June 9, 2022
Canada’s financial sector could face climate trouble, unless we implement a policy solution
By Sonia li Trottier, Director, Canada Climate Law Initiative, and Julie Segal, Senior Manager, Climate Finance, Environmental Defence Canada
Canada’s financial institutions could seize the climate transition as an opportunity, but by moving slowly to deliver their net-zero commitments, they’re instead setting themselves up for increased climate-related financial risks. Although policymakers usually work to reduce risks for the private and financial sectors, sustainable finance policy lags behind the pace of the climate challenge. A recent Bill tabled in the Senate offers clear-eyed solutions.
Canada’s financial sector is already experiencing the results of growing climate-related risks. In 2021 only, severe weather events caused $2.1 billion in insured damage in Canada. British Columbia was particularly hit by wildfires and flooding, but these natural disasters reverberated through the whole country by way of supply chains. The increasing likelihood and number of severe weather events have major impacts on both the private and public sectors. Therefore, the urgent need to mitigate and adapt to climate risks is also a huge opportunity for the private sector to avoid losses. The best way to reduce the negative financial effects of climate change, or climate-related financial risks, is to reduce the impacts of climate change by investing in a net-zero carbon emission economy.
We also need private capital to achieve our objective of building a net-zero economy by 2050. Bill S-243, An Act to enact the Climate-Aligned Finance Act (CAFA) and to make related amendments to other Acts, introduced by Senator Rosa Galvez, would provide alignment between Canada’s net-zero objectives and our financial system.
Canada can’t deliver on our climate commitments without alignment from the financial sector, but the policy environment doesn’t yet deliver on this. Reporting on climate-related financial risks, for example, can help the private sector, financial institutions, and pension funds understand how the complexity of the climate crisis affects their business and investments. Without these policy directives, the financial sector is subject to underprice climate risks and underinvest in climate solutions.
Canada’s regulatory framework with respect to climate action is behind compared to other jurisdictions. In the United Kingdom, climate-related risk disclosure in line with the Task Force on Climate-Related Financial Disclosures (TCFD) will be mandatory in 2022 throughout 2025 for more than 1,300 largest companies and pension funds. In the United States, the U.S. Securities and Exchange Commission published a proposed new rule earlier this year on mandatory climate-related disclosures for all public companies. The European Union has gone even further, introducing requirements for investors to report the adverse impacts their investments have on environment and social justice. In comparison, the proposed national instrument by the Canadian Securities Administrators does not require mandatory climate-related disclosures and scenario analysis. The proposed national instrument is not ambitious enough. If Canada wants to remain competitive in global markets, we need to take into account climate risks and opportunities in every decision we make, and Canadian regulators must reflect this major shift needed in policy. It is in everyone’s best interest to align finance with climate action.
Bill S-243 drew from these international best practices, and fit for purpose in Canada. It is an important legislative tool that, if enacted, would provide clarity and accountability in aligning finance with our climate commitments. The Bill would ensure the private sector and financial institutions disclose climate-related risks, require science-based climate targets, develop credible strategies and plans to achieve those targets, and account for climate-related financial risks in their investments. Both the public and private sectors must act now to ensure as smooth and orderly transition as possible.
The responsibility for acting on the urgency of climate change rests with everyone, and the federal government must take ownership of its responsibility. Senator Galvez’s Bill is a critically important step in all sectors of Canadian society taking ownership and accelerating the federal government’s action in building a resilient financial system and one that is prepared to tackle climate risk. The Bill sends a strong signal to all Canadians that the government is walking the talk and would also position Canada’s government as a real leader in moving to a net-zero carbon economy.