Canada’s financial sector takes climate change seriously, but doubts remain

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In a remarkable turn of events, the Canadian financial industry appears to be moving from a problem to a solution for Canada’s climate transition.

It’s too early to say that Canada’s banks, investment funds and asset managers believe in climate change, but recent announcements suggest the sector has come to accept that it has a vital role to play in financing the transition to net zero.

The announcements reflect pressure on governments and businesses to show progress ahead of the UN climate change conference which begins on October 31 in Glasgow.

In mid-October, after a six-month delay, Canada’s big six banks finally joined the global Net-Zero Banking Alliance, a network established by former Bank of Canada and Bank of England Governor Mark Carney. Alliance members have pledged to reduce CO2 emissions from their loan and investment portfolios to net zero by 2050 and to set interim reduction targets by 2030 or earlier.

Around the same time, Canadian investment funds and managers launched Climate Engagement Canada (CEC), an investor network of 27 major asset managers holding over $3 trillion in assets. The CEC will file shareholder resolutions, meet with company management and use the media to push 40 of Canada’s biggest greenhouse gas polluters to commit to reducing CO2 emissions.

These initiatives also received a boost in October from Canada’s securities commissions, which proposed new rules on climate-related reporting by publicly traded companies. The new rules will provide investors with comprehensive and consistent data on CO2 emissions and costs so they can compare companies on performance and net zero strategies.

There are reasons to be skeptical of these announcements. Canada’s five largest banks are among the top 25 global banks financing fossil fuel companies. With such large amounts of capital at stake, there is no guarantee that they will meet their climate commitments.

Moreover, the CEC makes no promises about its effectiveness in pushing companies towards net zero. And securities commissions have proposed a possible carve-out in the new rules for heat, power and direct product emissions, which could seriously weaken the entire disclosure framework.

Yet taken together, these announcements suggest that the Canadian financial sector is taking climate change seriously. By joining the net zero alliance, Canadian banks are connecting to a powerful group of global banks that are already turning away from the Canadian oil and gas industry. Additionally, the CEC will give large investors more leverage when dealing with large issuers, perhaps even calling for changes in boards or management. And all of this will be supported by new transparency regulations, providing investors with data to clearly differentiate net zero leaders from laggards.

The importance of this activity is underscored by a recent RBC report which found that Canada will need to spend $2 trillion over the next 30 years to reach net zero by 2050, a massive outlay that will transform banking and investment portfolios.

What will these climate-focused investment portfolios look like? If banks and investment managers are serious, CO2 emissions from portfolios by 2030 will decline in line with Canada’s climate commitment, which is 40-45% below 2005 levels by 2030. by 2050, wallets will suck.

Fossil fuel companies without carbon capture will be gone. The electrification of transport, space heating and industry will provide opportunities for new investments in technological change, business innovation and climate-resilient infrastructure. At the same time, there will be a huge demand for investments and loans for green energy production, which is likely to double over the next three decades.

Recent developments give reason to hope that the Canadian investment community will rise to these challenges and abandon its traditional role as one of the largest financiers of fossil fuels in the world.

Eugene Elmen has worked in the responsible investment industry for over 20 years. He now writes on sustainable trade and finance.

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