Sounding Board: It’s time for sustainable finance to go mainstream

As members of the federal government’s expert panel on sustainable finance, we recently published our final report on how to mobilize Canada’s financial sector in the transition to a low-carbon, climate-smart economy.

Our recommendations seek to connect the dots between Canada’s climate objectives, its economic ambitions and its investment imperatives. At its essence, if Canada is to meet its long-term environmental and economic objectives, sustainable finance needs to go mainstream.

Read: Global investors call for government action on climate change

As stewards of Canadians’ retirement and long-term savings, our role is to promote stability and sustainability. This entails designing portfolios that will respond to evolving climate risks and profiting from new clean growth opportunities over time. Yet, as a whole, climate change remains a fuzzy notion in asset management. Why?

Because market factors need certain economic basics in place to reach mainstream, and we are not there yet on climate risk. These basics define how markets understand, price, measure and manage risk and opportunity. They are essential to sound and informed long-term investment decisions.

We dedicated the second pillar of our report to these Foundations for Market Scale, recommending the following:

1. Issue a statement from the Minister of Finance that the consideration of climate factors is firmly within the remit of fiduciary duty, and consider judicial guidance to that effect. At the market level, we ask government and industry to collaboratively explore a Canadian stewardship code outlining principles for climate risk management.

Read: Most alternative investors see UN sustainable development goals as useful investment tool

2. Establish a new Canadian Centre for Climate Information and Analytics as an authoritative, interoperable portal to Canada’s consortia of public and private climate-related and financial data centres. The C3IA will curate user-based data sets and decision tools, bridging the gap between data and intuitive analysis. This is a powerful step and a potential competitive edge for Canada.

3. Implement a mandatory ‘comply-or-explain’ approach for adopting the recommendations of the task force on climate-related financial disclosures in Canada, phased in by organizational size and content complexity. Investors can’t make informed decisions about the security of their investments without knowing their degree of exposure to the costs of climate change.

4. Promote a climate-savvy financial support ecosystem. The financial sector relies on a professional network for specialized business intelligence and consultation. We recommend targeted funding assistance for these businesses to build capacity on key climate themes. For example, we specifically call on the Chartered Professional Accountants of Canada to develop a climate lens for Canadian accounting practices.

Read: Climate change task force launches new knowledge hub

5. Embed climate risk into the supervision of the financial system, including monitoring, regulation and legislation. Climate change will have transformative economic impacts and requires close assessment from both a prudential and systemic risk management perspective.

6. Convene a taxonomy technical committee to develop sustainable finance standards for a resource-based economy like Canada. Similar taxonomy efforts are underway around the world, and early precedents have emerged. The rub — most energy- and carbon-reduction initiatives in emissions-intensive sectors fail the existing ‘green test,’ even if their reduction impacts are significant. We recommend designing a ‘transition bond’ to finance these essential activities and introducing a range of temporary fiscal incentives to accelerate the supply and liquidity of these and other ‘green’ fixed income products in Canada. Our asset managers can invest directly in these bonds, use them as a cost-effective debt-financing source for portfolio companies or issue their own.

7. Offer an incentive for Canadians to invest in accredited climate-conscious products through their individual registered retirement saving plans or pension contributions. It would include additional contribution space and a ‘super deduction’ (>100 per cent) for every dollar invested in eligible investments. This would give individual investors a tangible stake in financing the transition to a low-carbon economy.

Read: Expert panel on sustainable finance recommends super tax deduction to incentivize green savings

8. Finally, the asset management community should reflect on its current climate change competency and fill in necessary gaps. Investors have an instrumental role to play in changing the climate change narrative while investing directly to address it. Asset managers should also work collaboratively to engage our country’s largest emitters. Similar global engagements, such as Climate Action 100+, have been successful, but its Canadian coverage is limited.

With the emissions-intensive nature of Canada’s economy, we can’t ignore the challenges that climate change poses to our financial system. Nor can we overlook the immense opportunity for competitive advantage in new, cleaner growth markets and the jobs that advantage could yield. In either case, success will require committed investment, financial ingenuity and leadership — the cornerstones of our world-class financial sector.

Our long-term investors manage trillions of dollars, with assets and influence around the world. How these players navigate the nexus of climate change and institutional investment will influence our country’s transition journey and future economic playing field. We have the opportunity to leverage these institutions’ resources and reach to tackle some of the world’s defining issues in a manner that benefits society and the bottom line.

Read: Canadian pension plans among top responsible asset allocators

As a matter of good governance (and business), climate change should be on high on the radar of our boards. It should be core to our investment, governance and risk strategies and an active, non-negotiable conversation topic with portfolio companies, policy-makers, regulators and peers. It is time to take a long view, ask tough questions and invest our way toward a sustainable, resilient and competitive economic future.

Kim Thomassin is executive vice-president of legal affairs and secretariat of the Caisse de dépôt et placement du Québec and Barbara Zvan is chief risk and strategy officer of the Ontario Teachers’ Pension Plan. They are both members of the federal government’s expert panel on sustainable finance.