Finance Committee on June 13th, 2023

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

I'm sorry. I have fairly limited time. It should be a fairly straightforward answer.

I just want to know if the investments in the activities that you describe as economic activities that contribute substantially to reducing greenhouse gas emissions have a return on investment similar to or greater than investments that don't. Just a very quick answer, and—

[Barbara Zvan]

Absolutely.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

—if you don't know, you can say so. If it's yes, you can say yes.

[Barbara Zvan]

Yes, absolutely.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Mr. Darwall, you seem to have, I think, a different perspective on this. In your article from last year, December 2022, you called 2022 the year that brought “ESG investing down to earth” and pointed out major sectoral losses. Do you concur with Ms. Zvan's experience when she says these investments have equal to or greater return, or is the empirical evidence different from that?

[Rupert Darwall]

I would just say that her qualification of what is material is doing a lot of work because material is something that shifts over time.

I would also point the committee to Tim Buckley, chief executive officer of Vanguard, who expressly rejected the view now being advanced by your colleague.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

You went on to say that by restricting investment and production of oil and gas in western producers, ESG increases the market power of non-western producers, enabling Putin's weaponization of energy supplies. Net zero has turned out to be Putin's ally.

Could you elaborate on that statement. It sounds very concerning.

[Rupert Darwall]

Certainly, sir. If you look at the IEA's net-zero road map for the energy sector, it forecasts that by the end of a period, OPEC will have a 52% share of the oil market. If you then assume that western oil companies, the west, conforms with net zero but the rest of the world doesn't, that market share rises to 82%. Essentially, if you're restricting investment by western oil companies in oil and gas, you're not displacing demand; you're just pushing supply to very fragmented regions of the world and to bad actors like Russia.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you, Mr. Chair. Those are my questions for now.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Morantz.

Now we go to the Liberals and MP Chatel, please.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Mr. Chair.

Thank you to the fine witnesses we have with us today.

I would especially like to thank Ms. Bardswick and Ms. Zvan for their excellent work on developing a taxonomy road map. I read your report and sound recommendations with much interest. You did a tremendous job, and you took into account developments happening around the world. The work being done by the European Union comes to mind.

I also appreciated what Ms. Zvan said. She made two points that struck me. First, if we don't act now, Canada could be left behind, and other countries could end up defining finance transition for us, which we don't want. We want to have a say in what that transition looks like. Changes are coming. This year, the EU's sustainable finance and green finance standards came into effect. The G20 has its own road map, as you know. You mentioned 30 countries.

Which of your 10 recommendations should the Canadian government implement this year or as soon as possible?

Also, what implementation barriers do you foresee?

[Kathy Bardswick]

I believe you are directing the question to me, but with your indulgence, Mr. Chair, given that Barbara has been driving the taxonomy work stream for SFAC, perhaps I can ask Barbara to elaborate on the ten recommendations that her work team has been addressing.

[Barbara Zvan]

We've laid out in the report the next phase. If you think of the work that we did, it was really to create the road map. We have not developed the hardware to develop the taxonomy and the detail.

There are two parts to that. One is to set up the governance structure. Our recommendation is to broaden out the representation on that governance structure to be more government, to be minority in the financial sector, civil society and indigenous rights holders. That is key to getting the oversight of the taxonomy to be credible so that this is internationally recognized.

The second is to set up the custodian, who is really the taxonomy developer, and those need to be with people with the climate and environmental knowledge who can also work with technical expert groups that bring in industry, bring in the financial sector, to put in the details. Without this detail, without the clarity that this detail provides and the consistency this provides, it will not draw in the capital related to where the parts that we need it are. Canada has a particularly challenging transition and without providing clarity we will not get the capital from international markets.

Those would be the two immediate priorities.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you.

I had a quick look at Bill S‑243, which is at second reading in the Senate.

Have you had a chance to look at the bill to see how it fits into your road map?

[Kathy Bardswick]

I have a taken a close look at the bill. I think the bill's focus is more broadly based than the taxonomy recommendations that are specific to the implementation of a taxonomy framework for the country, whereas the bill in the Senate is looking at broader engagement and a legislative regime that would more extensively call into play the regulatory and legislative requirements associated with the broader workings of the financial industry.

I would make a very clear distinction between what we are suggesting is a taxonomy framework that would be implemented versus the much broader and more inclusive expectations that the bill would require.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much.

We finally passed the budget implementation bill just recently, and that was no small feat.

Two specific measures were announced in the budget. The first requires federally regulated institutions—including federally regulated pension plans—to submit climate-related disclosure reports. The second relates to the funding for the Montreal office of the International Sustainability Standards Board.

I'd like you to comment on those two measures.

[Kathy Bardswick]

Those two measures speak very directly to a series of recommendations that SFAC tabled with the federal Ministry of Finance and ECCC, the two sponsoring ministries of SFAC. We recommended that we accept, embrace and move toward a much more inclusive and mandatory disclosure regime for the country, ensuring that not only is it directed to the financial institutions and the role they play, but that it is inclusive of a broad, economy-based strategy. This is given that, at the end of the day, financial institutions' effective capacity to put transition targets in place is highly dependent on how well they're able to measure and track the economic activities of the customer base they serve.

In order to have the financial institutions complying on a more regular basis or a more effective basis, including filing the appropriate targets and interim transition plans, it's highly dependent on the extent to which we're able to move the whole-of-economy strategies forward vis-à-vis disclosure.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Chatel.

Welcome, MP Garon, to our committee. The floor is yours for six minutes.

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

Thank you, Mr. Chair.

Thank you to the witnesses.

My first question is for Ms. Zvan.

To start, good morning, Ms. Zvan. I'm interested in your taxonomy road map.

In the preliminary documents that were released and provided to the committee, you refer to what are called transition activities. They include the use of carbon capture to reduce the intensity of greenhouse gas, or GHG, emissions per barrel of oil. Consequently, small modular nuclear reactors could produce more oil with lower per-barrel emissions, and that would be considered a transition activity.

Unless I'm mistaken, it seems to me that if we reduce GHG emissions by 10% per barrel while increasing oil production by 30%, we are actually increasing GHG emissions, since Canada's targets are based on total emissions. The planet doesn't care about emissions per barrel because total emissions are what matter.

Isn't that sort of taxonomy akin to greenwashing, in that it makes people think a transition is under way, when we are actually increasing our GHG emissions significantly?

[Barbara Zvan]

Thank you for the question.

Maybe I'll provide a bit more detail around the transition category. This tries to acknowledge that we need to address high-emitting GHG activities. To qualify for the transition label, a project must meet three strict criteria that are aligned with science for a 1.5°C scenario—significant emission reductions; limited lifespan aligned with a net-zero pathway; and avoiding what's known or referred to as carbon lock-in, so preventing other investments. Any project that supports the expansion of oil or gas via new extraction projects was seen as not viable due to the multiple climate scenarios out there that do not align with that. The thresholds for this transition category will evolve over time, so what's acceptable in 2025 will not necessarily be acceptable in 2035.

If we take items like CCUS, the taxonomy is meant to be applied on a project-by-project basis, not as a red or green light for a whole category of activities. If a CCUS project can meet those three strict criteria that are developed by the custodian and approved by the council, then it will be included. If it cannot, it will not.

I think the upshot also is that it sends a very clear message to the industry and the markets about what truly is a transitional CCUS project. I think there's a vast amount of lack of clarity in this area, and taxonomy can bring the clarity it needs. I would also note that in the IEA report, one of the top five emission reduction items for 2050 includes CCUS.

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

Thank you.

Now I'm going to turn to Mr. Stewart, of Greenpeace Canada.

An awful lot of hope is being pinned on carbon capture, it seems. As I see it, we have two options. Carbon capture technology can provide some hope once we're near the finish line and we have just a few really troublesome tonnes to go. The other option, which seems to be the one Canada has chosen, is to adopt carbon capture as an industrial policy that will allow us not to change the industry, not to undertake a transition, while making it look as though a transition is under way.

I understand all the nuances, and I truly commend the taxonomy work that's been done. However, the ambiguity around that taxonomy could strengthen Canada's approach of increasing oil production while making people think emissions are being reduced.

Do you think that's the wrong approach?

[Keith Stewart]

Thank you for your question.

I'm going to answer in English, because I'm not familiar with all the technical jargon in French.

This is a very complicated issue around transition finance. Canada is the only country that has introduced such a category. The key question, I think, from Greenpeace's perspective is whether or not it locks in emissions. That's a very difficult thing to define. I think one of our concerns is around whether it's viewed as “CCS is automatically a green light”. If you read carefully, it doesn't say that, but I think a number of people are interpreting it that way. There will be a lot of fights over exactly how this gets interpreted.

There are some areas where I think CCS is quite viable. As my colleague, Ms. Segal, mentioned, there are some areas, such as cement and certain aspects of steelmaking—although green steel is advancing by leaps and bounds technologically—where it looks like, okay, we're going to need CCS. I think the question in Canada is that the debate has been so dominated by the oil sands, where CCS can, at best, get you a 10% reduction in total life-cycle emissions. The question is this: If you're going to deploy CCS there, is it in fact truly giving an extended lease on life?

One of the projects we're looking at, for instance, is that Cenovus has proposed extending the lifespan of the largest in situ oil sands facility until 2079. They've also studied, although they haven't released the details, using CCS on that project. We would say that if you use putting in CCS as a reason to extend the life from 2023 right now until 2079, that is not fitting those criteria.

There are ways in which it definitely can be used as a justification of business as usual. There's also a concern about having a green label slapped on that. We've seen a lot of trouble in the ESG field around people loosely interpreting what is considered green or not to make a buck. People are going to work every angle and use every subclause to get the money that they can. I expect that. I don't think that's surprising. That's why you have to set very clear rules.

I would say that, for us, the application to particularly a high-carbon energy source like oil is very problematic. By the time you could actually deploy it, other options could be coming online at the same time. When you look at the pathways right now for electric vehicles compared with where we thought they would be even five years ago, it's night and day. We're light years ahead of where we thought we would be—

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Stewart.

Thank you, Mr. Garon.

Now we go to the NDP and MP Blaikie.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you.

Ms. Segal, earlier you mentioned that a majority of financial institutions that have voluntarily committed to climate goals aren't acting and that this creates a space and indeed a justification for public regulation in the space.

I want to take that insight and ask you to give your thoughts on a slightly different angle on the same idea. It seems to me that it's a little bit of a stronger case for public relations in that when we talk about the kind of certainty—I think Ms. Zvan referenced this as well—that investors are looking for, that policy actually has to come first. It has to be there as a basis upon which investors can make decisions. Not only does the lack of action justify public intervention, but in fact those actors are waiting on public intervention as a condition for the investments.

I just wondered if you could speak to that interaction between the fact that we have these voluntary commitments where we're not seeing the action and the role that public regulation would play in this space.

[Julie Segal]

Absolutely. Thank you for the question, MP Blaikie.

I'll start maybe by expanding on that information I provided. It was from Oxford net-zero tracker, which does a study about net zero commitments globally. They were the ones that highlighted that only 4% of global commitments from companies are backed up by action.

I appreciate the perspective that regulatory certainty would make it easier for investors who are moving in the inevitable direction of the green transition. I think that's certainly demonstrated by the momentum behind the Sustainable Finance Action Council and my colleagues here on the floor who are advocating for a green transition taxonomy, saying that would be very important to bring certainty to investors and clarity to a market on what a green investment constitutes.

I think one reason that regulations make so much sense for the sector is that climate change as it applies to finance is very complicated. Setting rules overall for what defines credible investment does provide certainty for institutions and also helps organizations ensure they're moving in the right direction.

I think the other point that's relevant here is what my colleague, Mr. Stewart, raised about how individual organizations are concerned about a response from moving in a particular direction. Regulation would make it clear that is the direction of travel and that moving towards reduced emissions and climate resilience is in fact what's expected of them and of course in their best interest.

From an opportunity cost perspective, I think this is very important for Canada to be able to attract investment ongoing, which is of course important in order to build up ongoing industries in the green transition and provide jobs for Canadians across the country. Providing regulatory certainty like other governments have done in the U.K. and the EU would help attract capital for the burgeoning green economic sectors.