Sustainable Finance Key to Low-Carbon Economic Transition

Canada’s Expert Panel on Sustainable Finance released its interim report yesterday with a clear message that harnessing the country’s financial assets is essential for a successful low-carbon transition—with climate change and carbon pricing top-of-mind.

Appointed in spring 2018 by Canada’s Minister of the Environment and Climate Change and the Minister of Finance, the Expert Panel’s mandate is to articulate the key challenges and opportunities for sustainable finance in Canada, providing “next step” recommendations to the government.

Their first message was a reminder of Canada’s economic exposure due to our carbon-intensive economy.

“Many of the sectors underpinning the Canadian economy are carbon intensive, meaning Canadians are exposed.”

The growing reality of climate change means that Canada must start transitioning to a low-carbon economy now. To do so, the Expert Panel pointed to the inescapable fact that this will require significant financial investment to pull it off. Canada’s financial services sector is “capable of the task” in the panel’s opinion. Moreover, we need to see this as “a big opportunity” for Canadian businesses.

The Sustainable Finance Imperative

The Expert Panel sets out three points that form a sustainable finance imperative:

Both observable measures and the feedback from our consultations suggest that sustainable finance is growing in Canada, but overall, we are not moving with sufficient determination or at the pace of many of our peers.

 

If we want to capture the large market opportunities and establish the rules affecting our financial industry and our key economic sectors for ourselves, we need to move faster and more decisively.

 

Canada should focus on areas where we can significantly move the needle.

Foundational Elements

From there, the Expert Panel went on to list six “Foundational Elements” for sustainable finance in Canada:

• Clarity on climate and carbon policy
• Reliable information
• Effective climate-related financial disclosures
• Clear interpretation of fiduciary and legal duties
• A knowledgeable support ecosystem
• Effective and consistent financial regulation

Financial Products and Markets

The Expert Panel followed with a list of financial products and markets necessary to give effect to these foundational elements and assist emitting sectors with the transition ahead:

Building Retrofits for Energy Efficiency and Climate Adaptation
In Canada, buildings are a major source of greenhouse gas emissions, as our building stock is more energy intensive relative to other countries, including those with similar climates. As a result, there is a tremendous opportunity to reduce Canada’s footprint by retrofitting our existing building sector. Building retrofitting has the potential to be a winning proposition for all stakeholders, with energy savings for building owners, jobs for the construction industry and increased lending activity at financial institutions.

Sustainable Infrastructure
Given the related funding gap, we need to "crowd in" substantial private sector capital toward sustainable infrastructure development, including the transformation needed in energy systems and transportation. 

Cleantech Innovation
Cleantech is a massive cross-cutting opportunity that provides a key link between increased economic efficiency and environmental outcomes, as well as jobs and wealth creation for our communities.

Innovation in the Oil & Gas Industry
We heard an imperative to focus on financing mechanisms to support innovation in this sector as a key enabler to its transition.   

Optimized Electricity Generation and Transmission
Electricity has the potential to provide cost-effective emission reductions related to transportation and heating and cooling, making it an important aspect of the transition. A well-connected electricity grid between key provinces could provide substantial benefits, and many expressed that financial structures could be created that would be attractive to infrastructure investors.

Sustainable Asset Management and Financial Products
There was a consensus view that more reliable information and more reliable and analytical frameworks will be prerequisites for broader integration of environmental, social and governance factors.

Green and Transition-Linked Financial Products 
Many expressed interest in how a market for transition-linked financial products could help bridge the gap between green-focused investors and firms in emission-intensive industries that are transitioning to more sustainable business processes.

Next Steps by the Expert Panel

On the Expert Panel’s next steps and timing:

Our intention is to move from identifying areas that require more attention to developing practical, actionable recommendations for the Government of Canada. ... Our aim is to deliver a final report of findings and recommendations to the Minister of Environment and Climate Change and the Minister of Finance in Spring 2019.

IISD Support for Sustainable Finance

IISD has strong and growing expertise in sustainable finance and low-carbon transition.

Carbon Pricing
IISD has been engaged in developing carbon pricing policies at the federal and provincial levels. Clarity on climate and carbon policy is being met with the federal government’s renewed determination to legislate carbon pricing in provinces unwilling to do so themselves. The need for carbon pricing is “critical” in the Expert Panel’s view.

“Clear policy signals, especially with regard to carbon pricing, allows the market to make long-term choices with regard to sustainability.”

Climate Risk Disclosure
IISD will soon release a new report setting out a specific pathway for mandatory climate risk disclosure for Canadian companies, in direct support for this Expert Panel statement on the topic:

Disclosure is critical for informed decision-making. The industry-led Task Force on Climate-related Financial Disclosures (TCFD) has published recommendations for how firms could put forward more consistent and comparable disclosures of climate-related financial risks and opportunities. Most participants agree on their criticality, and that implementation of these recommendations is a journey involving collective industry efforts. Clarity surrounding the anticipated implementation pathway is needed.

Comprehensive Wealth
As sustainable finance seeks to transition carbon-intensive sectors and businesses to low-carbon opportunities, it underlines the risk exposure that Canada’s economy faces. This reinforces the need to understand and measure comprehensive wealth as part of our longer-term decision-making. IISD will release a new Comprehensive Wealth Index for Canada next week, one that goes beyond the short-term focus just on GDP. GDP measures income today, but what matters in the long run is wealth, the foundation of income in the future. More specifically, a country’s produced, natural, human, financial and social capital determine its prospects for the future.