Canada's Final Report on Sustainable Finance

On Friday, the Expert Panel on Sustainable Finance led by Rotman Dean Tiff Macklem released its report. Barbara Zvan, OTPP's Chief Risk & Strategy Officer, was kind enough to share a summary with me:

As the effects of climate change continue to evolve rapidly worldwide; so too are policy, market and economic patterns. With these shifts, sound environmental stewardship and market access are converging, transforming the criteria for sustained competitive advantage. Consumers and businesses are increasingly seeking ecologically responsible goods and services. Climate-smart innovations are no longer marginal alternatives, but rather global market disruptors yielding well-paying jobs and export opportunities. Major nations are positioning their financial centres to stake their claim in new and evolving market opportunities. With the right focus and ambition, Canada has the means and clear opportunity to stand at the forefront of the global market for sustainable products, services and finance. But it will not happen under status quo business and financial patterns. From this point forward, the management of risks and opportunities from climate change will need to become business-as-usual for our financial services and business communities. Sustainable finance must become, simply, finance.

While the Government has put forward a plan to underpin Canada’s transition to a low carbon economy - the Pan Canadian Framework for Clean Growth and Climate Change (PCF) - and begun implementing key policies, the role of financial markets in driving this change has yet to be fully leveraged. Finance is not going to solve climate change, but it has a critical role to play in delivering the ingenuity and capital flows required to execute Canada’s transition and adaptation objectives. However, markets will not move at scale without a more decisive long-term strategy backed by public and private leaders, and a stronger sense of the business imperative.

With 2030 barely a decade away, Canada needs a concrete plan to ‘connect the dots’ between our nation’s climate objectives, economic ambitions and investment imperatives. Markets and industry need to understand – explicitly – what it will take for our key industries to “win” in the rapidly shifting global marketplace, in order to make sustainable long-term investment decisions and accurately price risk and opportunity. The Final Report of the Expert Panel on Sustainable Finance offers a package of practical recommendations focused on spurring the essential market activities, behaviours and structures needed to bring sustainable finance into the mainstream. The recommendations are designed to mutually reinforce, and rely critically on continued dialogue and committed alliance between the government, Canadian businesses and our financial community.

Collectively, the recommendations have three key aims:

• Engaging investors in the opportunities from Canada’s transition to a competitive, low-carbon economy;
• Developing the foundations needed to scale up sustainable finance markets; and,
• Establishing market structures and financial products to facilitate sustainable activities in key segments of the Canadian economy, including: broad clean technology adoption as a source of necessary industry innovation; a clean, responsible leadership vision for our oil and natural gas industry and other resource sectors; resilient infrastructure; sustainable building construction and retrofit; and enhanced clean electricity generation, transmission and use.

Responding to climate change presents an opportunity for Canada to secure its competitive position in an environmentally conscious global marketplace and deliver leading low-emissions, climate-smart solutions to the world. More than an opportunity, it is our imperative. Canada is one of the most carbon-intensive countries in the OECD. We are warming at twice the global average. Efforts around us are multiplying. The future is in our hands - it is time to collectively reset our growth trajectory and finance the actions needed to accelerate the transition that is already underway, securing a thriving and resilient economy as we go.

The Panel’s 15 high-level recommendations are as follows:

1. Map Canada’s long-term path to a low-emissions, climate-smart economy, sector by sector, with an associated capital plan.
2. Provide Canadians the opportunity and incentive to connect their savings to climate objectives.
3. Establish a standing Canadian Sustainable Finance Action Council (SFAC), with a cross-departmental secretariat, to advise and assist the federal government in implementing the Panel’s recommendations.
4. Establish the Canadian Centre for Climate Information and Analytics (C3IA) as an authoritative source of climate information and decision analysis.
5. Define and pursue a Canadian approach to implementing the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
6. Clarify the scope of fiduciary duty in the context of climate change.
7. Promote a knowledgeable financial support ecosystem.
8. Embed climate-related risk into monitoring, regulation and supervision of Canada’s financial system.
9. Expand Canada’s green fixed income market, and set a global standard for transition-oriented financing.
10. Promote sustainable investment as ‘business as usual’ within Canada’s asset management community.
11. Define Canada’s clean technology market advantage and financing strategy.
12. Support Canada’s oil and natural gas industry in building a low-emissions, globally competitive future.
13. Accelerate the development of a vibrant private building retrofit market.
14. Align Canada’s infrastructure strategy with its long-term sustainable growth objectives and leverage private capital in its delivery.
15. Engage institutional investors in the financing of Canada’s electricity grid of the future.

Take the time to read The Final Report of the Expert Panel on Sustainable Finance here. I thank Barb Zvan for sharing her summary with me.

Barb's critical message on this report is simple: “I just want to make sure people don’t see this as an environmental report, it's much more about the economy and about jobs.”

You'll recall I covered Canada's experts on sustainable finance here when I went over the interim report. I commend Barb Zvan, Kim Thomassin, Tiff Macklem and Andy Chrisholm for writing a comprehensive report on a complex subject matter which is still evolving.

I read the report over the weekend and even though it is broad in scope, it lays out many specific recommendations that are critical for Canada to develop a long-term approach to sustainable growth.

This report is needed because Canada has a lot of catching up to do on sustainable growth. The EU put out an action plan on financing sustainable growth last year. You can read it here.

A couple of large Dutch pensions, APG and PGGM, have already developed a methodology to identify investment opportunities linked to 13 of the United Nations’ 17 Sustainable Development Goals (SDGs).

In Canada, all of our large pensions take responsible investing very seriously, which is why many made the list of 2019's most responsible investors, but Canadian pensions have not leaped into specific sustainable investing initiatives like some of the larger European plans because they aren't as far ahead in terms of data, disclosure, methodology and taxonomy.

More importantly, Canada's large pensions are focused on their fiduciary duty first and foremost, and see sustainable investing as a way to enhance the risk-adjusted returns of their overall portfolio.

It's an important nuance. Responsible investing isn't the primary focus, rather it's adopted as a way to mitigate long-term risks to their overall portfolio and to capitalize on opportunities of disruptive technologies which are transforming the energy landscape.

Anyway, take the time to read the entire report to fully appreciate the complexity of the subject matter and how much thought was given by the expert panel to come up with practical recommendations.

In my opinion, this report lays out a blueprint for where we should be heading but it's only the beginning of a very long journey and it's up to the politicians to find consensus and start acting on it.

Below, watch the launch of The Final Report of the Expert Panel on Sustainable Finance which took place at Rotman on Friday. Fast forward to minute 23 to see the panelists discuss the report. Unfortunately, CDPQ's Kim Thomassin wasn't able to attend this event.

I thought Amanda Lang did a great job moderating and Barb Zvan raised really important points on the challenge with the data and disclosure.

Update: Barb Zvan joined Peter Tertzakian and Jackie Forrest on the ARC Energy Ideas podcast to discuss the Final Report of the Expert Panel on Sustainable Finance and what it will take to finance a greener Canadian economy. Great discussion on a timely topic, listen to it here.