The setting sun reflects off the glass walls of two office buildings in Toronto’s Financial District as the sun sets on Nov 7, 2022.Fred Lum/the Globe and Mail
Julie Segal is senior manager of climate finance at Environmental Defence Canada, and a visiting fellow at the London School of Economics. Rosa Galvez is an independent senator for Quebec, who introduced Bill S-243, the Climate-Aligned Finance Act, to the Senate in March, 2022.
Global financial and environmental experts recently made public calls for Canada to speed up action on climate-aligned financial policy.
The appeal focused in particular on the Climate-Aligned Finance Act, a bill that is progressing through the Senate that would ensure financial institutions’ investments help limit climate damage. To achieve this, the legislation would require plans from banks and pension funds to reduce the climate-related emissions from their portfolios and invest in ways that advance climate resilience. It would also increase regulatory oversight by enabling the main federal financial regulator, the Office of the Superintendent of Financial Institutions, to assess whether these climate plans are credible.
Financial experts like Allison Herren Lee, a former chair of the U.S. Securities and Exchange Commission, the leadership of Vancity and Quebec’s Caisse d’économie solidaire Desjardins credit unions, the province’s Fondaction pension fund and a broad swath of environmentalists across the country were among those outlining why Canada should set new rules to hold banks, pension funds, and insurance companies accountable for climate action.
It may be surprising to hear that increased regulation in the financial sector has become a cri de coeur. Historically, bankers have resisted increased regulation. But there are several reasons why the rules governing Canada’s financial sector, especially when it comes to climate change, must be strengthened.
First, regrettably, most Canadian financial institutions have not voluntarily shifted their portfolios away from polluting investments. While in 2021 all of Canada’s Big Five banks committed to reduce the climate-related emissions from their investment and loan portfolios to net-zero by 2050, the three years since have demonstrated a concerning trend of climate-related backsliding.
Just last month, Bank of Montreal revoked its anti-coal lending policy, meaning that despite net-zero promises, the bank is once again open to funding the most polluting fossil fuel — a sector definitively misaligned with climate action.
The Big Five Canadian banks remain among the largest financiers of oil, gas, and coal globally. They also underinvest in the clean energy sector, favouring fossil fuel investments over clean energy investments at a ratio of 3.9-to-1. In the absence of policy action, there is little to hold banks accountable to deliver on their green promises.
Second, public opinion supports financial policy to spur climate action. Canadians not only understand how climate, finance, and policy interact, but want to see progress on it. Recent polling shows 65 per cent of people want sustainable finance regulation, and support increases to 78 per cent if the rules explicitly counter greenwashing. A desire for rules which clean up greenwashing makes sense, given the chasm between banks’ climate promises and their capital placement.
Most people remain keen for the government to do more to address climate change, and this includes modernizing financial policy.
Third, governments’ responsibilities include setting policies which ensure private-market actors align with public interest. Designing a financial sector that mitigates the severity of climate change is in the best interest of society, given how climate-related risks are already affecting people across the country. Most people in Canada have experienced climate-related harm, including the 40 per cent of people affected by wildfires and workers increasingly being harmed by extreme heat.
Our economy could lose $25-billion in annual GDP by 2025, and by the mid-2030s, over $100-billion of investments are expected to lose their value owing to a lack of preparedness for the climate transition. Reorienting investments to reduce emissions now, and investing in resilience, is the best way to prevent these damages.
But Canada is recognized as a laggard when it comes to modernizing financial regulation in light of climate change. The European Union integrated sustainable finance policy as a core part of the bloc’s Green Deal, its 2020 legislation related to reducing emissions. Britain committed in 2021 to turn their sizable financial market to becoming a net-zero aligned financial centre.
A group of Oxford academics recently summarized this global trajectory of mandatory climate-related policy for the private and financial sectors in a Nature article. They acknowledged that voluntary climate commitments from the private sector have run their course. New ground rules are needed to credibly align banks, pension funds, and insurance companies with the requisite climate action for a stable economy and healthier environment.
Similar to the banks who have promised climate action yet not delivered, the Canadian federal government has likewise dubbed itself a “world leader in climate finance” without the Ministry of Finance yet demonstrating meaningful action to align finance with climate commitments.
Modernizing financial policy for climate action remains the missing piece of Canada’s climate plan. The Climate-Aligned Finance Act is the puzzle piece ready to fill this gap. Policy makers should seize the opportunity to future-proof Canada.
Editor’s note: A previous version of this article incorrectly stated that Toronto-Dominion Bank has also revoked its anti-coal lending policy. It has not. That reference has been removed from this version.