Environment Committee on Oct. 28th, 2024

[Keith Stewart, Senior Energy Strategist, Greenpeace Canada]

Thank you, Mr. Chair.

Thank you for the opportunity to address you today.

My name is Keith Stewart. I am the senior energy strategist for Greenpeace Canada and a sessional lecturer at the University of Toronto, where I teach a course on energy and environmental policy.

I've been meeting with Canadian banks about their funding of fossil fuels since 2008, so if I seem a trifle impatient, it's because after the first decade or so of delay, a certain amount of frustration does set in.

It's also been nine years since Mark Carney gave his “tragedy of the horizon” speech on how the financial sector has a short-term focus built into how it operates, wherein three years is considered long term.

This structural myopia makes bankers largely blind to climate risks or, worse, they can see the risks and have even begun to measure them, but their incentive structure doesn't allow them to respond appropriately, so we stumble towards disaster. This myopia can be overcome, but it will require elected officials to step in. This is not new terrain for governments, as we've been regulating banks to protect them from themselves since 1929.

On climate change, the banks have been very clear: They are not going to be leaders. They are not going to do this on their own. We see it in their balance sheets. Canada's big five banks are still among the largest funders of fossil fuels in the world. According to a recent international report, they funnelled more than $130 billion to fossil fuel companies in 2023 and have put over $1 trillion into oil, gas and coal companies since the Paris Agreement was signed. That's a trillion dollars dedicated to making the climate crisis worse, which dwarfs what the federal government has been spending to try to put out the climate fire.

We also see their unwillingness to lead in their backing away from their net-zero commitments in the face of an assault on ESG investing in the United States. They can claim to have the courage of their convictions, but those convictions seem to change, depending on whether they are writing to a Republican state treasurer in Texas about how much they support funding fossil fuels or testifying before this committee last spring about how much they care about stopping climate change.

We also see a lack of leadership in their lobbying efforts, which have sought to slow down the energy transition. They say they want an orderly transition even if the greatest source of disorder is climate-fuelled extreme weather that results in fires, floods, roads washed away, homes destroyed and drought-stricken fields.

Whether it was Jasper in July or Florida last month, the costs of inaction are all around us, and we should not look away.

A wise women once said that when someone tells you who they are, believe them. Banks are telling us that they are committed to follow, not lead, on climate change, yet financial regulation is still a missing piece in Canada's climate strategy.

We are here today asking you to once again save the bankers from themselves, and thereby help save the rest of us from climate chaos, by using all of the regulatory and legislative tools at your disposal to align Canada's financial system with the Paris climate agreement.

To this end, I join with my colleagues in the environmental movement to express our hope that your report will include recommendations to, first, keep fossil fuels out of any sustainable finance taxonomy; second, develop regulations under existing law to require all federally regulated financial institutions and large federally regulated corporations to implement climate transition plans that align with the 1.5-degree goal of the Paris Agreement; and, third, support the adoption of comprehensive legislation such as Bill S-243, which is the climate-aligned finance act.

We recently saw some movement on the taxonomy that's under development. The taxonomy and disclosure rules are important, but as planned, they will only provide information that others can use to hopefully do the right thing.

We need to stop hoping big money will do the right thing and make it mandatory for them to stop being a part of the problem and start becoming a big part of the climate solution.

Thank you for your time and consideration.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you, Mr. Stewart.

We'll now go to Julien Beaulieu, who is a lawyer and researcher at the Québec Environmental Law Centre.

Mr. Beaulieu, go ahead.

[Julien Beaulieu]

Good morning and thank you for inviting me here today.

I represent the Québec Environmental Law Centre, or QELC, the only non-profit organization in Quebec that provides independent environmental law expertise.

Today I'm going to discuss the risks associated with greenwashing, specifically the dissemination of false, deceptive and unproven information on environmental characteristics. Greenwashing is a major problem because it prevents investors from making informed decisions; it also slows down the transition and erodes market confidence. Greenwashing can also destabilize the financial system, particularly by causing the premature sale of financial assets.

Greenwashing has unfortunately introduced significant risks into Canada's financial sector. For example, many emerging financial instruments, such as green bonds, sustainability bonds and voluntary carbon credits, are not subject to any minimum content or procedural requirements.

As you are no doubt aware, Bill C‑59, which was adopted this past June, constitutes one step toward combatting greenwashing. Organizations are now required to back up environmental allegations with evidence. In other words, if you say that something is “green”, you must be able to prove it, which is a good thing. However, these measures apply solely to voluntary disclosures regarding environmental benefits. Consequently, they may not be applicable to certain allegations, such as those concerning environmental risks as opposed to impacts.

These measures obviously require no disclosure of information to investors and impose no common language on how to communicate that information. Lastly, although organizations are required under the act to provide evidence in support of their allegations, that evidence need not be disclosed to the public, which complicates the task of identifying greenwashing cases.

A few days ago, the government announced two measures that could help improve the situation. First, it stated that it would require large federally regulated businesses to publicly disclose information concerning climate change, which could well include a certain form of disclosure of GHG emissions by those businesses.

This is a positive measure, but, to ensure that it's effective, it must concern the disclosure of both environmental risks and impacts. Citizens, consumers and investors want to know the environmental impacts of businesses' activities and want that information to be disclosed in a clear and standardized format. General disclosure rules that enable businesses to omit or conceal unfavourable information must absolutely be avoided. Disclosures must also go beyond climate issues and include, for example, biodiversity, pollution, natural resource extraction and so on.

The second measure that the government announced a few days ago is that an independent consulting group will be created and will be responsible for developing a financial taxonomy. That taxonomy, which won't be made public for a year, will establish a classification system and official criteria for projects characterized as “green” or “transitional”. That measure has considerable potential as well. However, for this taxonomy to meet its objectives, three elements, some of which have already been mentioned by my colleagues, will be essential: first, it must include credible, science-based criteria that would prevent the greenlighting of environmentally harmful projects; second, it must be mandatory that it prevent the emergence of weaker rival taxonomies—to date, only one voluntary taxonomy has been announced, which I don't think is enough; third, it must have a governance structure that guarantees that its criteria remain resistant to future political pressure.

Once the taxonomy has been adopted, and taking for granted that it's a proper taxonomy, it will quickly have to be incorporated in the regulatory ecosystem, by requiring, for example, that organizations disclose their degree of alignment, standardize the labelling of financial products, require Crown corporations to establish objectives based on the taxonomy, and so on.

To supplement those two measures, we suggest that the disclosure requirements of federal financial institutions be made more binding, more specific and more comprehensive, in particular, by converting current prudential obligations to regulatory obligations and by compelling disclosure of climate impacts, not solely of risks, but also of information on other environmental aspects such as biodiversity.

Lastly—and we can discuss this further during the meeting—we recommend that the sustainable finance activities of the Financial Consumer Agency of Canada be expanded and that the distribution and use of voluntary carbon credits, those credits that some of us use to offset the impact of our air travel, for example, be regulated. We believe that this field should also be regulated.

I'll stop there. Thank you.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much, Mr. Beaulieu.

Now it's the turn of Aswath Damodaran, professor at the Stern School of Business.

Professor, you have five minutes for an opening statement.

Thank you for being with us today.

[Aswath Damodaran, Professor, Stern School of Business, New York University, As an Individual]

Thank you for having me.

I'm going to start from the perspective of what I'm not: I'm not a climate scientist. I'm not an expert on banking. I'm not a macro-economist. I'm not an academic researcher. I'm a dabbler. I dabble in lots of different things, and I've spent 40-plus years observing how businesses and investors behave. What I've discovered is that psychology and perception have a lot more effect on that behaviour than economic models.

As an outsider, I'm going to give you my perspective on what I've seen happen around climate change. This might not be diplomatic, but I might as well cut to the chase.

Here's what I've seen over the last 20 years: Climate change is the most publicized, the most warned about and the most discussed existential crisis that I've ever seen. You're saying that this is merited; that's fine.

Second, governments all over the world claim to care about climate change. In fact, every year they gather together, as in the most recent meeting, COP28. Hypocrisy runs rampant in this space, as in what was said in Dubai. They talk about how they're going to change the world. They set targets that everybody knows will not be met. I'll guarantee you that there'll be a COP29, perhaps in Riyadh, where we will repeat the whole process again.

Companies and businesses all claim to be green. They claim to care about the climate. I'm going to gag the next time I see the words “net zero” in a company's financial statement or an airline asks me to pay an extra $40 if I want to reduce my carbon footprint.

In this process, they've been aided and abetted by consultants and experts who fed them the buzzwords. Let's face it: ESG is an acronym. It doesn't even merit the notion of an idea or a concept—it's an acronym.

Sustainability is just as much of an acronym. These consultants have told these companies that they can have their cake and eat it too, that they can be green and be more valuable.

There's the same phenomenon with investors. They've pumped in trillions of dollars. Don't tell me enough money hasn't been invested in green spaces. There have been trillions of dollars, again with the promise that they can deliver higher returns while being good.

Consumers have been given lots of different ways in which they can show how wonderful they are. They can buy green products. They can invest in green funds. They can misbehave all day, come back home, buy an ESG fund and say, “I'm okay again.”

Here's, I think, the most sobering reality. After 20 years, trillions of dollars and all of this talk, if you look at how much of our energy comes from fossil fuels, it's barely budged. In fact, you know that our dependence on fossil fuels decreased more between 1975 and 1995 than it has in the last 20 years. The reason for that was the one alternative energy source that most green energy people claim to hate, which is nuclear energy.

Over the last 20 years, our dependence on fossil fuels has gone from 85% to 81.5%. We've reduced dependence by 3.5%, and we paid $10 trillion for that amazing fact. I'll let you do the math on that. If you really want to get the fossil fuel dependence down to 50%, you work out how much it'll cost. This notion that you can get good without sacrifice is the heart of why all of this space is in trouble.

I'm not in any position to give you advice on what you should do with your bank and your pension funds, but I'll tell you what I think. I think you've got to stop with this apocalyptic stuff. Do you really think that telling people that the world will end in 35 years is going to make them behave better? That's like telling somebody that they have 60 days to live and saying, “Behave healthfully.” It's not going to happen. Even if you believe that the world will end if climate change is not met, telling people that is the worst possible strategy psychologically.

Second, remove virtue from this discussion. This notion that if you believe that climate change is important, you're a good person, and if you don't, you're a bad person is contaminating the discussion. It's making perfect the enemy of good.

Let's face it: Much of the research on ESG and sustainability is not worth the paper is written on, but the research that takes a closer look has concluded that shades of grey are better than black and white, that investing in brown innovation is better than investing in green innovation and that accepting shades of grey, incremental change, is going to be much more effective than this: “Hey, if you don't do this, we'll die.”

[The Chair, Liberal, Francis Scarpaleggia]

Professor Damodaran, this is a fascinating statement, and I think we're going to have a really good discussion today, but I have to stop you there so that we can go to questions and answers and explore these ideas in greater detail.

We start with Mr. Mazier for six minutes.

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

Thank you, Chair.

Professor Damodaran, my questions are for you today.

Are Canadian depositors at risk if the government mandates ESG ratings or climate-related disclosure statements on financial institutions?

[Aswath Damodaran]

It goes back to the heart of what I said, which is that sacrifice is at the heart of being good. If you're going to ask banks to do something, you have to ask, “Who's paying for it?” Bankers are. It's not coming from bankers' personal wealth. The market cap of the five biggest Canadian banks, collectively, would be a drop in the ocean of the cost of meeting climate change.

If you ask banks to bear this cost—and what I hear when I hear that is that you have to lend to green energy companies at below market rates, because if it's at market rates, you don't need any of this stuff—guess who's going to bear the cost. It's going to be depositors. Is that really what you want of this process?

Acting like banks are like big tech companies with hundreds of billions of dollars to throw around is delusional, so ultimately, if you put strictures on banks, the people who will pay this—and I can almost guarantee you this outcome—will not be bank shareholders and managers; it will be bank depositors, and I thought your role was to protect them.

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

Thank you.

That goes into my next question. What will be the impact to retirement savings if government forces climate-related disclosures on Canadian pension funds in an attempt to meet the Paris climate targets?

[Aswath Damodaran]

I'll be quite honest: I call this “disclosure diarrhea”. It's happening across the board—companies, pension funds.

Do you know what the net effect of all of this disclosure is? We get immune to it. We'll have 150 pages.... In fact, if you want truly ineffective legislation, pass more disclosure legislation. It will actually make people even more immune to debate about climate change, because you're going to throw the big stuff and the small stuff into that disclosure. If in fact pension funds are required to bear a cost, there again you have to ask, “Is this the right group to be bearing that cost?”

[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?

[Aswath Damodaran]

Well, even the ESG services have no idea what ESG measures. ESG is the most diffuse, undefined.... It's like nailing Jell-O to a wall. If ESG services have no idea what they're measuring, how the heck are governments going to require companies to follow ESG rules? It's a recipe for disaster again.

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

There would basically be no way to measure how many emissions are even being reduced.

[Aswath Damodaran]

Well, they can disclose whatever they want, but if you look at the net effect, it doesn't seem to match up. In fact, if you collect what companies claim they've done and then you look at the output, you'll say, “Why isn't it showing up in the results?” There's many a slip between the cup and the lip. Disclosing this doesn't seem to show up in the final numbers.

I think that's a question we have to ask: Why, after 20 years of forcing companies to disclose this, and more so in the last few years, is nothing changing on the ground?

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

Thank you.

You referred to an “ESG gravy train” in one of your presentations. Can you explain this term and explain how banks and consultants benefit the most from ESG scores and climate-related disclosures?

[Aswath Damodaran]

BlackRock was very much up in front during this ESG train, early on. In fact, Larry Fink said that the world will not be safe if we don't have ESG. I took BlackRock's sustainability fund, which is a fund built around ESG, and I compared it to their regular fund. Out of the 500 stocks in the regular fund, 497 showed up in the sustainability fund. The difference was that BlackRock charged five times more for the sustainability fund than for the regular fund.

When you look at fund managers, bankers and consultants, you see that every one of them has an ESG arm, and the ESG arm makes money by selling this notion to people, again with the idea that you can be good and be more valuable at the same time.

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

Thank you.

Does improving ESG ratings or climate-related disclosures increase value or decrease risk in any proven way?

[Aswath Damodaran]

None that I can see. As I said, I've looked at every single research paper in this space. The papers that do show it are advocacy papers masquerading as research papers.

I mean, I live in the value space. That's what I do. I value companies. I have yet to value a company that ESG has made more valuable. It can make it less valuable, but when ESG makes a company more valuable, it's because it's PR. It's marketing. At that point, you're gaming the system. You're encouraging what you call greenwashing by pushing that idea on companies.

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

Thank you.

You stated the following in the Financial Times:

It serves ESG advocates to keep the definition amorphous, since, like the socialists of the 20th century whose response to every socialist failure was that their ideas had never been properly implemented, the defence against every ESG critic is that it is incorrectly defined or implemented.

What did you mean by this?

[The Chair, Liberal, Francis Scarpaleggia]

You have 30 seconds, Professor.

[Aswath Damodaran]

Thank you.

I've had a lot of blowback on that one. The truth is that in terms of what ESG measures, if you put 100 ESG people in a room, they'd come up with 100 different definitions. Whatever your critique, they would say that it wasn't their ESG you were critiquing. It's very convenient, but it's not very honest.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you.

We'll go now to Mr. Ali for six minutes.

[Shafqat Ali, Liberal, Brampton Centre, ON]

Thank you, Chair. I will be sharing my time with my colleague Mr. van Koeverden.

Thank you to the witnesses for being here today.

Mr. de Arriba-Sellier, what are some global best policy practices that you can share for ensuring that the private sector does business in a way that supports climate and environmental goals?

[Dr. Nathan de Arriba-Sellier]

Thank you very much. This is a very interesting question. Of course, I don't think we have the time to go through all of them or much of them in five minutes.

What I would say is that I share some of the comments that were just made about the fact that ESG is a melting pot of anything and everything, but climate is a real risk. In this respect, you can see policies that actually can move the needle. For instance, the European Union just adopted the corporate sustainability due diligence directive, which obliges every large company to have a net-zero transition plan. That can be powerful.

As I alluded to in my opening statements, I do believe that the move towards disclosure regulation is welcome as long as sustainable disclosures are aligned on financial disclosures. For instance, companies cannot trumpet net-zero commitments without actually reflecting them in their financial statements, which I think is analogous to what Professor Damodaran was saying.

Another policy that could be useful, for instance, is EU banking policy. EU banking regulation has recently been amended to require that banking directors have sufficient expertise on climate risks and climate change as well as a transition plan, etc. Again, that can also be important and impactful.

[Shafqat Ali, Liberal, Brampton Centre, ON]

Thank you.

My next question is for Mr. Keith Stewart.

Assuming that our shared goal is to ensure that the financial sector practises climate and environmental goals, what do you see as the government's role in enabling this alignment?