How to ensure finance drives a sustainable economy

Putting into place a structure that brings climate change considerations into financial decisions—a system known as sustainable finance—is one of the most important steps the federal government can take to ensure that Canada achieves its aspirations for a sustainable and prosperous economy.

This policy brief will explain what government should do and answer other critical questions, including:

• what is sustainable finance
• what the federal government should do
  • map the path
  • it begins with data
  • better understanding of climate-related risks
  • the energy sector is key
  • build better
• standards needed
• the road ahead

Overview

Under the terms of the Paris Agreement, Canada committed to reducing its greenhouse gas (GHG) emissions to 30 per cent below 2005 levels by 2030. In July 2021 the government revised its target, committing to reduce emissions by 40 – 45 per cent below 2005 levels by 2030. The recently legislated Canadian Net-Zero Emissions Accountability Act requires that national targets be set every five years to reach net-zero GHG emissions by 2050, a massive structural shift for our economy. 

These are challenging objectives, but Canada has an opportunity to refocus its efforts by shifting investment and capital flows to address these goals. It’s an opportunity made more urgent by the need to revitalize the economy as we emerge from the COVID-19 pandemic.

While federal leadership is essential, the reality is that the federal government cannot achieve these climate targets on its own. It requires that other decision-makers—all levels of government, business leaders across all sectors, investors, consumers—align their decisions accordingly. The best way for this alignment to happen is if all parties are able to fully understand all of the costs, benefits and consequences of their financial decisions. As Mark Carney put it, progress will require that we ensure that “every financial decision takes climate change into account.”

What is sustainable finance?

The essence of sustainable finance is to shift investments and capital flows to meet climate change goals and develop a more sustainable economy. Although there is no universally accepted definition of sustainable finance, the Expert Panel on Sustainable Finance established by the federal government in 2018, noted in its final report that:

“Finance is not going to solve climate change, but it has a critical role to play in supporting the real economy through the transition. The emerging field of ‘sustainable finance’ is focused squarely on channelling financial sector expertise, ingenuity and influence towards the challenges and opportunities posed by climate change.”

As such, sustainable finance can shift investor focus from short-term profit towards long-term value creation, and from risk to opportunity. Key elements of sustainable finance may include:

• improving the availability of climate data and the transparent corporate reporting of climate-related financial risks and opportunities to enable the making of fully informed decisions
• mobilizing capital to enable necessary transitions to be made to businesses, key industry sectors and the built environment (the human-made environment, such as buildings) to become more sustainable
• supporting investment in clean technology, green infrastructure and green financial products
• ensuring climate-related risk is factored into the regulation and oversight of Canada’s financial system and supported by a knowledgeable financial support ecosystem
• facilitating the transition to ESG (environmental, social and governance) reporting, an increasing priority for investors and stakeholders

Adopting sustainable finance is important for Canada’s competitiveness as reorienting capital flows toward sustainable investments is a regulatory imperative in many jurisdictions. Unlike many of the world’s leading economies, Canada’s is heavily dependent on natural resources. In order that we don’t fall behind other countries, it is critical for Canada to develop a “made-in-Canada” approach to sustainable finance, one that supports key industries to transition to more sustainable products and operations.

What should the federal government do?

Canada needs to decide if it will be a policy maker or policy taker, and to act with urgency. Other jurisdictions are moving rapidly to develop and implement policies and regulations that incentivize a low-carbon economy, but as these jurisdictions do not have significant natural resource sectors, insufficient attention is being paid to the transition challenges these industries face. Canada is a global leader in the decarbonization of high-emitting sectors and needs to translate that expertise into leadership in transition policy.

The Expert Panel on Sustainable Finance was a key starting point. Led by Tiff Macklem, now the Governor of the Bank of Canada, the panel held extensive consultations with stakeholders leading to its final report in June 2019. In the report, the panel made 15 recommendations which the panel “believes have the potential to help deliver Canada’s economic and environmental ambitions.”

We were heavily engaged in the work of the expert panel and support its final report and recommendations. The government recently established a Sustainable Finance Action Council, one of the panel’s recommendations and an important step in implementing and coordinating the other recommendations. There are several other expert panel recommendations that we believe should be priorities for government attention:

Map the path

You can’t arrive at your destination without a map, so the expert panel made mapping Canada’s long-term path to a low-emissions, climate-smart economy its first recommendation. They proposed that this be done sector-by-sector and with an associated capital plan.

We believe that such a plan would help to promote business confidence and mobilize private sector action. The government’s climate plan, A Healthy Environment and a Healthy Economy introduced in December 2020, combined with the passage of the Canadian Net-Zero Emissions Accountability Act to legislate net-zero GHG emissions by 2050 are important steps. But there is still a need to more clearly articulate the magnitude of change and investment required to meet that ambitious long-term target.

It begins with data

Sound decisions require reliable data. That’s why the expert panel proposed creating the Canadian Centre for Climate Information and Analytics. It would be a national centre to compile data collected by sources in the public sector, private sector and academia, and also to develop tools that would “translate that data into tangible impacts” for businesses, communities and other decision-makers.

Better understanding of climate-related risks

The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board in December 2015 to develop a voluntary, consistent climate-related financial risk disclosure framework for companies to use when providing information to investors, lenders, insurers and other stakeholders. The final recommendations of the TCFD were released in June 2017 after a collaborative process of global stakeholder consultations. The TCFD recommendations are about enhancing market transparency and enabling the efficient allocation of capital in the transition to a low-carbon economy as envisioned by the Paris Agreement.

The Expert Panel on Sustainable Finance recommends defining and pursuing a Canadian approach to implementing the TCFD recommendations. Fully implementing the TCFD recommendations in the Canadian federation requires actions by various jurisdictions and regulators, but we encourage the federal government to demonstrate leadership by implementing the TCFD recommendations within its own areas of jurisdiction.

The inclusion of a requirement for annual climate disclosure reports in the recently launched Large Employer Emergency Financing Facility (LEEFF) was one such example. Other actions the federal government is taking or should take include:

• begin phasing in adoption of the TCFD framework for large federal Crown corporations and federally controlled pension funds
• revise the Canada Business Corporations Act to require climate-related disclosures in the annual reports of all incorporated companies that fall under this Act
• mandate that investments by the Canada Infrastructure Bank require the filing of annual climate disclosure reports in accordance with the TCFD framework

The energy sector is key

Transitioning Canada’s energy sector to a net zero-emissions future is critical to success, particularly the oil and gas sector which is both a significant generator of GHG emissions and a key contributor to Canada’s economic growth. The expert panel’s 12th recommendation speaks to this specifically, but several other recommendations are essential to meeting this objective. Work on a Canadian-developed green taxonomy and the innovation of transition-oriented financing products (both addressed in the panel’s ninth recommendation) will be key.

The challenge is immense, involving significant capital investment, technological innovations, marketing shifts and workforce adjustments. Given all that, 2050 seems like not very far away at all. Government and industry players alike need to address this challenge with urgency.

CPA Canada held a series of roundtables throughout the fall of 2020 and spring of 2021 bringing together investors, directors and industry leaders to explore the challenges of transitioning the energy sector to a net zero-emissions future. The report resulting from those roundtables provides further ideas for both government and industry action.

Build better

The government notes in its 2020 Speech from the Throne the need to “build back better” as we emerge from the pandemic-related shutdowns. One obvious way this must be done is in our approach to infrastructure.

The expert panel goes into much greater detail on this topic in its 14th recommendation, but simply put, all infrastructure investments need to be viewed through a climate lens to ensure that projects are as energy efficient as possible and that they are resilient enough to withstand the effects of Canada’s changing climate. With $186 billion in infrastructure spending planned over 12 years under the Investing in Canada plan, this is as much a matter of fiscal prudence as it is our climate aspirations.

The opportunities and challenges of addressing the infrastructure gap, both globally and in Canada, are highlighted in a report we published in collaboration with the ACCA.

Standards needed

One important issue that was not addressed by the expert panel is the need for a consistent, globally accepted set of sustainability standards. The current level of sustainability reporting varies by region, sector and entity. The numerous sustainability frameworks and standards take time to report and can be costly to prepare and still do not satisfy the information needs of stakeholders. As a CPA Canada study showed, many entities have adopted some level of sustainability reporting, but it is usually in a separate sustainability report and does not fully meet the needs of investors. 

Incomplete and non-comparable data create barriers to assessing sustainability performance and may result in sub-optimal decisions affecting public policy, business, the global economy, and society at large. Following consultations in 2020, the IFRS Foundation, which oversees the International Accounting Standards Board, announced it would establish an international sustainability standards board to harmonize and streamline sustainability reporting.

In July, the Government of Canada declared its support for the proposed International Sustainability Standards Board (ISSB) and invited the IFRS Foundation to locate the ISSB in Canada. The Canadian bid is supported by a coalition of more than 55 Canadian public and private institutions, led by CPA Canada. Four other countries have publicly indicated their interest in hosting the ISSB and the IFRS Foundation is expected to announce its decision at the COP26 conference in Glasgow in early November 2021.  

The road ahead

To say that transitioning to a net-zero emission economy presents challenges for Canadian businesses is an understatement, although there are also considerable opportunities arising from this shift. The biggest challenge for businesses, however, is policy uncertainty – a problem that is only heightened by the fact the environment is a shared federal/provincial area of responsibility.

The Pan-Canadian Framework on Clean Growth and Climate Change was a critical and successful step toward aligning all Canadian governments to focus on a common objective of a more sustainable economy and a more collaborative approach to addressing that objective. Recently, our country’s response to the COVID-19 pandemic has shown once again that when faced with a common challenge, our various levels of government, along with businesses and citizens, are able to unite and collaborate effectively to achieve a common goal.

The government’s new climate plan, along with the proposed Canadian Net-Zero Emissions Accountability Act, add further policy clarity and will help to instill business confidence. We encourage all Canadian governments to maintain an open dialogue and continue to work collaboratively to harness the power of sustainable finance in creating a more sustainable and prosperous future.