Environment Committee on Oct. 28th, 2024

[Bryan Radeczy, Director, Financial Stability, Canadian Bankers Association]

Thank you for inviting the Canadian Bankers Association to appear this afternoon to participate in the committee study of the environment and climate impacts related to the Canadian financial system.

My name is Bryan Radeczy, and I am director of financial stability with the CBA. I'm joined today by Darren Hannah, senior vice president, financial stability and banking policy.

The CBA represents more than 60 domestic and foreign banks employing over 280,000 Canadians who help drive Canada's economic growth and prosperity. We advocate public policies that contribute to a sound, thriving banking system to ensure that Canadians can succeed in their financial goals.

Climate change is a critical issue of our time, and banks in Canada are committed to doing their part to address it. Banks understand that the financial sector is central to securing an orderly transition to a low-carbon economy while also ensuring the continued resilience of our country's financial system. This includes working with clients across industries to help them decarbonize and pursue energy transition opportunities.

By financing the climate transition, banks are helping Canada meet its net-zero ambitions while also helping society meet interim energy demands in a volatile global context. Our six largest banks participated on the federal government's sustainable finance action council. We acknowledge the updates provided by the government earlier this month on plans for developing a Canadian taxonomy, and we look forward to further progress in this area.

A taxonomy should provide greater clarity and certainty for businesses investing in new technologies and projects for the energy transition and for the financial institutions supporting them. Notably, even in the absence of a Canadian taxonomy, our largest banks have made commitments in the hundreds of billions of dollars. This is reinforced by the commitments made by our six largest Canadian banks as members of the Net-Zero Banking Alliance.

Our banks prepare and issue climate and sustainability reports on an annual basis, with details on their missions, targets and progress towards achieving targets, along with information on their sustainable finance activities. Our banks are also engaged with regulators and standard setters, both domestically and internationally.

Following the release of the Basel Committee on Banking Supervision's climate principles in June of 2022, our Canadian banking regulator, the Office of the Superintendent of Financial Institutions, finalized its guideline B-15, on climate risk management, in March 2023. OSFI went a step further than the Basel committee at the time by including a set of minimum mandatory climate-related financial disclosure expectations spanning governance, strategy, risk management, and metrics and targets.

These disclosures are based on the Financial Stability Board's task force on climate-related financial disclosures, which our largest banks have been voluntarily implementing for a number of years. Our largest banks are now mandated to meet OSFI's disclosure expectations starting as of their 2024 fiscal year-end, with our small and medium-sized banks being similarly obligated starting as of their 2025 fiscal year-ends.

At a broader level, the International Sustainability Standards Board set about developing standards that would create a global baseline of sustainability disclosures. The ISSB built on the work of the task force on climate-related financial disclosures and published their inaugural standards in June 2023, including a climate-related disclosure standard. OSFI had already incorporated this standard into guideline B-15 in March of this year. Importantly, the ISSB standards are intended for broader application across industry systems, should they be adopted by national jurisdictions.

While OSFI has already taken steps in this regard, it is also notable that a new Canadian Sustainability Standards Board was established and consulted earlier this year on their inaugural standards that closely mirror the ISSB standards. We look forward to the CSSB finalizing its standards, which we hope will be adopted by other regulators and sectors across Canada.

To this end, we also acknowledge the government's interest in mandating climate-related financial disclosures for large federally incorporated private companies and in considering ways for small and medium-sized businesses to voluntarily release climate disclosures as well.

Investors and analysts are looking for harmonized international disclosures that facilitate comparability. We are encouraged that Canadian regulators and standard setters are engaging with their peers internationally and are already in the process of adopting global baseline standards in Canada.

A Canadian taxonomy will also be important in incentivizing greater levels of sustainable finance. Governments, regulators, standard setters, banks and the private sector all have a role to play in taking concrete actions that support the energy transition in Canada. We believe it is important to recognize the progress that has been made to date, but we acknowledge that more work remains to be done.

Thank you, and we look forward to your questions.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much, Mr. Radeczy.

For the first round, we'll go to Mr. Kram for six minutes.

[Michael Kram, Conservative, Regina—Wascana, SK]

Thank you very much, Mr. Chair.

Thank you to all of the witnesses for being here.

Mr. Radeczy, I would like to follow up on what you said about the OSFI disclosures. Is it your understanding that climate reporting is already mandatory through the OSFI process? Is that correct?

[Bryan Radeczy]

Under OSFI's guideline, climate disclosures will become mandatory for our largest banks effective over their 2024 fiscal year-ends and for our small and medium-sized banks starting with their 2025 fiscal year-ends. However, our largest banks have certainly been voluntarily providing their disclosures under the TCFD framework—the task force on climate-related financial disclosures framework—for a number of years as well.

[Michael Kram, Conservative, Regina—Wascana, SK]

Okay. Thank you for the clarification.

I'd like to circle back to Professor Edmans.

Professor, you talked about the overlap between what is good for society and what is good for a company's shareholders. What advice could you offer policy-makers so that governments are working in co-operation with the private sector to achieve both of these goals, which, as you indicated, may or may not overlap at any given time?

[Prof. Alex Edmans]

I think it's to forget about this ESG label.

Here's the problem with ESG: It bundles everything under the ESG umbrella in the same way. However, some of these things overlap and some of them don't, so it's important to consider them separately.

What is one thing where the impact on society comes back and benefits the company's profits? It's human capital. Some of my early work is on how treating your worker well ultimately leads to greater profits down the line. That is something I call an internality. Even in the absence of government regulation, a company bears the consequences of its human capital investments.

Something like climate change is an externality through which you benefit wider society and might benefit other companies, but if you're a fossil fuel company, it is costly to reduce production significantly.

Those are the cases in which, if you are to tell a company to produce less or do this, it may well be at the expense of financial returns, and remember that financial returns don't just go to nameless, faceless capitalists: They could go to pensioners and they could go to depositors, if you're a bank, so we do need to consider financial returns, and when there are trade-offs, we need to acknowledge them rather than think that everything is going to be a win-win.

[Michael Kram, Conservative, Regina—Wascana, SK]

Given that there can be so many positive and negative externalities and internalities—as you use those terms—it would seem to me that it would be extremely complicated for a government to come up with a taxonomy system that could incorporate all of these different facets. Could you elaborate on whether that could even be done and, if so, how?

[Prof. Alex Edmans]

I think it would be extremely difficult to come up with a taxonomy. I'm not sure who is the supreme being to decide which things are material and which are not, and which ones to weight and which ones to not.

This is how ESG has become such a problem. Certain industries—let's say defence—were said to be bad, and now they're said to be good. This is because our weight on the different criteria will change over time.

Most recently, I've joined the sustainability advisory council of Novo Nordisk, which has come up with these weight-loss drugs. We've decided to send some of these drugs to developing countries, even though this leads to less revenue for us. Now, that is bad for our carbon footprint, because it means shipping these drugs to developing countries, yet there's a huge benefit in terms of reducing obesity. Actually, if you reduce obesity, then you can reduce climate change down the line, because if people don't develop diabetes, then they don't need to go to a hospital for dialysis three times a week.

Any taxonomy is typically going to ignore many of these criteria. It's really difficult to know where the bright line is to say what's good or what's bad. I would not like to be the regulator that claims that it has all of the knowledge to rule on these complicated issues.

[Michael Kram, Conservative, Regina—Wascana, SK]

Perhaps, Professor, if you were the regulator, you would have a considerable amount of power and a considerable amount of job security. Would you agree that this may very well become the case?

[Prof. Alex Edmans]

It would be, and then I'd have a lot of power to decide which companies succeed and which do not.

In the earlier session, somebody said, “Well, it's a taxonomy. It's just a description. It's value-neutral.” It is not value-neutral.

I understand that the EU taxonomy in articles 6, 8 and 9 was supposed to just be descriptive in using blue, green and red—you want to invest in blue, green and red funds. This is not how things have gone. If you're an article 9 fund, you're much more likely to get capital than if you're an article 8 fund, so if we classify certain activities as green, those will get more capital than the ones that don't have that classification, and it may well be that companies will spend a lot of effort in ticking the box and getting the classification rather than doing the right thing.

Actually, in some of my own research on a different topic—diversity, equity and inclusion—what I find is that when demographic diversity, which often comes into taxonomies, has no relation to true equity and inclusion within the workforce—to inclusiveness in corporate culture—we can focus on the things that hit the taxonomy without actually creating value for wider society.

[Michael Kram, Conservative, Regina—Wascana, SK]

Professor, in your opening statement you had some pretty stark examples of Africa's and Sri Lanka's climate change and global warming initiatives.

What is the best way for developed countries, like Canada and the U.K., to work with these underdeveloped countries, given that global warming is a global problem? In particular, can you offer some suggestions of technologies that could be shared with the developing world?

[The Chair, Liberal, Francis Scarpaleggia]

We have only about five seconds left, so it might have to be an answer to a question later on.

Madame—

[Prof. Alex Edmans]

I'll just say understand these issues.

[The Chair, Liberal, Francis Scarpaleggia]

You can also write to us and send us an answer in writing. It will be incorporated into the crafting of our report.

Madame Chatel is next.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Mr. Chair.

Mr. Delorme, I smiled when you talked about your career at the Department of Finance and at the OECD, the Organisation for Economic Co‑operation and Development, since it is very similar to my own.

The committee has had the pleasure of hearing from Mr. Miller, a representative of the OECD who spoke to us about the progress made by the OECD, and from Mr. Usher, from the United Nations.

If I may, I would like to address the issue of the competitiveness of the Canadian economy on the international stage. I think this is an important issue. My Conservative colleagues often talk about abandoning the carbon pricing system, which would, as you said, expose us to European tariffs on our exports. There are others who question sustainable finance, and this could make Canada less attractive to foreign investors.

Can you tell us more about the possible consequences of doing nothing on these two subjects?

[François Delorme]

The arbitrage takes place in the short term, not the medium or long term. Canada may decide to eliminate eco-tax measures in order not to hamper its competitiveness, but that will catch up with it at some point. The road not taken in the next three to five years will have to be taken. Talking is all very well, but the climate does not really care what we do or don't decide. Global warming is going to continue, and the costs of adapting and mitigating are going to continue rising. We can procrastinate and try to temporarily avoid problems or weaknesses when it comes to competitiveness, but it is only going to hit us harder later on.

[Sophie Chatel, Liberal, Pontiac, QC]

Can you tell us about Canada's recent announcement regarding green, sustainable finance and how they are going to impact small and medium-sized businesses? Our economy is largely based on small and medium-sized businesses.

I see that these businesses will not be covered by mandatory disclosure. Personally, I am worried about the competitiveness of our small and medium-sized businesses as finance is transitioned to green finance. I want these businesses to be competitive and be able to find medium-term investments.

Can you tell us more about this?

[François Delorme]

I think that if big corporations are required to comply with stricter disclosure rules, there is going to be peer pressure. In any event, there will be pressure on small and medium-sized businesses to take measures that the big companies have adopted. I think this will be a win-win situation. I also think this shows that there have to be coordination efforts and mechanisms, not just in the business community, but also between countries and with our competitors.

[Sophie Chatel, Liberal, Pontiac, QC]

You talked about Europe's competitiveness as compared to Canada's. Canada is already two years behind Europe, and we are going to be adding another year to that.

What risk is there in having waited so long for sustainable finance?

[François Delorme]

The risk is what I mentioned earlier. We are gaining time, but there is going to have to be an adjustment. The longer we wait, the more impactful it will have to be. Taking a short-term view, that is defensible, but from a medium or long-term perspective, it is not a good decision.

[Sophie Chatel, Liberal, Pontiac, QC]

So we are going to suffer a bit over the next few years, but it will be so we can reap the benefits of our efforts. Is that it?

[François Delorme]

That is what I believe, and I think the sooner we start, the better it will be.

[Sophie Chatel, Liberal, Pontiac, QC]

Great.

There has been a lot of talk about harmonizing the various taxonomies. In relation to finance, there is going to be a guide to the Canadian taxonomy, and that is a good thing, because I think we need to have our own taxonomy. That being said, there is going to be an exercise to coordinate the various taxonomies: the European, Australian and Canadian ones.

What recommendations are you making to the international organizations that will be looking at this?

[François Delorme]

I think we absolutely have to speed up the efforts being made for harmonization. In any event, as we have seen, the G20 has adopted a minimum 15% tax on big corporations and multinationals, precisely to level the playing field and avoid international tax optimization strategies. I think we have to do exactly the same thing when it comes to the green taxonomy.

[Sophie Chatel, Liberal, Pontiac, QC]

That is an excellent project.