Finance Committee on March 21st, 2023

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 80 of the House of Commons Standing Committee on Finance.

Pursuant to Standing Order 108(2) and the motion adopted on Tuesday, March 7, 2023, the committee is meeting to discuss the current state of play on green finance.

Today's meeting is taking place in a hybrid format pursuant to the House order of June 23, 2022. Members are attending in person in the room and remotely using the Zoom application.

I would like to make a few comments for the benefit of the witnesses and members.

Please wait until I recognize you by name before speaking. If you are participating by video conference, click on the microphone icon to activate your mike, and please mute yourself when you are not speaking.

For interpretation, those on Zoom have the choice, at the bottom of their screen, of the floor, English or French. Those in the room can use the earpiece and select the desired channel.

I remind you that all comments should be addressed through the chair. To members in the room who wish to speak, please raise your hand. To members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as best we can, and we appreciate your patience and understanding in this regard.

I'd now like to welcome our witnesses. We have, as an individual, Eric Usher, head of UNEP Finance Initiative. He's coming to us from Stockholm. From the Organisation for Economic Co-operation and Development, we have Robert Youngman, team leader, green finance and investment. Mr. Youngman is coming to us from Paris, France.

You now have an opportunity for opening remarks before we move to members' questions.

We'll start with Mr. Usher.

[Eric Usher, Head, UNEP Finance Initiative, As an Individual]

Thank you very much, dear Chair and committee members.

I'd like to thank you for the opportunity to share observations on sustainable finance policy and regulation globally and to help inform the study under way in Canada.

Please note that my remarks are made on a voluntary basis in my individual capacity and should not be understood to be a waiver of the privileges and immunities of the United Nations.

Canada has expressed its commitment to transition to a carbon-neutral economy and society. The Canadian Net-Zero Emissions Accountability Act is foundational for further policy action, and I want to congratulate the Canadian government on this important step.

Equally, I welcome Canada's recognition that the private sector, particularly the finance industry, has a key role to play in achieving the overall net-zero policy agenda. The establishment in 2018 of the Canadian expert panel on sustainable finance and in 2021 of the sustainable finance action council, the SFAC, are important steps in this regard.

Many financial institutions, including leading banks, insurers and investors in Canada, have already begun integrating sustainability considerations into their operations. For example, their identifying sustainability is a key priority within their business strategy, and they reflect this in their governance and compensation policies. They establish systems to analyze the climate-related risks and impact of their financing, and they have begun making sustainability disclosures. Most of this is done on a voluntary basis, at least so far.

Now, we believe, is the time, really, to step up action to implement conducive and effective regulatory framework conditions to drive Canada's transition to a more sustainable economy and society. When we think of effective financial regulation, we think of needing as little as possible but as much as is necessary.

The private sector needs room to innovate, but I believe that voluntary leadership from industry and regulatory action from government really need to work hand in hand. Each needs to signal the other towards market uptake and towards learning and ever-increasing ambition and innovation. There are a number of trends and developments in sustainable finance policy globally that countries can look to in driving this ambition.

First, mandatory corporate sustainability disclosure frameworks are being implemented across many jurisdictions, with increased attention to covering not only the short-term risks of environmental and social externalities on business value, but also the impact of the business on people and the planet. Significant negative impacts on society eventually become material risks to the business itself, and they need to be properly understood, managed and disclosed.

Second, central banks and supervisors are issuing supervisory expectations for how financial institutions should manage and disclose climate and broader environmental risks. Many are carrying out exploratory scenario analyses and climate-risk stress tests. Some are grappling with their wider role in encouraging the overall transition of the real economy.

Beyond the focus on climate, I do observe increased regulatory attention to supply chains—for example, due diligence requirements around human rights and child labour practice.

Also, of course, an increasing number of classification systems and taxonomies are being developed across many jurisdictions.

In line with these trends, I want to end by sharing some thoughts on what regulatory action might be conducive to driving Canada's sustainability transition forward. Canada has begun to put in place some of the foundational regulatory elements in support of becoming a leader in sustainable finance. I believe that these early initiatives should now be duly executed and expanded.

First of all, mandatory sustainability disclosure is needed across the economy. I highly welcome the ambition and direction of the Office of the Superintendent of Financial Institutions' recent guideline on climate risk management for financial institutions. At the same time, I encourage regulators to expand such requirements also to the broader economy and to non-financial corporates as this is the only way to ensure a sound transparency across the economy. My understanding is that the Canadian Securities Administrators, CSA, is actively considering such disclosure obligations, and I highly encourage rules to be adopted as soon as possible, in line with international best practice, such as the framework developed under the International Sustainability Standards Board, the ISSB. Over time, companies should be required to set clear climate targets and to publicly disclose their transition plans.

Second, we need to broaden regulatory action beyond climate. It would be an important step to step up regulatory consideration of the risk and stability implications of broader environmental risks, such as biodiversity loss, soil erosion, pollution and other factors. I really encourage Canada—as host where the landmark Kunming-Montreal global biodiversity framework was adopted at the end of last year—to become a front-runner in this space.

Third is the taxonomy on how to enable the transition.

Canada is a resource-rich economy, and the ability of its sectors to attract the capital needed to transition to sustainable business models will be key. Canada's transition taxonomy, helping corporates and financial institutions identify sustainable economic activities, will be crucial.

I welcome the taxonomy technical expert group's recent road map report and highly recommend prioritizing the finalization of the taxonomy in close collaboration with industry. Building on this taxonomy, I commend the 2030 emissions reduction plan announced last year to develop sector-by-sector pathways for Canada to reach its emissions reduction targets.

The last point is, underpinning all of this, Canada should continue to actively engage in relevant international fora, working toward the alignment of sustainability measures and for the improved interoperability of frameworks.

Thank you for your attention.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Usher.

We will now hear from the OECD.

Go ahead, Mr. Youngman, please.

[Robert Youngman, Team Leader, Green Finance and Investment, Organisation for Economic Co-operation and Development]

Thank you very much, Mr. Chair.

Thank you, committee members.

Today, my remarks will focus on transition finance, and we'll dive into that topic.

To achieve the Paris Agreement goals, all sectors of the global economy—in particular, hard-to-abate industries—must rapidly decarbonize. This has given rise to several tools and initiatives in sustainable finance and, more recently, in transition finance.

Defining what is already sustainable has traditionally been—

[The Chair, Liberal, Peter Fonseca]

I'm sorry to interrupt you. I think the paper that you may be reading from is in front of the camera, so we can't see you. We are televising this session, so I think people will want to see you and hear you.

If it is possible to lower it, that would be great.

Thank you.

[Robert Youngman]

It is absolutely possible.

Thank you.

Defining what is already sustainable has traditionally been the focus of sustainable finance initiatives. This approach is criticized by some corporates and financial market participants as being insufficient to facilitate the whole-of-economy greenhouse gas emission reductions necessary to achieve the temperature goal of the Paris Agreement.

Transition finance focuses on the dynamic process of becoming sustainable rather than providing a point-in-time assessment of what is already sustainable today. This inclusive approach creates room for financing to decarbonize the most polluting and hard-to-abate industries today. On the other hand, transition finance can run the risk of sacrificing environmental integrity for inclusiveness and enabling greenwashing, a topic that is attracting increasing attention from stakeholders and regulators.

The "OECD Guidance on Transition Finance" provides a comprehensive analysis and mapping of existing initiatives. It identifies key challenges to scaling up transition finance currently faced by market actors and policy-makers. In the context of the guidance, transition finance is understood as finance deployed or raised by corporates to implement their net-zero transition in line with the temperature goal of the Paris Agreement and based on credible corporate climate transition plans. The guidance presents 10 elements of credible corporate plans, and highlights areas where more transparency is needed. In doing so, it can support market actors in conducting transition finance transactions with environmental integrity; corporates in developing their transition plans; and policy-makers in developing robust policy frameworks for transition plans.

This focus on transition plans in the guidance is also reflected elsewhere, including the G20 sustainable finance working group's transition finance framework, the International Platform on Sustainable Finance's transition finance principles, and the U.K. transition plan task force disclosure framework. Existing frameworks share several common elements, which they cover with varying degrees of detail, prescriptiveness and stringency. These elements include setting of net-zero and interim targets, use of metrics and key performance indicators, use of carbon credits and offsets, internal coherence with a company's business plan, guidance on governance and accountability, as well as issues surrounding transparency and verification. The guidance draws on all these existing frameworks and initiatives when presenting elements of credible corporate climate transition plans.

I will skip a little bit just to stay within the five minutes, Chair. I'm sorry for the initial “coverage”.

It is worth highlighting that the journey toward credible transition plans has only just begun. In a recent report, CDP found that in 2022, 22% of the organizations disclosing through the climate change questionnaire disclosed that they had already developed a climate-aligned transition plan. However, of those organizations, only 81—that's less than 1% of the full sample—reported sufficient detail on key indicators. Moreover, only 9% of the full sample reported that their transition plan was publicly available. We're very early on in the process.

The guidance was developed in consultation with an informal reflection group of interested policy-makers that included the Bank of Canada, the U.S. Department of the Treasury and representatives from several other countries. In addition to being reviewed by relevant policy committees at the OECD, it was also submitted as an input to the G20 sustainable finance working group. It also informed the development of other relevant transition finance initiatives and frameworks.

Thanks very much for the opportunity to share this information to help inform the study on the current state of play. I'll be happy to answer any questions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Youngman and Mr. Usher. You will have a lot of opportunity in question time with the members to elaborate on your comments.

We have about an hour and 45 minutes. We'll get through a number of rounds of questions. In our first round of questions, each party will have up to six minutes to ask questions of our witnesses. We'll start with the Conservatives.

MP Lawrence, you have six minutes, please.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you very much.

Thank you to the witnesses for appearing. We very much appreciate their time here today.

Although we didn't like the excessive coverage, it's much better than an excess of “uncoverage”, which we have also seen on Zoom.

[Voices]

Oh, oh!

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

That's a bit of humour to get us started.

Hopefully, Mr. Youngman—Mr. Usher, you might want to enter into this discussion, as well—we'll see a transition to net zero that will, perhaps, take many different forms.

One thing I am very bullish on is clean Canadian energy. We saw the European Union recognize natural gas as a green fuel in their taxonomy. They recognize—which, I think, is only factual—that natural gas will put less than half of the amount of carbon into the atmosphere than coal or some other technologies. Natural gas is also often necessary in an energy mix, in order to pump energy. When the wind isn't blowing for windmills or the sun isn't shining for solar, natural gas often goes hand in glove with renewables such as solar and wind.

When we're creating financial instruments, are we taking into consideration that natural gas can be part of the solution, especially given the geopolitical pressures Europe has felt, being as dependent as they are on natural gas? I hope we will support clean Canadian energy and not actively defund it.

[Robert Youngman]

Thank you for the question.

The question of gas has been raised in the context of the European Union. It's certainly relevant in today's geopolitical context.

The question of whether it is compatible with 1.5° pathways is relevant here, perhaps. What we've seen from the IEA and the IPCC is that, in order to reach net zero by 2050, there can be no additional fossil fuel exploration. Existing and planned fossil fuel infrastructure, without additional abatement, would exceed 1.5° if it's used to the end of its lifetime. Continuing to install unabated fossil fuel infrastructure will lead to emissions lock-in. By “unabated”, I mean.... “Abatement” essentially means interventions that substantially reduce GHG-capturing by 90% or more.

In that context, transition plans that rely on investments in new fossil fuel explorations, sale or distribution are likely not compatible with the Paris Agreement temperature goal and could lead to lock-in. However, in the context of developing transition plans, there's consideration about whether, over the course of its lifetime, infrastructure can be used for greener substitutes—that is, natural gas pipelines being used, in the future, for ammonia or green hydrogen.

These are some considerations. For example, in the the “OECD Guidance on Transition Finance”, transparency on future plans to help avoid emissions lock-in is important, in order to give confidence to the finance community, which is looking to stay consistent, on their side, with the 1.5° pathway, so—

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you very much.

I'm sorry. My time is short.

It's clear where you stand on that. I would have some disagreement. I think the European Union would as well with respect to natural gas being part of the solution, not part of the problem.

My other question is almost the exact same one, but with respect to nuclear. Would your organizations and reports be in support of financing and providing financial instruments to support the growth of the nuclear industry?

[Robert Youngman]

The topic of nuclear energy, with respect to transition, was a relatively unemphasized area. With respect to greenhouse gas emissions, it's widely recognized that nuclear energy would need to play a major role, moving forward. This is the choice of individual countries.

I would say the relevant question is this: Can the use of nuclear energy be done in a way that does no significant harm relative to other environmental goals?

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you for that. My apologies; my time is short.

I have one final question for you.

In energy, the measure of its contribution to productivity per worker is about $500—more like $600 now or even more—of GDP per worker. That is in contrast with the average worker, who contributes in Canada about $55 to GDP. What is the contribution of a green worker to GDP per hour?

[Robert Youngman]

I'm afraid I don't have that answer. I'd be happy to look it up, however.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Lawrence and Mr. Youngman.

We're moving over to the Liberals and MP Chatel for six minutes, please.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much.

Thank you, Mr. Usher and Mr. Youngman, for being here with us today.

Mr. Youngman, one of the reasons I joined the OECD during my career is their value statement of "better policies for better lives". I'm sure it has inspired you. In fairly concrete ways, would you be able to describe how the work you do for the OECD and your team on green finance could create better policies and better lives for Canadians and all OECD members?

[Robert Youngman]

Our work on the green finance team focuses on policies, institutions and instruments to help accelerate investments towards a low-carbon economy. Governments are all faced with this enormous challenge to speed up the transition to a low-carbon economy. We feel that sharing best practices with all of our member countries and other partner countries is a good way to help inform domestic policy-making to choose the specific approaches that will work best, in this case for Canada.

We try to provide that best practice and also go into new areas such as transition finance, where there's an important gap. In this case, if high-emitting sectors do not rapidly secure financing to take ambitious action, then we're likely to continue with inadequate emission reductions to meet our climate goals.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you so much, Mr. Youngman.

When we talk about green finance, at the core, we first of all need to know what we are talking about. As Canadians, we need to invest—and we all share the values that we want to live in a clean country, breathe clean air and be safe in our communities. We want to invest where our values are, but we need to know what green finance is. What is transition finance?

The OECD guidelines on transition finance highlight that there's a "growing risk of greenwashing in transition finance". Can you explain how the work you published on developing a sustainable finance definition and taxonomy can help Canadians and investors around the world invest where their values are?

[Robert Youngman]

Our work on transition finance has found that there is a mushrooming of different approaches by governments and market actors on transition finance. The absence of universally accepted criteria raises questions about the environmental and market integrity of transition finance approaches and potential risks of greenwashing.

It's early in the development of this market, but it's important to provide maximum transparency and guidance to companies that wish to be seen as serious in their efforts to transition to low carbon. The guidance considers transition finance to be finance intended for emissions-intensive economic activities, those that currently have no viable green substitute but are on their way to becoming sustainable or reaching net zero.

The key distinction between green and transition finance is that green finance focuses on activities that are already green. It's a point-in-time assessment, and today you can say that renewable energy is consistent with meeting Paris goals, whereas transition finance is directed at entities' entity-wide efforts to become green—a corporation that's looking to move to net zero from where it is today, particularly in emissions in sensitive sectors.

[Sophie Chatel, Liberal, Pontiac, QC]

This is the last question from me.

We hear so many initiatives on how to define green transition finance, how to develop standards and how to ensure there is disclosure of the companies' activities in that area. There are lots of international initiatives right now.

What is the OECD's role in mutualizing all of those initiatives and using best practices to develop international standards, as you mentioned? Where is the OECD's work on that?

[Robert Youngman]

Sure. Thank you.

The guidance on transition finance takes a look at different approaches, and there is a wide range across countries. Some governments use taxonomies; others provide technology road maps.

It's true that in the last year there has been a lot of activity on transition finance. I would like to reassure you that in this process, first of all, the OECD has been feeding into relevant processes like in the G20 sustainable finance working group. They came up with transition finance principles. We have fed into the international platform on sustainable finance, organized by the European Commission. They came up with principles. We see significant convergence across these instruments. In addition, it's worth noting the U.K.'s transition plan task force.

What the guidance does is recognize a common factor across all of these elements, whether it's corporate sustainability reporting standards, taxonomies or other approaches. This is the centrality of a credible corporate transition plan. It provides 10 different elements for what constitutes a credible transition plan that, when you are making comparisons, you will find is very much in line with many other recommendations.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Youngman.

Thank you, Ms. Chatel.

Mr. Garon, you have the floor for six minutes.

[Jean-Denis Garon, Bloc, Mirabel, QC]

Thank you, Mr. Chair.

Mr. Youngman, I would not want you to judge the way I spend my leisure time, but last night I looked at the website of the Canadian Bankers Association. I tried to find the most recent initiatives implemented by our large financial institutions with regard to transition finance. I have to admit that it was very hard to find anything on their website. It doesn't seem to be one of their priorities.

I then visited the website of the Insurance Bureau of Canada. The green transition initiatives were easy to find, stood out and were well presented. It implies that, in terms of transition, insurers are ahead of other financial institutions.

The way I see it, insurers today are dealing with the direct and immediate financial consequences of climate change, as are their shareholders. Conversely, banks, including Canadian ones, which are deeply involved in the oil sector, will only be feeling those effects in the long term. This leads me to believe that in certain sectors, such as banking, we need government policy that includes financial incentives linked to prices. This might nudge our banking sector into starting the transition so that these incentives are as effective as they were on the insurance sector.

What do you think about that?

[Robert Youngman]

Yes. Thank you.

What you're touching on, I think, has broader links to incentives for climate policy and to helping accelerate investment and action. The portfolios of insurance companies are being affected by the physical climate impacts, so they have, as you are saying, this natural incentive to begin to take into account risks.

In addition, many countries are requiring disclosure on climate-related risks.

I'm glad you brought up incentives, because we see globally, in our work on carbon pricing at the OECD, that generally the level of carbon pricing needed to meet greenhouse gas emission reduction targets is insufficient. Of course, countries use many different policies to get there, but generally there needs to be increased ambition.

In the area of transition finance, that would be completely new. The question of what incentives exist for companies in emissions-intensive sectors to develop credible transition plans and to actually make these investments and secure financing is, I think, a very relevant question for policy-makers and a gap that currently exists.