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Canadian ‘HLEG’ calls for focus on ‘transition-linked’ investment products, carbon price and centralised data

Government-backed panel included asset owners like Ontario Teachers and CDPQ

Canada’s Expert Panel on Sustainable Finance has released its interim report, urging the government to explore “a market for transition-linked financial products” and calling for “a centralised source of climate data”, among other things.

The government-backed panel, which is often compared to the European Commission’s High Level Expert Group on Sustainable Finance (HLEG), comprises leading asset owners and finance market players.

It comprises: Kim Thomassin, Executive Vice-President of Legal Affairs and Secretariat at Caisse de dépôt et placement du Québec; Barbara Zvan, Chief Risk and Strategy Officer of Ontario Teachers’ Pension Plan; and Andy Chisholm, Director of the Royal Bank of Canada and former Senior Global Strategy Officer and Head of Financial Institutions at Goldman Sachs.

It is chaired by Tiff Macklem, Dean at Rotman School of Management, director of Scotiabank and former Senior Deputy Governor of the Bank of Canada.

Like HLEG, the group was convened to consult with stakeholders and provide recommendations to policymakers on how to bolster sustainable finance. Initially, it was slated to present its final report this autumn, but “given the scope and complexity” of the topic, it will now deliver next spring.

In the interim report, the authors say sustainable finance is growing in Canada, “but at a pace and scale outstripped by many of our peers.” It identifies a number of challenges including a lack of “organised effort” from financial players looking into sustainable finance, insufficient understanding, “outdated” perceptions around fiduciary duty and materiality, pressure to keep short-term costs down and a lack of clarity from regulators.

It identifies six “foundational elements”, which it claims are essential to scaling up sustainable investment. “Without these, market development will continue to be slow and sustainable finance will remain an add-on to the financial system, rather than core to mainstream financial markets.”

These are:

1. Clarity on climate and carbon policy
2. Reliable information
3. Effective climate-related financial disclosures
4. Clear interpretation of fiduciary and legal duties
5. A knowledgeable support ecosystem
6. Relevant and consistent financial regulation

On policy, the report says: “Stakeholders said the importance of certainty around climate policy is a vital prerequisite to unleashing innovation and providing a sufficiently reliable trajectory to put long-term capital to work.”

“A clear price on carbon is arguably the most direct measure for persuading markets to make more sustainable choices,” it added.

The interim report has been released by the Canadian Ministry of Environment and Climate Change in the same week that Prime Minister Justin Trudeau announced plans for a “backstop” carbon tax, to ensure that there is some level of pricing on carbon emissions across all provinces.British Columbia, Alberta and Quebec have carbon markets in place that meet federal guidelines, while Newfoundland, Prince Edward Island and Nova Scotia have them under development. But Ontario, New Brunswick, Saskatchewan and Manitoba have all refused to introduce schemes.

As a result, this new backstop will force a level of carbon pricing in those four provinces, starting at C$10 (€6.7) p/t and rising to C$50 p/t by 2022. Interestingly, part of the pledge by Trudeau is to redistribute the money raised from the scheme to citizens, via tax rebates.

The move to include carbon pricing as a priority issue sets it apart from its European counterpart, which barely addressed the issue of carbon markets in its recommendations – prompting criticism from many in the investment, policy and corporate worlds.

On the reliability of information, the panel reports that “there is overarching private sector support for a centralised source of climate data and financial analysis, whether through expansion of the Canadian Climate information Portal or a separate body”.

“Many players are willing to actively support development,” it adds.

As well as “foundational elements”, the report identifies several “financial products and markets” that it believes may have “transformative importance and economic potential” for sustainable finance.

One of those is “green and transition-linked products”.

On the basis that Canada’s economy includes swathes of carbon-heavy companies, the report proposes “transition-linked bonds and loans” might be appropriate. “Unlike green bonds, transition-linked products could be available to firms in emissions-intensive industries that are undertaking projects to reduce their carbon footprint, which do not nearly fit within standard green taxonomy.”

“By nature of step-down covenants, transition-linked instruments could help borrowers obtain lower-cost capital as they work to transition to more sustainable business activities; the financial logic being that in doing so, they are reducing strategic risk to the organisation.

“Transition-linked loans could also be made available to smaller entities which may not yet have the scale required.”

As part of the “financial products and markets” section, the panel also addresses sustainable asset management, in the context of which the report claims Canada’s banks have a particularly important role in engaging investors and businesses on sustainability and outlining appropriate options.

Strongly mirroring the conclusions of the EU HLEG recommendations earlier this year, the report also says that conversations with stakeholders highlighted a consensus that pension beneficiaries should be consulted on the sustainability impacts of investments made on their behalf.

The report also touches on whether the recommendations by the Taskforce on Climate-related Financial Disclosures should be mandatory, the role of retail asset managers, insurers and investment into cleantech and innovation, among other topics.