Evidence of meeting #128 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.
Liberal
Bloc
Monique Pauzé Bloc Repentigny, QC
I would again like to thank all our witnesses for participating in this exercise, in which we are trying to better understand why Canada has is lagging behind when it comes to sustainable finance.
Mr. Delorme, you are an insider, as you told us. You have made your home at both the Department of Finance and the OECD. You have seen how short-term the objectives are, when what we need are long-term objectives.
Do you think a paradigm shift is needed in economics and finance? If so, what change should be made, and why?
Associate Professor, As an Individual
I absolutely believe it is, because it is plain to see that the dynamic we are in right now emphasizes short-term returns or short-term profits, which makes logical sense from a short-term perspective. However, climate and climate change are not short-term processes. They take place over a medium term.
I stress this because we are aiming for maximum warming of 1.5°C by 2100, but the IPCC, the Intergovernmental Panel on Climate Change, is calling for impactful measures to be taken by 2030. That is why I mentioned the countdown effect in my preliminary remarks. So I believe it is all very well to talk about net zero and carbon neutrality by 2050, but this is not useful for deciding the public policies that we need to adopt in order to change course when it comes to climate change.
Bloc
Monique Pauzé Bloc Repentigny, QC
We have people here who represent the Canadian Bankers Association, but we have also heard from the CEOs of the banks.
Why do you think we cannot leave the financial sector to make these decisions on its own?
Associate Professor, As an Individual
The motivation of big corporations and the banking sector—and again, this makes sense—is not to address climate change, or, in any event, that is not their main objective. Nor are they addressing homelessness. So private enterprise has to be made to bite the bullet and focus on a much more distant horizon.
I was not able to say this earlier, but I will be very brief. We did a study on the ESG criteria last year, and we found, first of all, that there are inadequate ESG criteria in all companies. There is very high potential for greenwashing. And that is the economist speaking. Are we really able to measure progress on the environmental, social and governance levels? Mr. Edmans talked about this in his testimony earlier, that we have to combine these three points of the triangle.
Second, are we able to monitor progress quantitatively? When we apply this grid, we see that for the ordinary person, it is impossible, with what we have right now, in the financial reports, to really give big corporations or the banking sector their assurances that ESG criteria are robust criteria. That is extremely important, because we talk about ESG criteria a lot. We wrap ourselves up in these criteria, but they are not robust enough yet. Mr. Edmans talked about this earlier as well.
Bloc
Monique Pauzé Bloc Repentigny, QC
So you are in favour of having more constraints. There was actually a witness on the previous panel who said that companies do not know what to measure in the ESG criteria. As well, like disclosure as it stands now, it has changed nothing on the ground. So do you—
Associate Professor, As an Individual
Yes, we often don't know what to measure, but even when we do know what to measure, we don't know how to measure it properly so it is comparable from one company to another and so we are able to know whether one company has a better record than another as regards environmental, social and governance criteria. That is quite important.
Monique Pauzé Bloc Repentigny, QC
You said it was important to impose additional constraints on financial institutions. What measures should be given preference?
Associate Professor, As an Individual
Transparency needs to be properly documented and increased. To that end, passing Bill S‑243 on climate-aligned finance would be an excellent thing when it comes to disclosure, which would be voluntary, but with robust guideposts regarding the environmental, social and governance criteria for the financial sector.
Bloc
Monique Pauzé Bloc Repentigny, QC
You are referring to Senator Rosa Galvez's bill. Can you tell us in more detail why we really need that bill? Is it sufficient? Could it go further?
Associate Professor, As an Individual
We are all on the side of the angels. That is certainly a step in the right direction.
Bloc
Monique Pauzé Bloc Repentigny, QC
Earlier, there was also reference to one of the objectives of the Paris Agreement, the agreement to limit global average temperature rise to 1.5°C.
How can we make sure that the banks shift their funding of the fossil fuel industry to renewable energy? Is there a way to ensure that?
Associate Professor, As an Individual
There is a way to ensure it. We have to find a way to make green investments more profitable than brown investments. We have to find a way to make sure that the banks, acting on the basis of market logic, are able to benefit from it.
Should there be tax credits for green assets? Should access to brown assets be restricted? I think the transition has to be facilitated. We might think the finance sector could do it on its own, but that would take too long.
Liberal
NDP
Laurel Collins NDP Victoria, BC
Thank you, Chair, and I want to thank all the witnesses for being here.
I wanted to pick up with some questions for Mr. Delorme and kind of dig in a little bit more to “transition plans”.
You've spoken about how these voluntary pledges that financial institutions are making may not be sufficient. Can you elaborate for the committee on what a climate transition plan is, why climate transition plans are so important and why this goes farther than what's happening right now?
Associate Professor, As an Individual
First, the transition plans have to be more transparent and the disclosure criteria clearer. On that point, I think the new rules adopted by the Office of the Superintendent of Financial Institutions that will be coming into force are going to be positive.
I think we have to speed the transition up, and that can't be done if we have voluntary disclosure. We need to compel companies to adopt more transparent rules, or else we won't get there.
I think it comes down to speed. We can't take baby steps. From now on, we have to take big steps, and having tougher rules will help speed up the transition.
NDP
Laurel Collins NDP Victoria, BC
Thanks.
Can you talk a bit about how other countries are legally requiring these things and a bit more about what risks Canada's financial systems face in terms of international competitiveness when we fail to have these kinds of proper climate-aligned financial regulations in place, and just how we compare generally?
Associate Professor, As an Individual
I am not an expert on green taxonomy, but I can tell you that the initiatives taken by the Office of the Superintendent of Financial Institutions are good ones. However, we may have to go further and create an independent body, like in the United Kingdom, to determine whether the measures adopted for carrying out the transition are useful. On that point, as Ms. Pauzé pointed out, Canada is a few years behind Europe. So the process absolutely has to be sped up.
As I said, the rules adopted by the Office of the Superintendent of Financial Institutions are a step in the right direction, but there needs to be more independence or distance from the financial sector. This could be done by creating an independent body along the lines of what is being done in the United Kingdom.
NDP
Laurel Collins NDP Victoria, BC
One of the things that we heard from other witnesses on other panels in this study was that there are conflicts of interest when fossil fuel directors also serve on the boards of financial institutions.
In your opinion, does this pose a governance problem, especially when we heard that one in five bank directors has an explicit connection to fossil fuel companies?
Associate Professor, As an Individual
I can only give you a one-word answer: yes.
NDP
Laurel Collins NDP Victoria, BC
That's great.
Mr. Edmans, in a recently published a paper—and you restated this in some of your testimony today—you said that there are very few equity portfolio managers who are willing to sacrifice financial returns for environmental sustainability performance, largely due to fiduciary duty concerns, and that voting and engagement are mainly driven by financial considerations.
Given what you've outlined for the committee today, can you talk a little bit about the package of regulations you'd want to see from government that would incentivize climate-aligned financial decisions instead of those for more polluting sectors?
