathan Arnold]

That's a very big question. However, I think the three main initiatives that I laid out in my opening would cover that well, from taxonomy to climate-related disclosures and transition plans. The combination of those essentially helps shine a light on the physical and transition risks to the financial system. Doing all of those things and levelling up Canada to where these standards are going internationally is essential to reducing greenwashing and that misinformation in capital markets.

[Shafqat Ali, Liberal, Brampton Centre, ON]

Could a green and transition finance taxonomy provide clarity and consistency for investors so that they can easily compare the environmental performance and impact of institutions and investment funds to inform their financial decisions?

[Jonathan Arnold]

Absolutely...and you don't have to ask me that question. The 25 biggest financial institutions in Canada are asking for this for exactly that reason. Lots of financial institutions both in Canada and in other parts of the world have their own internal taxonomies that they use, but they're all different and that leads to this alphabet soup of how we track environmental, social and governance issues, or ESG. Taxonomies are really a way of standardizing that language to reduce greenwashing in capital markets.

[Shafqat Ali, Liberal, Brampton Centre, ON]

In the absence of finalized green and transition taxonomy, how have Canadian financial institutions been assuring potential investors that green financial products are what they appear to be?

[Jonathan Arnold]

I'd say that's difficult. There are some financial institutions that are a little bit further advanced than others in terms of developing their own internal frameworks and publishing those in a public-facing way. However, it is challenging, and especially when we speak to these financial institutions, it requires so much due diligence on their part and a lot of technical knowledge to do this work themselves.

Having a standardized national taxonomy is a way of simplifying all of that. If you think of the Energy Star label, for example, if you were to go out and buy a new refrigerator, you as a consumer don't have the time to look into the environmental credentials of that one particular refrigerator, so that Energy Star label plays a big role in that.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much. We'll have to leave it at that.

I'd like to thank the witnesses for sharing their knowledge with us. It's been quite a stimulating discussion, I must say. They have contributed a great deal to our thinking. I wish them a good day.

We'll take a short break to get ready to welcome the next group of witnesses.

[The Chair, Liberal, Francis Scarpaleggia]

We're back with our second panel.

We have with us Mr. Richard Dias, who's appearing as an individual. He is a global macro strategist. We have from Environmental Defence Canada, in person with us, the senior manager of climate finance, Ms. Julie Segal, and from Re-generation, we have the co-executive director, Gareth Gransaull, who is also by video conference, as is Mr. Dias.

You have five minutes for opening statements.

We'll start with Mr. Dias.

[Richard Dias, Global Macro Strategist, As an Individual]

Good afternoon, ladies and gentlemen. Thank you.

As a proud Quebecker and Canadian, I'm honoured to speak with you today and I want to express my gratitude to the committee members for the opportunity to provide testimony.

First, I'll tell you a little bit about myself. I graduated from McGill in finance and economics. I am a CFA charter holder, with over 18 years of experience as a global macro strategist. In this capacity, I've worked for large institutional asset managers and hedge funds in the city of London, United Kingdom. I'm now back in Canada as a portfolio manager, helping families preserve and grow their wealth.

I'm one of the co-hosts of The Loonie Hour, Canada's most popular economic and financial market podcast, which is committed to demystifying capital markets for Canadians. I love what I do, and I'm committed to a dispassionate analysis of macroeconomic phenomena. I've earned my reputation as someone who can articulate cogent and pressing analysis without fear or favour.

In my role as a global macro strategist, I've researched more topics than I can remember—productivity, housing, monetary policy, energy, etc. Having worked for a large financial institution, I've also been exposed to green finance, ESG and other sustainable investment initiatives, as well as the corporate apparatus that has mushroomed to exploit society's concerns over the environment.

Having reviewed some of the witness testimony in preparation for today, I want to highlight that several speakers are engaged by firms that would stand to directly benefit financially from the types of regulations that are likely to result from the study in question. As loyal employees, they are responsible for telling this committee that green finance, sustainable investing and the regulations proposed will benefit Canada and the environment writ large. However, their firms' revenues are tied not to lowering global emissions or hitting Canada's Paris Agreement commitments but rather to the billable hours or extra fees they can amass to help navigate the increasing regulatory burden that these regulations would necessarily result in.

I bring this up to cast a spotlight on something that is a critical pillar in the investment world, which is fiduciary duty—the obligation to act in the best interests of clients or employers. Put simply, who do you ultimately work for? Investment managers, for example, have the solemn duty to maximize financial returns for investors or pensioners. It is not to use their position of incredible power to prioritize one social or environmental goal over another, no matter how noble that goal is. Using regulations to coerce financial institutions to subordinate their clients' interests in favour of political goals is on its face unethical, as it would be for a bank manager to direct a bank's considerable financial power to achieve a political aim rather than to act as a sober custodian for its shareholders.

Furthermore, it is not even clear that this would work, resulting in both unethical action and a net loss of returns to its clients and profits to its shareholders—and there are plenty of examples. The consultants, however, will get very rich.

In effect, this is legislation through the back door. Given that reporting of this nature is onerous and the negative impact on a country suffering—and I quote the Bank of Canada here—a productivity emergency, it is clearly ill-advised.

Another angle for your consideration is the law of unintended consequences. On this I submit the following testimony. Green energy policy, as it is constituted, is the greatest thing to happen to fossil-fuel companies since the transatlantic flight. I'll repeat that: Green energy policy has been a gift for the industry you're trying to neuter.

Humans consume 101 million barrels of oil a day. This number is rising; it is not falling. Even in a world of hyper EV adoption, it is likely to stay well above 100 million barrels for at least a generation or two. The issue with this is that recent green energy policy has been focused on starving public oil companies of capital in order to constrain or constrict the supply of oil, but that is doing nothing for demand. This situation has, predictably, lifted the floor on oil prices. As a result, normally spendthrift oil companies are now reluctant to deploy capital to procure fresh reserves.

Cash flows, on the other hand, are at record levels because demand is rising and prices are high. This has lifted cash flows, along with the falling capex. There has been an explosion of free cash flow yields. Profits are at a record level, and cash is being returned to shareholders by dividends and share buybacks, and these companies are paying down debt. Green energy policy has instilled a fiscal discipline in the CEOs of these oil companies for which shareholders have been begging for 40 years. The industry has never been healthier.

Surely—

[The Chair, Liberal, Francis Scarpaleggia]

Mr. Dias, we're going to have to stop there. I'm sure we're going to have a lively debate today, and there will be opportunities to deliver your ideas.

Ms. Segal, go ahead for five minutes, please.

[Julie Segal, Senior Manager, Climate Finance, Environmental Defence Canada]

Good morning.

My name is Julie Segal. Thank you for inviting me to appear.

I lead a program on climate finance policy at Environmental Defence. I managed a portfolio of investments before working on policy. I'm a member of the Quebec government's advisory committee for its road map to a sustainable financial system.

This study about the environmental and climate impacts from Canada's financial institutions is important. Canada needs policy to align its financial system with climate action and Canadians want it. I'm glad to detail solutions today.

Globally, Canada is still recognized as a low-regulation jurisdiction on sustainable finance. The lack of climate-aligned finance policy in Canada harms our environment and people living across the country. The lack of climate-aligned financial policy also damages our competitiveness for business and investment. For the benefit of this environment committee, I will focus on the environmental impacts.

To start, Canadian financial institutions provide among the largest sums of money to oil, gas and coal. The harms from oil, gas and coal are irrefutable when it comes to climate change, with fossil fuels being the leading cause, and are likewise obvious for other environmental harms like water pollution.

Where our banks and pension managers place money today determines these real-world impacts. Their climate ambitions do not match the urgency required to limit global warming, and they are not investing sustainably enough. Nearly all of Canada's financial institutions have committed to reducing their climate-harming emissions, but very few have plans or have started to act. Data shows that financial institutions' targets and plans improve when they are regulated to deliver on them.

People across Canada understand this. This is a very important point I'd like to underline. In recent polling, people across Canada said they do not trust their finance institution to take meaningful action on climate change without regulation. Over 90% of people do not trust voluntary action from their financial institution. The majority of people surveyed want rules to ensure the financial system invests more sustainably. When this is framed as directly countering greenwashing, just about 80% of people want the government to implement sustainability rules for the financial sector.

We have ready-made policies in Canada that can be executed. The climate-aligned finance act introduced by Senator Rosa Galvez is currently being studied in the Senate. I had the pleasure of being an adviser for this bill. It outlines a set of policies that would align our financial system with Canada's climate commitments of limiting global warming to 1.5°C.

More broadly, requiring plans from financial institutions—known as climate transition plans—is key. This is something nearly all participants mentioned today. This ensures that banks, pension plans, insurers and large companies detail plans for climate action, including short-term actions.

Modernizing the mandates of financial regulators is another key point for ensuring accountability, as is clarifying that leaders of financial institutions should aim to help mitigate climate damages. Public opinion supports these policies. Over 120 groups have specifically endorsed the climate-aligned finance act. Elected officials from four political parties, including members from this committee, endorsed a motion to align our financial system with safe climate action.

People understand that climate change is expensive. People understand that financial institutions should serve their interests, as the clients of banks and the beneficiaries of pension funds. Right now, the financial sector is under-regulated on climate and environmental impacts.

Canadians are waiting for outcomes on climate-related financial policy. This is the missing piece of Canadian climate policy.

In your committee report, I very much encourage you to urge the federal government to prioritize using all tools at its disposal to align Canada's financial system with the Paris Agreement. Canadians want mandatory policies that ensure that finance is sustainable and resilient to climate change.

Thank you very much for inviting me to testify today. I look forward to questions.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you, Ms. Segal.

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

[Gareth Gransaull, Co-Executive Director, re•generation]

Thank you so much for your time. It is an honour to speak to you today.

My name is Gareth Gransaull. I'm a researcher at the Institute for Integrated Energy Systems at the University of Victoria. I am also presenting as the co-executive director of Re-generation, a non-partisan coalition of business and economic students at 23 campuses across the country.

I want to begin my remarks by observing that the people around the world most concerned about climate change are not actually environmentalists. They're military experts. The Pentagon calls climate change an “existential threat” and is preparing for a world of heightened national security risks due to conflict, displacement and natural disasters. However, when you look at the climate stress tests of major financial institutions in Canada, in the fine print you'll notice something strange. Many of them say that climate change is not a material risk to their asset values.

How is this possible? Nobel Prize-winning economist Joseph Stiglitz and Nicholas Stern have publicly said that the mainstream models we use to quantify climate risk, which central banks and prudential supervisors then use to create the guidelines they give to financial institutions, are deeply flawed. As a result, the data on which the so-called risk experts rely is often very wrong.

Let's give an example. We know that the world is warming faster than predicted, which means more days of extreme heat. At temperatures higher than 35°C, photosynthesis begins to shut down. Therefore, scientists predict that by 2030, the frequency of crop failures in the world's breadbaskets could increase by 450%. The most prominent model that purports to account for the impacts of climate change on the economy, the DICE model, as Mr. Coffin mentioned earlier, literally assumes that the systemic failure of global food production wouldn't matter that much, because agriculture is only 3% of GDP. Let that sink in for a second.

In other words, we're living in a reality gap. There's the real world, where 26 million people were displaced by natural disasters last year alone, and then there's the alternate reality that the banks and regulators are living in, where three or four degrees of warming apparently won't affect asset prices. That is actually what the CFA Institute is currently teaching their certificate students. Conversely, if you look at the recent report by the U.K. Institute and Faculty of Actuaries, you see that they predict a possible destruction of global GDP by as much as 50% by 2070.

The world is currently on track for 3°C of warming. At 1°C, the town of Jasper, Alberta, burnt to a crisp overnight. Because the climate system behaves in non-linear ways, 3°C is not three times worse than 1°C. It's exponentially worse.

There are nine globally significant tipping points that could all cascade simultaneously. The Institute for Economics & Peace predicts that at current rates, there could be 1.2 billion climate migrants by 2050. This is why the 1.5°C temperature threshold is so important. The good news is that the International Energy Agency has developed a net-zero pathway that would allow us to preserve a livable climate without relying on unrealistic levels of reverse combustion. This is coming from the world's top energy economists, but they're very clear about what this means—no new fossil fuel projects after 2021.

The largest five Canadian banks are not aligned with this science-based pathway. They have given over $1 trillion to the fossil fuel industry since the signing of the Paris Agreement, including $26 billion to fossil fuel expansion in 2022 alone. Climate change is a systemic risk to the financial system, but it's one that the financial system itself causes by funding fossil fuel expansion. This self-reinforcing cycle is not going to end without greater policy ambition. Canada's current approach is a “choose your own adventure” that allows financial institutions to disclose risks without actually requiring actions to limit those risks.

To address this, we need mandatory 1.5°C-aligned transition plans that align with international best practices, including the UN guidelines for net-zero commitments. One way would be to introduce the climate-aligned finance act put forward by Senator Galvez, which would substantially improve corporate governance on this issue. We also need to make sure that new fossil fuel projects are not given a green label under any voluntary or regulated system and that natural gas stays out of Canada's transition taxonomy.

Thank you so much for your time. I'd be happy to answer any questions.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you, Mr. Gransaull.

We'll go to the six-minute round.

It's Mr. Mazier who's batting leadoff.

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

Thank you, Chair.

Thank you to the witnesses for coming today.

Mr. Dias, my questions will be for you today. Can the Canadian government help meet the targets of the Paris Agreement by interfering in the financial system and by imposing mandatory climate-related disclosures?

[Richard Dias]

I just think it's interesting that the gentleman previous said that we should not expand on natural gas, because the way that the U.S. has absolutely crushed its emissions goals is by shifting from coal to natural gas. It has done so by financing projects at certainly the bank level and definitely a pension fund level. Obviously, there was some private money in there too. Is the goal to end the fossil fuel industry or is the goal to end emissions? That's the first thing.

The second thing is that, yes, that would be an important consideration. When you think about reducing emissions, probably the most important example of using fossil fuels to drastically do so—we're not talking about a little bit here, we're talking about 20% over maybe a 10- or 12-year period—was through a transition to natural gas.

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

You mentioned the principle of fiduciary duty. Should average Canadians be worried if the government is undermining this principle by trying to achieve a global environmental objective through financial institutions?

[Richard Dias]

Having worked for large financial institutions, I think it's important to understand how, why and when these people get paid, and it is absolutely not to meet global or countrywide green energy goals.

I'm not sure if I'm allowed to give specific names of ETFs as examples that claim to be designed to support climate initiatives or whatever, but what they do is exploit people's good intentions or noble view that emissions should be lower or what have you.

The consultants you've heard are the exact same way. If tomorrow someone invented a machine that immediately fixed climate change at the snap of a finger, those consultants would all be out of business, and I'm sure they would be reluctant to suggest that as a means to deal with this obviously very big problem.

It's very important that we keep those people's incentives front of mind and hold that fiduciary duty as a sacred totem. Those investors should be representing the financial interests of those clients, first and foremost and above all else, and allowing for legislation. If you want to ban oil and gas, bring it to Parliament and let's vote on it rather than going through the back door, which is the way I see it, and subverting the fiduciary duties these investors have on behalf of their clients.

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

Can you explain how consultants in financial institutions will benefit financially from climate-related disclosures or ESG ratings at the expense of returns for Canadians?

[Richard Dias]

Absolutely. Let's be honest. For some of the companies that are supposed to be leaders in this ESG stuff, it's basically just a box-ticking exercise. It's really important because, through the advent of ETFs, the brokerage fees—the fees that these large asset managers have been able to charge—have basically been destroyed.

You used to be able to, through all kinds of either research dollars or soft dollars, charge hundreds of basis points to your clients for the assets that you were managing. ETFs basically allowed individuals to buy pieces of, let's say, the S&P 500 for a de minimis amount of money. It absolutely destroyed that part of the business.

Financial businesses have been so readily willing to sign up for sustainable investment stuff, green energy policies and ESG, because if they say, “Oh, it's expensive to do the due diligence around this business,” of course, that expense means you're adding value. You're doing your job as the financial guy or girl to see if this business is really meeting their climate objectives.

What you end up doing is you supposedly add value, and then you're allowed to charge a lot of money for that value and, therefore, your margins go up because instead of charging five basis points on a S&P 500 ETF, you're now allowed to charge 60 basis points for a product that basically does the exactly the same with scarcely any reporting.

That's not to mention it's not at all clear they even meet these objectives that they set. For example, there's a vegan climate ETF that charges 60 basis points of management expense ratio that basically just tracks the S&P 500, which you can buy for five basis points. The company is happy. The regulators are happy. The consultants are happy. The only person who seems to lose out is the individual who genuinely cares about either being vegan or about the climate or what have you.

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

Do you think the end goal of the concept we are studying today is an attempt to starve capital from Canadian natural resource companies?

[Richard Dias]

Yes, I do, and that's why I put in my opening statement that green energy policy is the greatest gift to the oil industry and their shareholders.

You're starving companies of capital that are notorious for badly allocating capital. That's why, from a CFA perspective, you look at free cash flow yields. It is about your cash flow relative to your capital expenditure, and the entire apparatus is about constraining the capital expenditure for a product—

[The Chair, Liberal, Francis Scarpaleggia]

We'll have to stop there and go to Mr. Longfield.