June 18, 2019

By William Scott, Katherine Monahan & Stewart Elgie

Last Friday, Canada’s Expert Panel on Sustainable Finance delivered their final report, outlining the opportunity, challenges, and key next steps for Canada to leverage its strong financial sector to accelerate clean growth.

The Expert Panel calls for a strategy tailored to Canada’s unique national context.  Our strong financial sector has a history of rising to challenges and developing innovative instruments to support Canadian industries. Leveraging that expertise to direct necessary capital flows, manage risk, and grow clean and innovative businesses, as well as building resilience into our financial system, is a challenge worth undertaking.

“Climate-smart innovations are no longer marginal alternatives - they are becoming a massive global market opportunity yielding quality jobs.”

  • Expert Panel on Sustainable Finance

As outlined in SPI’s landscape report on clean innovation, Canada has many of the ingredients needed to succeed in capturing a significant share of growing global markets. This includes expertise in many of the sectors seeking clean technology solutions and an array of early stage clean technology firms poised for growth – but lack of growth capital remains a major challenge.

The Expert Panel provides a blueprint for how Canada can integrate sustainability into the financial sector and finance the transition to a clean economy. Its report is divided into three pillars with 15 recommendations, each with significant detail, and specific steps for how to implement these recommendations, including which federal agencies should be tasked to lead each part. Panel member Andy Chisholm will offer a firsthand account of the report this Thursday June 20th at 12:30 pm EST – register here.  What follows is a summary of the report’s key findings. 

 

  Pillar I: The Opportunity

  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.

 

The Expert Panel calls for a shift in the conversation to recognize the economic opportunity presented by the transition to a “competitive low-emissions, climate-smart economy”. This would be guided by a detailed capital plan aligned with Canada’s long-term climate change plans, such as the Pan-Canadian Framework and Mid-Century Strategy.  The proposal for a sector-by sector strategy, which can build on the Economic Strategy Tables’ work, is important since the barriers and opportunities differ by sector.

The report calls for rigorous, agile climate standards to meet our targets. It supports carbon pricing as an efficient way to price risk and spur investment. It also recognizes the opportunity for targeted tax incentives to help drive private investment into clean innovation, and specifically calls for a ‘super-deduction’ (>100%) to embolden Canadians toward climate-aligned investments, with robust accreditation standards to avoid greenwashing.

 

  Pillar II: Foundations for Market Scale

  1. Establish the Canadian Centre for Climate Information and Analytics (C3IA) as an authoritative source of climate information and decision analysis.
  2. Define and pursue a Canadian approach to implementing the recommendations of the Task Force on Climate-Related Financial Disclosures.
  3. Clarify the scope of fiduciary duty in the context of climate change.
  4. Promote a knowledgeable financial support ecosystem.
  5. Embed climate-related risk into monitoring, regulation and supervision of Canada’s financial system.
  6. Expand Canada’s green fixed income market, and set a global standard for transition-oriented financing.

 

The second pillar focuses on developing the building blocks of a strong sustainable finance system by creating and strengthening financial sector institutions to help integrate climate considerations throughout the sector – with a focus on improving access to climate relevant information, adopting disclosure practices, clarifying legal obligation, and developing supportive professional services.  

The report recommends addressing existing information gaps by creating an institution (C3IA) to provide a single hub of reliable climate information, to allow businesses to ‘assess, measure, and manage climate risk and opportunity.’ It also outlines a pathway for implementing the recommendations of the Task Force on Climate-Related Financial Disclosure and highlights the need for legal clarity around fiduciary duty obligations and how they apply to climate risk.

It further highlights the need to build capacity around climate-risk through education, training, and professional development, particularly for the accounting, auditing, and assurance industry. And importantly, recommends formally integrating climate risks into regulation of the financial sector. At the same time, it is important that regulation not impede innovation and the Expert Panel encourages regulators to consult the new External Advisory Committee on Regulatory Competitiveness and the Centre for Regulatory Innovation to ensure regulations are flexible, predictable, and agile.

The report supports the Bank of Canada’s decision to recognise climate-related risks in its financial framework and to research climate-related risks to the macroeconomy and the financial system. The Panel recommends that the Bank look beyond physical risks to include research into transition-linked risks associated with deep decarbonisation.

 

  Pillar III: Financial Products and Markets for Sustainable Growth 

  1. Promote sustainable investment as ‘business as usual’ within Canada’s asset management community.
  2. Define Canada’s clean technology market advantage and financing strategy.
  3. Support Canada’s oil and natural gas industry in building a low-emissions, globally competitive future.
  4. Accelerate the development of a vibrant private building retrofit market.
  5. Align Canada’s infrastructure strategy with its long-term sustainable growth objectives and leverage private capital in its delivery.
  6. Engage institutional investors in the financing of Canada’s electricity grid of the future.

 

The final pillar focuses on products to finance clean innovation in priority areas of the economy, including clean technology, oil and gas, buildings, and electricity. Recognizing that Canada’s natural resource industries will continue to play an important part in the economy, there is a need to implement innovative financial instruments to help support clean innovation across the economy. This requires an effective ‘transition-oriented‘ taxonomy that includes sectors that are not considered ‘pure-play’ clean technology but have real potential to improve their environmental performance - and thus are important cleantech adopters (and potentially investors). Given Canada’s resource rich economy, the report recommends that activities linked to improved practices in traditional industries should also be measured and accounted for in any new taxonomy classification.

Canada also needs to continue to develop its burgeoning cleantech sector, by supporting growing companies using blended finance models to ‘crowd-in’ private finance, paired with green public procurement to help Canadian cleantech scale. Canada can simultaneously address emissions from buildings and leverage our strong real estate and construction sectors by developing advanced building codes, labelling, and strategic infrastructure investment.

The report also notes that Canadian Green Bonds are highly oversubscribed, and recommended that the federal government offer fiscal incentives to stimulate supply – such as tax credits, tax exemptions, and interest deductibility for bond investors and issuers.

 

The Path Forward

The report marks a critical step in identifying the opportunity and risks facing Canada’s financial sector and outlines important next steps that extend for the financial sector and governments to help drive Canada’s transition to an innovative and competitive low-carbon economy. The report recommends the establishment of a standing Canadian Sustainable Finance Action Council, with cross-departmental secretariat to help push implementation of these recommendations across government.

“It’s up the public sector to create the right conditions to allow the private sector to solve these [climate] issues; and in that context the financial community has got a huge opportunity and responsibility.” 

  • Andy Chisholm, Member of Expert Panel on Sustainable Finance

The scale of action required is proportional to the scale of the challenge, and that is reflected in the many detailed recommendations laid out in this report. Achieving Canada’s clean growth ambitions will require a significant undertaking by many sectors and levels of government, and the work is just beginning.

 

Panel member Andy Chisholm will offer a firsthand account of the Expert Panel on Sustainable Finance report in a webinar this Thursday June 20th at 12:30 pm EST – register here.

Stewart Elgie

Executive Chair

Katherine Monahan

Senior Research Associate