Environment Committee on Nov. 18th, 2024

[The Chair, Liberal, Francis Scarpaleggia]

Colleagues, I want to welcome Mr. McKinnon, who is subbing today.

We're on the last day of our study on sustainable finance, which has been very interesting.

In the first hour, we have with us from the Department of Finance, Mr. Clifton Lee-Sing, director, markets and securities, financial stability and capital markets division. We have, also from the Department of Finance, Kathleen Wrye, director, pensions policy, financial crimes and security division.

From the Department of Environment, we have Mr. Nicolas Barbe, director, economic policy, sustainable finance.

I guess we'll start with the five-minute opening statements. That's five minutes from the Department of Finance and five minutes from ECCC.

I'm sorry, it's seven for finance and seven minutes for ECCC, I'm told.

Is that what you understand?

[Clifton Lee-Sing, Director, Markets and Securities, Financial Stability and Capital Markets Division, Department of Finance]

My understanding is that finance will share the seven minutes and our colleague at ECCC will help in responding to questions.

[The Chair, Liberal, Francis Scarpaleggia]

Okay, Mr. Lee-Sing, go ahead, please. Thank you.

[Clifton Lee-Sing]

Thank you very much, Mr. Chair and members of the committee.

My name is Clifton Lee-Sing. I'm the director of markets and securities policy at the Department of Finance. I am pleased to appear before you in support of the committee's study.

In keeping with my responsibilities at the department, I will focus on the Government of Canada's efforts to develop the foundational market infrastructure needed to scale up Canada's sustainable finance market. By infrastructure, I mean the tools and frameworks to provide effective information to boards, managers and owners of companies in the real economy to help them make decisions about their climate-related activities.

The public sector alone cannot fund the net-zero transition, and it is vital to mobilize private sector capital to realize Canada's climate objectives.

I'll speak about two important sustainable finance initiatives the government announced at the October 9 UN PRI conference to promote financial and capital market transparency. The first is a plan to deliver made-in-Canada sustainable investment guidelines, also known as a taxonomy. The second is mandatory, climate-related financial disclosures for large, federally incorporated private companies.

On taxonomy, financial market participants need clarity and standardization—that is, a common language—about what economic activities and investments are considered green or “transition”. This is the purpose of a taxonomy. It is a set of criteria to be used to identify activities and investments that are eligible for a green or transition investment label.

A Canadian taxonomy is expected, among other objectives, to help close the confidence gap that climate investments currently face. This could include financing delays, reduced levels of capital and higher costs of capital for these particular projects. A taxonomy would also give Canada an opportunity to influence the global transition finance dialogue, particularly in the natural resources and agriculture sectors.

Concurrent with the government's announcement to support funding for the taxonomy, the government released a backgrounder, which is a set of expectations for the development and implementation of this taxonomy.

In the backgrounder, the government expects that the taxonomy would be developed at arm's length from the government. What we want by arm's length is to ensure that the taxonomy is developed and deemed to be credible and usable by financial markets, the real economy and civil society experts. They will be consulted and will help to develop the taxonomy.

The taxonomy would cover both green and transition elements, unlike many of the other international taxonomies, which focus just on green activities. The purpose of this is to include transition activities to help mobilize financing to decarbonize these particular sectors.

The taxonomy would categorize activities rooted in scientifically determined eligibility criteria that are consistent with limiting temperature warming to 1.5°C.

Furthermore, the development of the taxonomy would be based on several guiding principles. These guiding principles draw from the recommendations of the sustainable finance action council, international organizations that have opined and worked on taxonomies, and international taxonomy precedents. For example, users of the taxonomy are expected to have net-zero targets, to have well-defined transition plans and to use robust climate disclosure.

The government, when announcing the backgrounder, identified certain sectors the taxonomy will focus on. These were chosen based on the level of green and transition investment opportunities, the importance for decarbonizing the Canadian economy and the economic significance of these sectors in Canada's economy. These are electricity, transportation, buildings, agriculture and forestry, manufacturing and extractives, which include mining and natural gas.

Lastly, the government expects the taxonomy to be a voluntary investment tool. It's not going to restrict continued private and public sector support for projects that are ineligible for a taxonomy label.

The government announced it would contribute funding for the initial phases of the taxonomy development—roughly three years—upon which it is expected that the private sector will take on the cost of maintaining the taxonomy. The Minister of Finance has the authority to select an external-to-government organization that will be in charge of developing the taxonomy. Work on choosing that organization is happening now. As I mentioned, the taxonomy development is expected to take roughly three years, with the expectation that two or three sectors could be completed within the next year.

Next, on climate-related disclosures—building on previous federal efforts to mandate climate-related financial disclosures for federally regulated financial institutions and Crown corporations—the government announced it intends to bring forward amendments to the Canada Business Corporations Act to enable climate-related financial disclosure requirements for large, federally incorporated private companies. Transparent and robust climate-related financial disclosures can ensure that climate considerations are integrated into an organization's culture and decision-making. It will support investors, lenders, insurance underwriters and other stakeholders in assessing and pricing climate risks and opportunities. This is going to help drive net zero-aligned finance and investment decisions.

Extending climate-related financial disclosures to privately held companies is consistent with approaches being taken in other jurisdictions, including the EU, the U.K., Australia and some U.S. states.

The government intends to launch a regulatory process to determine the substance of these disclosure requirements and the size of the private federal corporations that would be subject to them. The government also intends to work with provincial and territorial partners to harmonize these regulations with those that will be required of publicly traded entities by the securities regulators, in order to avoid fragmentation across the markets and jurisdiction shopping.

Thank you.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much. That was very interesting, and I'm sure the questions will be excellent.

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

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

Thank you, Mr. Chair.

Welcome to the witnesses.

[The Chair, Liberal, Francis Scarpaleggia]

I'm sorry.

Mr. Barbe, my understanding is that you're answering questions later.

[A voice]

That's correct.

[The Chair, Liberal, Francis Scarpaleggia]

Okay.

Go ahead, Mr. Deltell.

[Clifton Lee-Sing]

Pardon me, Mr. Chair.

Could I offer a few minutes to my colleague Kathleen, so she can talk about pensions?

[The Chair, Liberal, Francis Scarpaleggia]

How much time is that?

[Kathleen Wrye, Director, Pensions Policy, Financial Crimes and Security Division, Department of Finance]

I can take a few minutes.

[The Chair, Liberal, Francis Scarpaleggia]

Sure. Go ahead for two minutes.

[Kathleen Wrye]

Thank you very much, Mr. Chair.

Good morning, members of the committee. My name is Kathleen Wrye. I'm the director of pensions policy at the Department of Finance. I'm here today to answer any questions with respect to federally regulated registered pension plans.

Under the Pension Benefits Standards Act, 1985, the federal government regulates the workplace pension plans of employers in areas of federal jurisdiction, such as telecommunications, banking and interprovincial transportation, as well as private pension plans in the territories. This represents 7% of pension plans in Canada.

The Pension Benefits Standards Act, 1985, imposes a fiduciary duty on plan administrators with respect to the administration of the plan and the investment of its assets. As fiduciaries, plan administrators must act prudently and in the best interest of all plan members and beneficiaries. As such, they must account for any factor that could materially affect the financial performance of the pension fund.

There is growing acceptance and expectation that environmental, social and governance, or ESG considerations should be taken into account when making investment decisions. The Canadian Association of Pension Supervisory Authorities, which is the national association of pension regulators, recently released its comprehensive risk management guideline to support pension plan administrators in fulfilling their fiduciary duty in giving appropriate consideration to ESG factors.

With respect to federally regulated plans, in budget 2022 the government announced it would move forward with requirements for the disclosure of ESG considerations, including climate-related risks. Following consultations, the department is working on regulatory amendments that will contain the detailed disclosure requirements.

Thank you.

[The Chair, Liberal, Francis Scarpaleggia]

Thank you very much.

Mr. Deltell, you have the floor.

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

Thank you, Mr. Chair.

Good morning, fellow members. It's always nice to see you, especially when Parliament resumes after we've spent a week in our respective ridings.

Witnesses, thank you for being with us, and welcome to the committee. I also want to thank you for dedicating your talents and energies to the good of the country as Canadian public servants. We greatly appreciate it.

We are all gathered here to be as effective as possible in the fight against climate change. We recognize that climate change is real, that we have to adapt to its effects and that adequate measures have to be put in place, particularly when it comes to funding. For example, we need to find ways to fund the best approaches and guide businesses and financiers in the choices they make to fight climate change. However, these measures have to be effective.

A few days ago, the commissioner of the environment and sustainable development tabled a series of very scathing reports on Canada's approach over the past nine years. The commissioner concluded quite bluntly that Canada is not on track to meet the 2030 targets, which, you'll recall, are based on the Paris agreement. Let me point out that the targets in the agreement were exactly the same as those set by the previous government, down to the decimal point. According to the report by the commissioner of the environment and sustainable development, Canada has the worst record in the G7. As you see, we are a long way from meeting expectations.

Here, we zero in on a major problem. We have to find a way to assess the effectiveness of environmental measures. These measures guide businesses in their financial choices, whether it be funding pension funds or investing in green energy or a green approach. The results have to be conclusive, and above all, the calculations have to be accurate.

The commissioner wrote, “The recent decreases to projected 2030 emissions were not due to climate actions taken by governments but were instead because of revisions to the data or methods used in modelling.” That's not us saying it; it's the commissioner of the environment and sustainable development.

Mr. Barbe, you play a major role at the Department of the Environment. How do you explain the fact that everyone is happy to see that the targets seem to have been met, but that the commissioner of the environment and sustainable development says that they haven't actually been met and that the results are instead due to changes made to the calculation method?

[Nicolas Barbe, Director, Economic Policy, Sustainable Finance, Department of the Environment]

Thank you for the question.

First of all, I would like to clarify something. We all have different responsibilities within the department. I am responsible for sustainable finance. Your question is a little bit outside my area of expertise.

However, I can say that the progress report on the 2030 emissions reduction plan, published at the end of 2023, says that Canada is on track to meet the targets set for 2030.

That said, there is a slight difference. As you know, the target to reduce greenhouse gas emissions is 40% to 45% below 2005 levels by 2030. According to my department's calculations, the reduction is about 36% at the moment. The slight difference will be made up through future measures and, we hope, through measures that will be put in place by the provinces, territories and indigenous groups.

In terms of your question about the commissioner, those are basically the numbers we have. I would be very happy to refer the question to my colleagues, who can give you a more detailed answer.

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

Mr. Barbe, before going any further, I would like to mention that there is a direct connection with what you do. I'll tell you why. This is about taxation. The committee is studying taxation and corporate financing, as well as the choices financial institutions have to make. Canada needs to adopt environmental policies, but we still need to know how to ensure that those policies are effective.

However, the commissioner of the environment and sustainable development tells us in his report that the targets and figures provided are due, not to measures taken by governments, but to changes in calculation methods. That's where the problem lies.

No one is against virtue. We all want to reduce greenhouse gas emissions and pollution, but we have to take the right approach. That said, we feel that the approach taken over the past nine years is not the right one, as the commissioner's report shows. It states that the reason some people think things are going better is the change in the calculation method. That's not exactly the right approach.

Mr. Barbe, I also want to talk to you about transparency and disclosure of information. That concerns the department as a whole. The commissioner wrote, “This lack of transparency meant that accountabilities for reducing emissions remained unclear.” Elsewhere in the report, he stated, “The federal government had not established a consistent government-wide approach to assess value for money for all types of emissions reduction measures.”

How is it that after nine years, the government has not been able to transparently and consistently tell Canadians the truth about reducing greenhouse gas emissions?

[The Chair, Liberal, Francis Scarpaleggia]

Your six minutes are up.

Ms. Taylor Roy, you have the floor.

[Leah Taylor Roy, Liberal, Aurora—Oak Ridges—Richmond Hill, ON]

Thank you very much, Mr. Chair.

Thank you to the witnesses for being here today.

I think our topic is sustainable finance. These are things that have not yet been implemented. We're working on the guidelines, the taxonomy and the disclosure requirements. I don't think they've had any impact on what the commissioner's report has said, but we're hoping that they will have a positive impact going forward and help to meet those targets.

We've frequently heard that putting in a taxonomy or disclosure requirements will not reduce emissions one bit. How do you respond to that? How will these taxonomies or these disclosure requirements help us meet our targets? We know that directly they don't—I mean, this is not the real economy—but how will they help us meet our targets?

Perhaps you could start, Mr. Barbe, and then we could go to Ms. Wrye or Mr. Lee-Sing.

[Nicolas Barbe]

I'm happy to start.

The main purpose behind a taxonomy is to make sure capital flows are aligned with our environmental climate objectives. If a taxonomy is well done and well implemented, it has the potential to increase funding in sectors that we require to meet our net-zero objectives and to meet decarbonization objectives as well.

[Leah Taylor Roy, Liberal, Aurora—Oak Ridges—Richmond Hill, ON]

Increased funding to these areas would mean there's more progress made; therefore, we'd be better positioned to meet our targets. Is that correct?

[Nicolas Barbe]

That's correct. It's the additional mobilization of resources to accomplish our goals, essentially. It comes down to this, yes.

[Leah Taylor Roy, Liberal, Aurora—Oak Ridges—Richmond Hill, ON]

Thank you.

Mr. Lee-Sing.

[Clifton Lee-Sing]

I would just add that the taxonomy approach is really an incentive to help encourage the real economy to direct capital to particular activities. The benefit of having an activity labelled as “green” or “transition” is that it draws in, or hopes to draw in, other investors who are interested in that particular line of activities. There's a positive benefit to having that label, but there's no requirement, as in it's not mandatory, for a borrower to use that framework. It really is meant to draw investment into particular areas.

Climate disclosure, on the other hand, we see as being mandatory. It's to provide decision-makers with all the information they need to effectively balance the various things they need to consider, whether it's growth in a particular area or focus on a particular type of market, or whether it's risk, which includes making decisions about how to manage climate risk. That one is more to ensure that the appropriate information is available when making decisions.