Leveraging Sustainable Finance Leadership in Canada

Link to Report: 2018-Leveraging-sustainable-finance-canada.pdf

 

In its interim report, Canada’s Expert Panel on Sustainable Finance proposed that, for the purposes of discussion, sustainable finance be defined as “capital flows (as reflected in lending and investment), risk management activities (such as insurance and risk assessment), and financial processes (including disclosures, valuations, and oversight) that assimilate environmental and social factors as a means of promoting sustainable economic growth and the long-term stability of the financial system.”

 

This is aligned with the EU’s definition, whereby the term “sustainable finance” generally refers to the process of taking due account of environmental and social considerations in investment decision making, leading to increased investments in longer-term and sustainable activities. More specifically, these environmental considerations refer to climate change mitigation and adaptation, as well as the environment more broadly and related risks (e.g., natural disasters) (European Commission, 2018c).

 

In order to mainstream and normalize sustainable investment that provides financial, environmental and social returns, governments and the private sector must work together to promote trustful and efficient capital-allocation decisions based on the accurate and timely disclosure of material risks to capital.

 

By outlining a three-year plan for relevant stakeholders, this report first makes the case that it is possible for Canada to commit to updating laws and standards and, through these minor changes, to make climate-related financial disclosure mandatory. Along with development of governance mechanisms aligned with this disclosure, it will follow that regulatory certainty can underpin the private sector investments needed for training and/or hiring of people to prepare such disclosure and updated financial statements and to ensure that mainstream reports are assured by auditors. Doing so will contribute to economic productivity by widespread reporting of readiness to adapt to climate-related risk and of carbon and energy productivity, which in turn will trigger private capital flows from investors seeking highest risk-adjusted returns.

 

Leveraging Sustainable Finance Leadership in Canada

In support of this recommendation, this report then proposes legislative, non-legislative and standards-setting updates at the international, federal and provincial levels. This report also contains current legal and statutory precedents in G7 and G20 countries to support these recommendations. With foreign direct investment flows into Canada in mind, this report makes the case for Canada’s finance policymakers

to closely follow international efforts to assess the sustainability of economic activities through taxonomies and frameworks. These frameworks are now being developed to guide the formulation of market benchmarks as well as standards for the labelling of financial products.

 

Finally, the report introduces the work of the G20’s Eminent Persons Group and the pillars it proposes to safeguard the stability of the global financial and monetary system. It does so in the context of tail risks that may exist within Canadian capital markets. In response to the first report of the G20 Eminent Persons Group, and in the context of most climate science, as published by the International Panel on Climate Change on 1.5°C of warming, this report proposes a rationale for Canadian financial sector supervisors and regulators to be engaged in international efforts to share best practices, to contribute to the development of environment and climate risk management in the financial system and to mainstream sustainable finance.