Environment Committee on Nov. 4th, 2024

[Rosemary McGuire]

I can't speak specifically about that.

The standards I referred to earlier are ones that are solely targeted for the capital markets' use. There is another set of standards that would be applicable to the engagement you're referring to.

[Lloyd Longfield, Liberal, Guelph, ON]

Thanks.

I have a final question for you. Then I'm going to Monsieur Chenet.

I know Canada and Argentina did a lot of work as part of a subcommittee of the United Nations. As we develop these standards internationally, are there implementation goals we are working toward now? I haven't had an update on that lately.

[Rosemary McGuire]

I'm not familiar with that, so I can't speak about it, unfortunately.

[Lloyd Longfield, Liberal, Guelph, ON]

Is it fair enough to say that if the standards are changing globally, it is a fluid market, so measuring backward won't be as important as measuring forward?

[Rosemary McGuire]

It's interesting, because the international standards I referred to contain quite a bit of forward-looking information. To your point, it's important to reflect on where you've been and assess the progress being made. More importantly, we need to be able to anticipate challenges ahead. It's important to recognize the forward-looking aspect of these standards.

[Lloyd Longfield, Liberal, Guelph, ON]

Thank you.

Monsieur Chenet, you mentioned your work in France. That got my attention. France has been quite involved with the international standards.

Could you expand on that a bit? How are we looking at transferring some of the lessons you've been learning internationally to the Canadian market?

[Hugues Chenet]

Thanks a lot for your question.

Well, it depends on whether we are talking about regulation in general, which is now very much pushed at the European level, or about things that are much more oriented to the financial markets.

What is very interesting in what happened in France—the story may be overly simplistic—is that because France was organizing COP21 in Paris, the idea was that it would be nice to show some things before setting it up. As the one very crucial ingredient for the climate diplomacy discussion was the finance part, there was a kind of a push behind the scenes before COP21 was held to have something happen. At the end of the day, six months or three months before COP21, we had a law in France, for the first time ever, asking financial stakeholders in the investment community to communicate about their climate action. There were a lot of different items.

That was just before COP21, and I think that promoting something was very positive for France as a regulator and also for the Paris Agreement, which was reached at the end of the day. As you know, one of the three main overarching goals in the agreement is about finance. There may be a kind of chicken-and-egg issue there, but it was clearly good. I think that having this incentive under the spotlight was probably a good thing.

Also, then, what is very important, I think, is that this would never have happened if some investors, not necessarily the biggest or the most well known, and the banks, public and private—public in terms of government or private on the markets—had not pushed for it as well. There was a kind of an agreement for that—

[Lloyd Longfield, Liberal, Guelph, ON]

I think there was a push in the co-operatives and mutuals as well. I know that Guelph has the Co-operators head office, and the former CEO of the Co-operators in Guelph was very involved with the European discussions. It's not just the banks. It's all financial institutions.

[Hugues Chenet]

Yes, but here in France, the major thing that was maybe under the spotlight was the investor community through asset management and the very little pension funds we have here.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you.

Ms. Pauzé, you have the floor.

[Monique Pauzé, Bloc, Repentigny, QC]

Thank you again to all the witnesses.

Professor Chenet, you have extensive experience in a number of countries, such as France. You have contributed to a number of studies at the University of Oxford. I also read that you were a visiting researcher at the Financial Services Agency in Japan.

Given your extensive experience, can you elaborate on the damage Canadian banks have caused with respect to Canada's ability to meet global climate commitments?

[Hugues Chenet]

Thank you, Ms. Pauzé.

It's true that I have been able to observe various financial ecosystems. For the moment, it's not the one in North America that I'm most familiar with. As far as Canadian banks are concerned, I don't have a very specific opinion.

What's very visible from the outside is Canada's industrial activity, particularly in the area of energy production and fossil fuel resources. I would imagine that Canadian banks are involved in providing financial support for the Canadian economy. Necessarily, there's quite a strong connection to be made there, and that's the case in most countries. Even though finance is international and these companies finance themselves on international markets, there's still a very strong local connection in financing.

I don't know if that answers your question.

Even though I've been working in finance for 15 years, I tend to say that it's not so much financial matters, but industrial matters, that are discussed. To tackle the problem of fossil fuel resources, we must first have a clear understanding of how these industries work and really be motivated to get them off fossil fuels. The banks will follow suit, in a way.

[Monique Pauzé, Bloc, Repentigny, QC]

One bill introduced in the Senate links the impact of climate change on financial institutions to the impact of financial institutions on climate change.

Given all that and the competition for global capital in the energy transition, how do you see the fact that Canada is really a step back in this area?

[Hugues Chenet]

It's a key issue.

In Europe today, it's really central to all discussions. The principle of double materiality is being imposed in the progress reports of businesses, starting with the big ones and, little by little, the smaller ones. As you said, it's about analyzing the impact of activities on climate and the impact of climate on activities, and therefore on the financial performance of businesses and portfolios.

In my opinion, this is really a key issue, because the double materiality principle is precisely what will help companies look beyond their solely financial view of performance so that they can say that, of course, activities must perform well financially to be continued, but they must be carried out within the limits of feasibility. In other words, financial performance must be consistent with the prerequisite, a functioning biosphere. Otherwise, companies can turn out products and add value, but that serves no purpose if life is no longer possible in 10, 20 or 200 years. This raises the question of the ability to operate within planetary boundaries, to use that framework. Personally, I think that prerequisite must be established.

Obviously, if you're the first to jump in the pool when the water is cold, you look a little silly and you will probably want to get out. That's more or less what's happening today. Europe is starting to want to backpedal, because it's very complicated when it comes to competitiveness. However, we have to be able to say that we're not talking about five years, but a century and potentially more. It may hurt and there may be a price to pay in the short term, but if we don't do it, we're sure to pay a much heavier price in the long term. Until we accept that, it will be virtually impossible. As a result, today, those who can afford to make somewhat more radical decisions about their economy are those who think long term and don't necessarily have to use market incentives and look at their effects on stock market performance every quarter.

[Monique Pauzé, Bloc, Repentigny, QC]

What are the risks to the Canadian financial system in terms of international competitiveness? We know that France and the United Kingdom impose an import tax on certain products. So Canada's international competitiveness is at risk if the Canadian financial system doesn't make a move.

[Hugues Chenet]

In terms of European economic operators, if this system is fully implemented and robust, and if we can do without these imports or, in any case, if it can be included in the competitiveness mechanisms, that's very good for Europe. So, if Europe leads markets to certain specific products or if exporters need Europe to operate, that will trigger an incentive mechanism. That's the European strategy. It's to set an example and for this example to be repeated. If Europe is the only one doing it and there are other solutions, it won't work.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you. We'll have to stop there.

Ms. Collins, you have the floor.

[Laurel Collins, NDP, Victoria, BC]

Thank you.

Mr. Chenet, you talked a bit about how the financial system really hasn't been considering those externalities and hasn't been considering the devastating impact that the climate crisis is having on our society and on markets more generally, and will have in the future.

We've seen many financial institutions in Canada turn away from their net-zero commitments. Can you speak a little bit about why this has happened and how, in jurisdictions with stronger financial regulations in this area, financial institutions might or might not have been able to meet climate targets?

[Hugues Chenet]

Thank you very much, Ms. Collins, for this question. It's actually, for me, the tipping point.

Today we have financial institutions everywhere on earth in the global financial markets committing to net zero. It's easy to find and easy to flag but almost impossible to do it. When financial institutions realize they have signed something that is probably too difficult for them, either they resign so that they are again compliant with their engagements, or they really have to take strong decisions.

As of today, as I was mentioning, it's very difficult for global financial institutions to see a very profitable market—for instance, oil and gas—and then decide not to go there. This is very difficult. What is almost impossible for them if they're already there is to say they quit, and have to close down the branch working on that and fire the employees or organize them differently. This is not a win-win situation.

We are at a situation that is very interesting, because stakeholders are no longer looking for a win-win option. I think we are entering a win-lose option, and we know there will be a cost. We know that there will be something that will be closed, so we have to organize this.

Finally, for me, it's much more a societal, policy and political issue than a pure financial thing. When you have really motivated banks—and I work with some of them—that are very committed to trying to go to this net zero, when they realize what it means for them, then behind the scenes they say that they will never succeed if the economy is not in alignment to do that. Then it's not a financial stake anymore; it's first and foremost an industrial policy thing.

Take the car industry in Europe, for instance. The internal combustion engines are expected to be forbidden in 2035. It's in the law, but it can always go back and forth. It's easy for a financial decision-maker to say that they won't go to a particular company but to another because they are going electric. However, if there is not such a regulation, they will not stop financing car producers that make cheap internal combustion cars. It would be stupid.

For me, the industrial policy has to be first and foremost, and then the financial industry has to follow and implement.

[Laurel Collins, NDP, Victoria, BC]

You've published the difference between push and pull, between incentive-based carrots versus more restricting policies. You just gave the example of industrial policy that would shift our economy and would ideally have a profound impact on emissions reduction. Can you flesh out what some other jurisdictions are and how we might learn some lessons from that carrot-and-stick, push-pull dynamic?

[Hugues Chenet]

Yes. Clearly, even if it's a bit sketchy, when you take a country or a jurisdiction like China, where there is a kind of alignment between the governmental policies and a lot of the markets and the industry, it's relatively easy to not distinguish the two. It may work because not only the central bank, for instance, but also the industries—the car producers, for instance—have to be aligned, to a certain extent, to the policy goal, so it's relatively clear to orient the market in that direction.

In Europe, for some things like car production, clearly there's a target that is set up by the European Commission and European governments, and then the market must follow. There is not much choice. However, for other stuff, it's much less oriented, so there's a mix of this pull and push. We would hope that all the signals are sufficiently aligned so that financial markets would make good decisions and would align the market with the goal, but it may not work. It depends.

[Laurel Collins, NDP, Victoria, BC]

Do you find, especially in peer countries, in democratic countries, that there are examples of this kind of industrial policy that's really having an impact on the financial institutions and on emissions reduction more broadly?

[Hugues Chenet]

Just off the top of my head, I don't have a very concrete example. However, maybe to couple with your previous question, in Japan, for instance, the central bank is providing support to green banking activities, but it's very much on a voluntary basis. You have a mix of very centralized policy and even monetary policy decisions, but it's quite open in terms of the way it's done, because there is no strict rule that this is green and this is not green.

Thank you.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much. We'll have to stop there.

We will go now to our second round, which will be three minutes and one and a half minutes so that we can finish this first panel at noon.

Mr. Deltell, you have three minutes, please.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you very much, Mr. Chair.

Thank you to the excellent witnesses we have today.

Professor Chenet, how can a company honestly and accurately calculate its emissions record and determine that it is carbon-neutral?