Canada’s banks must get on the climate action train

If Canada decides to succeed in cutting greenhouse gas emissions this decade, at the pace required for a safe climate and stable economy, our banks and pension funds must align with the same trajectory. We can’t dither. The federal government should commit to align our whole financial system with climate action.

A recent report from the government’s climate auditor, the commissioner of the environment and sustainable development, deems Canada’s climate efforts to date as inadequate. Policymakers should rush to fix the problem with every tool at their disposal.

Our Canadian financial institutions are not yet aligned with climate action. They fund polluting energy and infrastructure that is not resilient to climate disasters, bringing greater environmental and economic risks for Canadians. While these banks and pension plans manage Canadians’ money, the return on investment underperforms expectations when it comes to climate action.

Over $100 billion in investments are at risk of becoming obsolete if our banks and pension funds continue to invest in climate-polluting industries. With Canadian investors currently the largest fossil fuel financiers globally, climate finance policy is the missing piece for success on net zero. Committing to a climate-aligned financial system is overdue and is necessary. Finance Minister Chrystia Freeland should make it happen.

The ground has been tested internationally. The United Kingdom in 2021 committed to become a “net-zero aligned financial centre.” This unleashed a suite of policies, including plans from its Financial Conduct Authority to require large companies and financial institutions to be held accountable for “transition plans” to reduce their emissions.

Similarly, the United States Treasury published guidance for credible climate transition plans, and California, which likes to claim it is where “the future happens first,” recently implemented two bills to make businesses astute about climate risks and encourage their contributions to climate action.

When you couple these climate finance policies with big new incentives like the Inflation Reduction Act, it is clear some countries are designing their economies to maximize opportunities in the climate transition.

Canada is not quite there.

Policies for climate-aligned finance have been drafted and proposed, with groups across the country advocating to move faster. Leaders in the federal government, including members of Parliament (MPs) from four out of five main parties, encouraged the government to “use all legislative and regulatory tools at its disposal to align Canada’s financial system with the Paris Agreement.”

In other words, these MPs want Canada to decisively align the financial system with climate action.

And later this month, the Senate will finally discuss the Climate-Aligned Finance Act, which is recognized as one of the most thorough climate finance policies globally.

We have momentum for a climate-aligned financial system. But the policymakers in charge of the file — namely, the finance minister — must deliver. Two climate finance policies can carry us most of the way to green.

First, the minister should commit to a climate-aligned financial system.

Second, transition plans should be required from financial institutions to ensure they disclose and are held accountable for reducing emissions from their activities and investments. This has been deemed the year of the transition plan (by those of us who follow climate finance closely, like Mark Carney), and Canadian policymakers should catch up.

Requiring transition plans would require teamwork from the Office of the Superintendent of Financial Institutions (OSFI) for financial institutions and from Industry Minister François-Philippe Champagne under the Canada Business Corporation Act for federally regulated companies.

A climate-aligned financial system is not a hollow platitude. It would spur positive action.

Good social and climate-related returns happen when financial institutions have broader social mandates. Canadian credit unions have a mandate to serve their members’ goals and a democratic system to define members’ priorities. Credit unions like Desjardins and Vancity have progressive climate policies, such as blocking coal investments and advancing energy efficiency.

In Quebec, the Caisse de dépôt et placement du Québec has a dual mandate to both maximize returns and invest in the best interests of the province’s development. It is one of the most forward-thinking pension plans in Canada, and even globally, when it comes to mitigating climate-related risks.

Committing to a climate-aligned financial system would set the direction for our financial institutions to invest in Canadians’ best interests. Canada has a jigsaw puzzle of financial regulators, but the tone from the top must point to climate action. Finance Minister Freeland should give a swoosh of her pen to align our financial system with climate targets.

Julie Segal is the senior program manager of climate finance at Environmental Defence, and a Visiting Fellow at the London School of Economics’ Grantham Research Institute for sustainable finance and just transitions.