September 5, 2023

By: Anik Islam, Colleen Kaiser & Geoff McCarney

Strengthening Canada’s Climate Information Architecture

Recent estimates of the investments needed to meet Canada’s net-zero targets are large (up to $125 to 140 billion a year till 2050). Current public and private investments only meet a fraction of this need. Private- and public-sector spending on clean innovation will need to increase seven to 12 times from current levels to meet the estimated financing requirements of the net-zero transition. This significant shortfall must be addressed.

To benefit from the net-zero transition, private investors, both domestic and international, will need to allocate significant amounts of capital to the sectors and technologies that will form the net-zero economy. The Canadian federal government should support these investments by supporting the development of standardized climate data, by mandating disclosure requirements, and by identifying the economic activities that could be considered “green” and “transitional” through a green and transition finance taxonomy. 

The International Monetary Fund calls these three interconnected building blocks — data, disclosures and taxonomies — the climate information architecture. Investors need clear and consistent information on current and future Greenhouse Gas (GHG) emissions, net-zero targets, planned future investments in clean energy technologies, and ability to adapt to different climate change scenarios to decide where to invest their capital to meet the country’s net-zero objectives. The architecture provides this information and helps promote transparency, quantify climate-related risks and opportunities, and ensures that financing decisions are aligned with Canada’s environmental and economic goals. Without these building blocks, it is costly and time-intensive for investors to accurately assess the associated risks and avoid exaggerated claims of sustainability known as greenwashing.

Ensuring Useful Data for Climate-Related Disclosures by Financial Institutions

Along with other G7 members, Canada has committed to adopting mandatory climate-related financial disclosures for large segments of the economy as a key step towards implementing Canada’s climate information architecture. Disclosures (ideally) provide consistent and comparable climate-related information for investors, lenders, and insurers to help them direct capital to businesses and projects aligned with their own climate goals and global ones too. In turn, disclosure standards help to make definitions, scopes, and governance processes uniform across users and preparers of disclosures.

To ensure disclosures provide decision-useful information, there is a need for an evidence-based understanding of climate data requirements and associated gaps and challenges. The Smart Prosperity Institute’s (SPI) latest report titled, Climate Data Requirements, Gaps, and Challenges to Support Climate-Related Financial Disclosures, completed in support of the Sustainable Finance Action Council (SFAC), identifies data requirements, gaps, and challenges for climate-related financial disclosures.

READ THE REPORT: Climate Data Requirements, Gaps, and Challenges to Support Climate-Related Financial Disclosures

Our research identified insights into data-related gaps and challenges across the five types of disclosures: GHG emissions, net-zero targets, transition risks, physical risks, and scenario analysis, as well as the data requirements to ensure disclosures are in line with the recently developed sustainability standards from the International Sustainability Standards Board. 

Our report shows that data availability is a core challenge for many types of disclosures. For example, data to estimate and disclose GHG emissions from direct sources owned and controlled by the organization (Scope 1) and purchase of energy and electricity (Scope 2) are generally available for large companies but not for small and medium-sized ones. There are also significant challenges in calculating GHG emissions across the value chain (Scope 3) because of hurdles like the lack of granular data, significant time lags in reporting from suppliers, and methodological challenges.

For other disclosure types, the challenge extends beyond the lack of data to the need to establish methodologies ensuring its interpretations are reliable and comparable. For example, while the data may exist for Canadian companies to assess their exposure to the physical risks stemming from an unstable climate, such as the risk of property being flooded or burned down, translating those physical risks into a quantitative understanding of vulnerability on a firm’s balance sheet is often challenging.  This is particularly the case for small and medium-sized companies who lack the resources to provide in-depth analytical capacity.

In assessing these challenges, our report makes clear that it is important to recognize that data requirements and disclosure standards together with taxonomies depend on and reinforce each other. However, research capacity on these topics in Canada is still in its early stages. To this end, SPI is working with our partners to explore new ways to advance and implement the climate information architecture that Canada needs. 

Moving Forward

We want to support government in developing the policy innovation that will make both public and private investing in net-zero projects and entities efficient and effective. To do so, we are working to align new ways of thinking about the challenges of developing and implementing the data, disclosure and taxonomy requirements for a sustainable finance system. Failure to move quickly will not only lead to capital flight to other jurisdictions but also impede progress on better understanding and adapting to the growing climate-change-related risks and opportunities.

Our new analysis of data requirements, gaps and challenges for disclosure is an important first step to addressing these inter-connected challenges. It concludes that collaboration between governments, experts, and stakeholders from across the sector (regulators, standard setters, data providers, financial institutions, businesses, etc.) is critical to produce the applied research needed to strengthen the climate information architecture and catalyze net-zero capital allocation.

But we can’t stop there. Additional lines of enquiry we are currently advancing with our partners include related topics such as:

1. Applying global lessons learned in blended finance to help drive Canada’s net-zero transition;
2. Analyzing time-bound sustainable finance roadmaps implemented by other G7 nations to show ways for policymakers to accelerate the adoption and implementation of the core climate information architecture here; and
3. Supporting research to build upon the work of SFAC and extend learnings to the nature economy and “nature financing” — a key first step in aligning financing with Canada’s 2030 conservation targets.

These research areas will require strengthening Canada’s climate information architecture, including understanding and filling in some climate data gaps and challenges across the five areas of disclosures highlighted in our report.

The body of work outlined above intends to bring together the leading thinking across a range of disciplines to propose new solutions. We invite potential collaborators to reach out to us at anik@smartprosperity.ca or at research.network@smartprosperity.ca.

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