Environment Committee on Oct. 28th, 2024

[Prof. Alex Edmans]

Certainly.

It's not clear that regulation would address the issue.

You're absolutely right; that's what we found as the current status quo. Asset managers are not going to be taking into account issues they don't believe are material.

However, what can lead them to doing this are constraints from their own clients. If there's a fund mandate saying that you have to invest in sector X and you're not allowed to invest in sector Y, that is something that absolutely can move them to investing in a different way, but that will come from the clients of those funds, not necessarily from regulation.

What might be the issue of having regulation do it is it will go back to the previous discussion of taxonomies. It's very difficult to decide what is good or what is not good. Maybe a client can decide for themselves, but I'd be rather nervous about a regulator deciding on behalf of all clients.

That has happened, actually, for my industry of education. A while ago, you had “no child left behind” in the U.S., where they said, “Let's try to have a taxonomy and let's measure which schools are good and which ones are bad and allocate capital to the well-performing schools and keep it away from the poorly performing schools,” just like the idea of allocating capital towards the transition, but this then led to many schools teaching to the test.

When you have such a complex issue and there are so many moving parts, it is quite difficult for regulators to have a taxonomy that takes these all into account. It's incumbent on the clients to express their wishes to fund mandates in order to guide investors on where they should be allocating their capital.

[Laurel Collins, NDP, Victoria, BC]

Thanks.

Mr. Chair, do I have any time left?

[The Chair, Liberal, Francis Scarpaleggia]

You have 15 seconds.

[Laurel Collins, NDP, Victoria, BC]

Okay. I will cede that time and I will pick it up in the next question.

[The Chair, Liberal, Francis Scarpaleggia]

The committee thanks you.

Mr. Mazier, go ahead.

We'll make this a three-minute round as well.

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

Thank you, Chair.

Mr. Edmans, if Canadian pension funds divest themselves of oil and gas, will this have any impact on reducing emissions, or will it only move capital from one beneficiary to the other?

[Prof. Alex Edmans]

Unfortunately, it will do the latter.

What it will mean is that you can only sell if somebody else buys. We think of it like a customer boycott: If I don't buy products, they're going to stay on the shelves. However, that is not true in capital markets. You can only sell if there's a buyer.

In fact, it may well mean that the buyer is somebody who cares less about climate change than you do, because they're willing to buy those stocks, so you actually no longer have a seat at the table to engage. Not only do you lose the higher returns from carbon, but unfortunately—and I wish this were not the case—evidence is that emitting firms earn higher returns, perhaps because this is an externality, not an internality. You not only lose those higher returns, but you also lose your ability to engage with these companies.

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

What would be the impact on retirement savings if the government forced climate-related disclosures on Canadian pension funds in an attempt to meet Paris climate targets?

[Prof. Alex Edmans]

It's not clear to me what the goal of disclosures is to begin with. It's like saying that the best way to lose weight is to have more accurate scales. No; it's actually to take real action here. It seems we're all about disclosures and taxonomy, but this can lead to taking action in order to beat whatever taxonomy there is in place. It's not clear that it will have any positive impact, and yet you're going to have to put a lot of effort into disclosing.

For example, Unilever, I believe, has to hire 10 people for the next five years to just disclose information—not actually to do anything, but to disclose what they're doing. Here there's a direct cost of disclosure, and then the indirect cost might be that you focus on the measures that are being disclosed rather than actually creating value, as I mentioned in my diversity comment earlier.

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

Will government regulation of ESG scores and climate change disclosure statements on financial institutions have any impact in reducing emissions?

[Prof. Alex Edmans]

Before you have a regulation, you need to think about what the problem is to which regulation is a solution. You might think we need to regulate ratings because they disagree with each other, and that's bad. What is another word for disagreement? It's diversity. We can have legitimately different opinions on the ESG of a company, as we've discussed. There are so many complex issues here that it's hard to say what's green or brown. It's actually fine for ratings to disagree, just like Goldman Sachs and Morgan Stanley might disagree as to whether a company is a buy or a sell.

I'm not clear what regulation would achieve in that instance, because it's not clear what the problem is for which regulation is the solution.

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

There's really no clear answer to reducing emissions.

[Prof. Alex Edmans]

There is a clear answer, which is that there's not going to be a clear positive effect.

[The Chair, Liberal, Francis Scarpaleggia]

Okay. We're pretty much done.

We'll go to Mr. Longfield for three minutes.

[Lloyd Longfield, Liberal, Guelph, ON]

Thank you, Chair.

I want to start with Mr. Radeczy.

In terms of Canada's positioning in the international banking system, Canada has been very respected for its system of regulations in the banking industry, but it's not being as well recognized for its ability to apply externalities to the banking system in terms of sustainable finance.

If we're not able to correct the ship there, what's the impact on the Canadian banking industry?

[Bryan Radeczy]

I would say that our largest banks were happy to participate in the federal government's Sustainable Finance Action Council. We did a lot of good work collaboratively to produce an initial taxonomy road map report.

The government gave the updates earlier this month that they're looking to make further progress. I think that's one forum in which our banks are active participants in supporting sustainable finance activities in Canada.

[Lloyd Longfield, Liberal, Guelph, ON]

I think participating on the action council was very important. I think it really sent a clear message in terms of the commitment of the banking industry towards sustainable finance and also in terms of the government's commitment to getting it right.

What's the risk if we get it wrong?

[Bryan Radeczy]

I think we obviously want to support the energy transition in Canada. We're doing all we can to work closely with our clients and our largest banks. Some of their initial targets were focused on the oil and gas sector. They're continuing to work toward progress in achieving those targets.

It's hard to answer that question. I'm not a climatologist in terms of what could go wrong. Obviously, there could be serious consequences, and our banks are doing everything they can, whether it's through the SFAC or complying with OFSI regulations, to ensure a good energy transition in Canada.

[Lloyd Longfield, Liberal, Guelph, ON]

In terms of the business of this discussion, I was managing director of a firm in Canada that was U.K.-centred. We were operating in various countries around the world. Canadian banks are also operating in various jurisdictions, including the EU.

What's the pressure on compliance for Canadian banks operating in other countries and then transferring compliance to Canada?

[Bryan Radeczy]

We definitely are working to be in adherence with the regulations under which our banks operate around the world. Definitely the EU has their own corporate sustainability reporting directive that may impact some of our banks, so we're definitely making sure we're going to be compliant with that directive for those banks to which it will apply.

I would also say that at an international level, the International Sustainability Standards Board that I mentioned in my opening remarks has done a mapping to those European sustainable reporting standards. That will be helpful for our banks that are impacted to understand how they need to comply with them.

[Lloyd Longfield, Liberal, Guelph, ON]

Trying to close the door on this is an impossible thing, because we are in a global market and we have to react to global winds of change.

[Bryan Radeczy]

Absolutely.

[Lloyd Longfield, Liberal, Guelph, ON]

Great. Thank you.

[The Chair, Liberal, Francis Scarpaleggia]

Your time is up. Thank you very much.

Ms. Pauzé, the floor is yours for a minute and a half.

[Monique Pauzé, Bloc, Repentigny, QC]

Thank you, Mr. Chair.

Mr. Delorme, I'm not sure, but I think I heard another witness say that reducing emissions had no clear effects. I'm not sure I understood correctly.

Starting with that, I am going to ask you to talk about the cost of inaction when it comes to climate change.