Canada's financial sector urged to ‘take off the blinders’ and prioritize climate change

Canada does not have adequate rules for investing in an era of climate change, according to a new analysis from a world-leading international body.

A new study published Monday by Principles for Responsible Investment, an authoritative body of financial institutions supported by the United Nations, found the country’s laws “permit and may even require” investors to consider sustainability in their investments. But without clearly defined legal obligations, many investors are interpreting their fiduciary duties incorrectly, even when pursuing climate-related goals could help them bag higher profits.

This renders Canada “a low-regulation jurisdiction by international standards” that relies overwhelmingly on voluntary measures, according to the report, which compared Canada to 11 other jurisdictions. The study is recommending Canada clarifies its laws to ensure climate concerns are part of an investor’s legal obligations.

“Canada still lacks the kind of economic policies that would signal to investors its long-term commitment to an equitable transition to a low-carbon economy,” the study found. “It also lacks a comprehensive sustainable finance policy that would enable investors to manage the risks and opportunities arising from climate change and contribute to national sustainability objectives.”

Without clearer regulations, Canadian investors are unlikely to pursue sustainability goals, “even if doing so is in line with their duty to prioritise investment returns,” the study says.

The report notes that failing to keep global temperatures down will come at a tremendous cost to the Canadian economy. At 2 C of global warming, Canada would lose $2.7 trillion in GDP from 2015 to 2100; at 5 C, the country would lose $5.5 trillion over that same period. Based on current policies, Canada is on track for 4 C of warming.

Despite Canada being the world’s fourth biggest oil producer and sixth largest gas producer, the service industry is largely what makes up the Canadian economy, the PRI study notes. Still, “the extractive industry has an outsized influence over the government,” it says.

The study offers a flurry of recommendations to improve Canada’s financial regulations, including clarifying some directors' responsibilities to ensure their organizations are not just profitable but sustainable, introducing a sustainable finance taxonomy to help guide green investments and requiring climate-related risk disclosure. Due to the complexity of Canadian laws, the recommendations are specifically aimed at pension funds, but many would be applicable to all institutional investors, the study says.

Independent Sen. Rosa Galvez applauded the PRI report and said in a statement it confirmed the results of her office’s consultation with dozens of experts, which helped create her Climate Aligned Finance Act tabled last year.

The proposed legislation “would guide Canada’s financial sector through an orderly transition to a low-carbon economy while safeguarding the financial system from the systemic risks posed by climate change and respecting other social and environmental sustainability goals,” she said.

She agreed the oil and gas industry has significant influence over the federal government, adding: “There is growing evidence the fossil fuel industry’s outsized influence extends to the boards of Canadian pension funds and banks.”

Last year, a Canada’s National Observer investigation found one in five bank directors at the country’s five largest banks also sits on the board of a fossil fuel company, throwing into question their legal obligation to act in the best long-term interests of both companies at the same time. In response to that investigation, Galvez said you wouldn’t put the director of a cigarette company in charge of public health, so why let a fossil fuel exec weigh in on a bank’s climate policy?

The Climate Aligned Finance Act “is a worldwide first attempt to address these conflicts of interest, first through mandatory disclosure and eventual appointment prohibition after five years,” she said.

Environmental Defence senior manager for climate finance Julie Segal told Canada’s National Observer the report published Monday confirms that all investments have an impact on the world and therefore should have guardrails put in place to make sure the impacts are positive.

“Investors should be fixing these problems, not making them worse,” she said. “This report points out that most Canadian investors are not thinking that way right now. A lot of Canadian investors still think that profit maximization is their only goal, and that's not the case.”

Segal says investors must “take off the blinders” and “recognize that continuing to invest in fossil fuels is going to make the climate more volatile,” thereby exposing investors to greater risks.

The federal government is currently developing a sustainable finance taxonomy to define what business activities count as green to help guide investment decisions. However, confidential documents obtained by Canada’s National Observer reveal an attempt to list certain business activities under a “transition” definition that would allow investments that prop up the fossil fuel industry, like carbon capture and storage for oilsands production, to count as sustainable.

Defining carbon capture for oilsands production as a transition activity is greenwashing, climate advocates say, because it can only capture emissions from the production stage, which represent a fraction of oil’s overall emissions. Roughly 80 per cent of planet-warming greenhouse gas emissions come when the fuel is burned, like in the engine of a car.

John Woodside / Local Journalism Initiative / Canada's National Observer