Environment Committee on Nov. 18th, 2024

[The Chair, Liberal, Francis Scarpaleggia]

Thank you.

The first part of the meeting has now come to an end.

I'd like to thank the witnesses for being with us.

I believe we will be receiving written documents from the witnesses to clarify points that were raised during the meeting or answer specific questions.

We'll take a short break while we set up for the second panel. It should take about five minutes. All the witnesses in the second panel will be joining us by video conference.

Thank you.

[The Chair, Liberal, Francis Scarpaleggia]

I call the meeting back to order.

We will begin with the witnesses' opening remarks. They will have the floor for five minutes each.

Ms. Walton, why don't you go ahead for five minutes?

[Lindsey Walton, Director, Americas, Responsible Investment Ecosystems, Principles for Responsible Investment]

Thank you, Chair.

Good afternoon, honourable committee members. I am appearing today from the traditional territory of many nations, including the Mississaugas of the Credit, the Anishinabe, the Chippewa, the Haudenosaunee and the Wendat peoples in Toronto.

As mentioned, I am the director of the Americas for the Principles for Responsible Investment. Thank you very much for the opportunity to provide information to this study, which is clearly in the Canadian public interest.

For close to 20 years, the UN-supported PRI has been the world's leading proponent for responsible investment. We work with our global network of signatories, comprising over 5,000 institutional investors and financial organizations that are signatories to the principles. These investors are based in 100 countries across the globe, collectively managing over $120 trillion U.S. There are approximately 240 signatories headquartered in Canada, including the major Canadian pensions and the asset management arms of the major banks.

PRI's 2024 to 2027 strategy sets out a vision for a global financial system that rewards responsible investment, operates within planetary boundaries, promotes human rights and achieves equitable societies. Signatories to the principles incorporate environmental, social and governance factors into their allocation and ownership decisions to fulfill duties of prudence and diligence owed to clients and beneficiaries.

For institutional investors seeking to generate long-term value, physical and transition climate risks pose new challenges to investment strategy. Legal analysis has established that investors generally have an obligation to consider identifying and acting on climate-related financial risks, including system-level risks. Leading up to COP29, the PRI has outlined recommendations that support long-term institutional investors that seek sustainable investment opportunities.

Number one, the world needs a fair, fast and stable transition to a low-carbon future. The PRI calls on Canada and other countries to take a whole-of-government approach to transition. Their updated 2025 nationally determined contributions—or NDCs—as a part of the Paris Agreement need to be an ambitious and credible platform for investors.

Number two, financial systems should align with the Paris Agreement's goal of 1.5°C. Foundational legislation and policy reforms are needed to clarify the relevance of climate and other system-level risks to investor duties and promote international regulatory compatibility on policy measures like disclosure standards, taxonomy and transition plans. These recommendations are related to the work undertaken by the expert panel on sustainable finance and the Sustainable Finance Action Council.

Number three, coherent real economy policies should include robust, predictable carbon-pricing regimes to boost transition, as well as other measures and incentives to ensure a fair, fast and stable transition.

Lastly, number four, scalable blended finance is required to enable capital to flow to sustainable solutions in emerging markets and developing economies. All the countries in which our signatories operate take their own approach to transitioning their economies to meet their sustainability targets on climate change mitigation, restoring nature and protecting human rights. Financial policy, corporate practice policy and real economy climate policy and regulation all work in tandem to maximize the universe of assets aligned with a climate-safe future and to address systemic risk. This approach can create a positive feedback loop that accelerates the transition.

Globally, we see concrete reforms in many areas of financial systems addressing climate change and nature. The PRI's regulation database, which documents financial, corporate and real economy policies that support, encourage or require responsible practice, shows that since 2014, across jurisdictions assessed, the variety of policy instruments has increased with the introduction of taxonomies, investor due diligence requirements, etc.

In the same period, the number of policies that reference the Paris Agreement has increased from 33 to surpass 200 out of the 379 entries in our database. The number of regulations that support the economic transition has also grown. It has quadrupled as a percentage of policies assessed. This has increased from 41% in 2014 to 60% of our policies in 2024. There's also an increased focus on regulations that support governments to drive economy-wide transition towards a sustainable future, recognizing that the financial sector alone cannot resolve system-level sustainability-related risks.

Over the course of these hearings, the committee members have already heard about the incredible financial risks and opportunities that climate change poses for Canada and the global economy. The government has projected that it needs upwards of an additional $115 billion annually to meet its climate targets. This, while damage and severe weather are increasingly costly to the Canadian government, taxpayers and insurers—

[The Chair, Liberal, Francis Scarpaleggia]

Unfortunately, we're out of time. We're well over the five-minute mark, but there will be ample time to explore these ideas in the Q and A.

Ms. Chipot, you now have the floor for five minutes.

[Alice Chipot, Chief Executive Officer, Regroupement pour la responsabilité sociale des entreprises]

Good afternoon.

I'd like to thank the committee for inviting me to be here today to discuss a key issue, one that affects our collective future and the energy and climate challenges we face.

First of all, I want to make very clear a crucial point. It is heresy to think that we will be able to change our practices simply by providing better access to information. What's more, there is this idea that all economic players need to make well-thought-out choices is clear, perfect information, that this would be beneficial across the board and that the information would give them alone the ability to course correct climate engagement. A binding framework is necessary. As the taxonomy would, the framework should make it possible to compare information provided by big banks and businesses. However, a penalty system is also necessary to make the corrections that are needed.

Specifically, I'd like to talk about a report the RRSE produced, with the help of the firm Æquo. The report examines the approach of banks with their own clients, in other words, the businesses in their portfolios. We wanted to see the transition plans and find out how robust they were. We wanted to examine their credibility, if you will.

Last year, we looked at a group of 23 banks, comprising not just the big banks in Canada, but also banks in Europe and the U.S. We looked closely at the banks' statements and their expectations of their clients, to ascertain whether it was possible to credibly achieve the Paris agreement target to limit the increase in global temperature to 1.5°C.

It was, in fact, a comprehensive analysis, and the conclusions are clear. On one hand, in order for an oil and gas company's plan, say, to be credible, it has to incorporate reductions in greenhouse gas emissions across all three scopes used to classify emissions. That means the plan has to include reductions in scope 3 emissions. On the other hand, it is paramount that the financial institution commit to not investing in new oil and gas projects. That is key.

Our analysis of the financial institutions' plans revealed very disparate practices that were highly inconsistent with the evaluation criteria and the way the banks intended to implement their transition plans. Overall, we found not only a lack of engagement, but also highly unclear methodologies. We saw multiple occurrences of such terms as climate engagement, ethical products, responsible products and green products, as well as a lack of support for clients so that they, themselves, could transition successfully.

However, there was no clear explanation of the expectations, the time frames or the penalties. By penalties, I mean a strategy for escalation or for excluding the business from the portfolio. That would mean a commitment on the part of financial institutions to not do business with big companies that don't play ball when it comes to reducing their greenhouse gas emissions. Currently, the information we have is not sufficiently reassuring vis-à-vis the banks' public statements. We used all the available frameworks and best practices, and what we are seeing is that we are headed for disaster.

To wrap up, I would say that our findings are consistent with those in the notice released last week by the Canadian Securities Administrators. The notice is based on an analysis of 425 reviews of reporting issuers' compliance with disclosure requirements. It highlights a plethora of activities involving greenwashing, and unclear or hardly achievable commitments on environmental, social and governance, or ESG, matters.

As things stand, by allowing financial institutions or economic actors to regulate themselves and adopt practices, we will not be able, collectively, to reach the targets set under the Paris agreement or effectively reduce greenhouse gas emissions.

I will leave it there. I'm not sure whether I stayed within my allotted time.

[The Chair, Liberal, Francis Scarpaleggia]

Yes, you stayed within your allotted time. Thank you. That's very helpful.

We will now hear from Anthony Schein.

Go ahead, Mr. Schein.

[Anthony Schein, Chief Operating Officer, Shareholder Association for Research and Education]

Good morning. Thank you for inviting me here today. I'm the chief operating officer of the Canadian Shareholder Association for Research and Education.

For 25 years, SHARE's mandate has been to support institutional investors in addressing the full range of risks and opportunities in modern capital markets, including by working with many of Canada's largest institutional investors in strengthening public market regulations and helping engage with corporate boards and management as shareholders.

Asset owners and managers are ready to invest in the low-carbon economy of Canada's future, but delay, uncertainty and inconsistency are some of the biggest barriers to producing good jobs for Canadians, building a world-leading economy and protecting our environment.

Today I want to address three conditions necessary to unlocking investment in the low-carbon economy and securing our Canadian competitive advantage. The first one is about consistent regulation; the second is around critical infrastructure, and third is clarity on industrial carbon pricing.

To begin, we need a regulatory system that sets and enforces sustainability disclosure standards consistently. This is not an appeal for excessive regulation. In fact, it's quite the contrary. It's an appeal for rules that help investors and investing companies manage data flows so they're focused on what really matters. Internationally, we're finally seeing convergence on sustainability reporting standards, and we cannot afford to be left behind. The transition taxonomy is fundamental to aligning with international standards, and we hope that it will be supported in its future development and oversight.

The effort to include climate data disclosures in our security regulations is critical as well.

We also need to make sure that disclosures are happening across the private market systems to encourage a level playing field. Efficient private markets require accurate data, and if we're building models based on only public market data, they will be estimates at best. That uncertainty may discourage investment where it's needed the most, so we urge the committee to study the Canadian private market system more closely, and we support the recent proposed changes to the CBCA.

Second, we need to build the infrastructure to enable growth and investment. For example, global businesses are considering the availability of reliable and clean electricity in their setting positions. The new VW battery plant to be built in St. Thomas, Ontario, was won partly because of promises of the availability of 100% green energy and commitments to deliver that energy directly to the new plant. The VW deal shows that Canada can be a powerhouse in low-carbon manufacturing, but we will still have considerable work to do to deliver a green electricity grid all across the country.

What will it take to drive investment into the clean energy production, storage and distribution infrastructure? The tax credit regime is critical, including for related components manufacturing, and so are working to develop a workforce development strategy to support the clean energy industry, supporting partnerships with indigenous communities, and improving interprovincial co-operation and an efficient regulatory process.

Another example where we should be excelling and attracting capital is in developing critical minerals—the necessary components for battery storage, solar panels and electrification—but there is a financing gap in the industry. High capital costs and low payback periods are two of the significant barriers to investment. A lack of clarity around indigenous rights and title and delays in permitting and regulatory review processes are also significant project-related barriers. Governmental support is needed to address these identified barriers and to grow our competitive advantage.

Finally, we need clarity on industrial carbon pricing. Whatever one may think about the consumer price, the industrial price plays an outsized role for both emissions reductions and investment decisions. Promoting certainty in the continuance of the pricing system and in pricing schedules beyond 2030 will help to set investment and credit values for new projects and enterprises and spur investor confidence here in Canada. We need a lot more final investment decisions being made in Canada's favour.

In each of these three areas, I can't emphasize enough the importance of acting early, decisively, clearly and consistently. Our economy is changing now, whether we like it or not, due to technological change, innovation, market forces and geopolitics. Our financial system, including the regulatory and policy environment that facilitates it, needs to help deliver smooth flows of capital into the hands of businesses that can take advantage of those changes, deliver new jobs here at home and build the economy of the future.

Thanks very much, and I look forward to taking some questions.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much, Mr. Schein.

We'll go to questions now.

We have a fourth witness who hasn't joined us yet. If he does join us, I'm going to interrupt rounds of questioning and have him present his opening statements. We'll see what happens there.

We'll start with Mr. Kram for six minutes.

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

Thank you very much, Mr. Chair.

Thank you to all the witnesses for joining us today.

I would like to start with Ms. Chipot.

Ms. Chipot, in your opening statement you talked about the need for a framework that is constraining and limiting, but I wasn't quite sure about some of the tangible examples you had of that. Could you share with the committee what particular policies the government should be implementing that are more constraining and limiting?

[Alice Chipot]

I was referring more to what we're seeing overseas.

Can I speak in French, or should I speak in English?

[The Chair, Liberal, Francis Scarpaleggia]

It's your choice. Whichever language you choose, your remarks will be interpreted into the other language.

[Alice Chipot]

Excellent.

We are seeing a lot of momentum in Europe when it comes to making transition plans mandatory. They have to be detailed, sound plans that set out significant requirements. There is also a lot of momentum around establishing penalties. That requires thinking about the institutional process that's needed to do those checks and penalize bad actors.

In Canada, in recent years, we've seen some good work with the legislation Senator Galvez introduced, Bill S‑243. It sets out a series of ambitious obligations, including in relation to transition plans, both to control the behaviour of financial institutions and to regulate large companies regarding their disclosures.

[The Chair, Liberal, Francis Scarpaleggia]

Mr. Kram.

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

In terms of the mandatory transition plans, were you envisioning that just for financial institutions and large businesses, or for every business and organization in the country?

[Alice Chipot]

Eventually, all businesses need to have a plan, but there's no doubt that it is necessary to think about financial flows and the interdependence with economic actors. As far as we are concerned, you can't have financial institutions with transition plans without a similar requirement for businesses. It's about ensuring consistency across the decision-making chain. The same goes for the information that is disclosed. The practice should be mandatory industry-wide if the goal is to find out whether businesses are meeting expectations.

That means regulating not only financial institutions and institutional investors, but also big companies—and ideally, smaller businesses, taking into account the type of sector and size of the business.

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

[Inaudible—Editor] the mandatory transition plan for every business in the country.

Has your organization come up with an estimate for the cost to businesses or governments if they implement such an idea?

[Alice Chipot]

We haven't estimated the cost of that social transformation, which is necessary. However, others have endeavoured to quantify the cost of political inaction, and I think we have more to lose financially and on a human level if we don't do what is necessary than if we try to improve transition plans.

I am not saying that estimating the costs is secondary, but we have a lot more to lose if we do not take bold action.

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

Okay.

However, to date, neither you nor your organization has come up with an actual dollar value for each option.

Is that correct?

[Alice Chipot]

That's correct.

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

Has your organization come up with an estimate for emissions reductions when implementing such a proposal?

[Alice Chipot]

I could send you more information. We have been looking at different frames of analysis, from the best ones used at the international level and what they have done to.... There is a different type of quantification, but I can't give you this right now.

If you're interested, we could let you know.

[The Chair, Liberal, Francis Scarpaleggia]

We would appreciate it if you could send those documents to the clerk, who will share them with the committee members.

Thank you.

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

Okay. Thank you.

Maybe I'll shift gears to Ms. Walton now.

You also talked about disclosures, taxonomies and transition plans. Were you imagining an optional or a mandatory system of taxonomies, disclosures and transition plans?

[Lindsey Walton]

Typically, “optional towards mandatory” would be the approach. The problem with voluntary disclosures, for example, is that folks don't disclose. There would have to be a pre-step towards mandatory.

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

[Inaudible—Editor] mandatory disclosures that were implemented, were you envisioning this for every business in the country, or just the financial institutions and large businesses?