Mr. Chair, ladies and gentlemen of the committee, thank you for inviting me to be here. I want to thank you especially for undertaking this important study on the climate and environmental impacts related to Canada's financial system.
It is a dry and complex subject, which is too often left to bankers and financial analysts. The fact that you are studying it nonetheless indicates how important you consider this crucial matter to be for Canadians today.
When I started my legal career in 2007 at Davies Ward Phillips and Vineberg, one of Canada's top-tier corporate law firms, British economist Sir Nicholas Stern was calling climate change the biggest market failure the world had ever seen. Almost 20 years later, despite the grandstanding and all the noise, we have not yet addressed this great market failure that is climate change. Large Canadian financial institutions still operate, for the most part, as if the climate crisis does not exist and as if the government efforts to curb carbon emissions do not concern them.
Worse, Canadian banks are some of the largest investors in fossil fuels: That is, they fund the very cause of the climate crisis, even as the governments of the world came together in Dubai last year and finally pledged to transition away from fossil fuels. This should be a very clear signal that financing fossil fuels is unsustainable finance.
Much of the conversation on how finance pre-empts climate change focuses on disclosure of material risks—mostly, the risks that climate change poses to their operations. Worryingly, an Oxford study earlier this year revealed that investors are “flying blind” to the risks of climate lawsuits, even as court cases against polluting companies, and the financial institutions that support them, are mounting globally. By the time these lawsuits reach judgment, which could amount to trillions of dollars in liabilities, the risks will have materialized and it will be too late for the prudent risk management that the current rules are meant to ensure.
Overall, the risk-based framework is ill-suited to address the climate crisis. As a former Bank of England economist said, “Just discussing risks, and assessing risks, does not mean we are actually transitioning to net zero. Many firms may discuss risks—and do exactly nothing to advance the transition.”
We cannot afford to wait any longer for the financial industry to realize its error in underestimating climate risk and to recognize its fundamental materiality for all aspects of business decision-making.
The United Nations principles for responsible investment call Canada a “low-regulation jurisdiction by international standards”. We are dangerously lagging behind our more forward-looking trading partners.
I was the legal architect behind the climate-aligned finance act, introduced by independent Senator Galvez in 2022. This bill was drafted on the advice of dozens of national and international experts. It is informed by the best available climate science, financial expertise and international practices. It is now before the Senate's banking committee.
The CAFA has been endorsed by 120 civil society organizations and by MPs from four different parties. Five petitions in the House of Commons have been filed in support of this bill. The Financial Times' “Moral Money” recently called it “one of the most interesting pieces of climate legislation...in the works anywhere.”
We need a financial sector that supports—rather than one that works against, as is the case today—Canada's goals to reduce global warming emissions. We need to regulate our way out of unsustainable finance. The time has come to mandate action and to stop waiting for financial institutions to self-regulate.
The climate-aligned finance act introduces the regulatory elements that we need.
First, financial institutions are to be aligned with Canada's international and national commitments and produce credible climate plans and annual reports on progress.
Second, they also need to avoid conflicts of interest at the board level and leverage climate expertise while dealing with climate change as a new, superseding public interest duty.
Third, the CAFA calls for new capital requirements that account for systemic climate risks generated by the activities of financial institutions.
The climate-aligned finance act is the missing piece we need to align Canada's financial sector with a climate-safe future and to foster a clean investment boom that will future-proof our economy.
I hope your report on the present study will shed light on this important matter for Canadians and suggest possible solutions, including aspects introduced by the climate-aligned finance bill.
I look forward to your questions.
Thank you.