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Create a green investment plan, a transition taxonomy, climate scenarios and national CA100+, says Canadian ‘HLEG’

RI takes a look at the sweeping recommendations to Canada’s government

Canada’s Expert Panel on Sustainable Finance has called for a slew of policy interventions and supervisory updates to help the country keep up with the growing need to tackle climate change through financial markets.
The group, which was set up by the federal government last year, published 50 pages of recommendations today, covering everything from rules for TCFD alignment to the creation of a Canada-focused green taxonomy.
Unlike the EU’s High Level Expert Group on Sustainable Finance, the Canadian taskforce – which comprises just four members: Tiff Macklem, Dean of the University of Toronto’s Rotman School of Management and former Deputy Governor of the Bank of Canada; Andy Chisholm, member of the board of directors of the Royal Bank of Canada; Kim Thomassin, Executive Vice-President of Legal Affairs and Secretariat for the Caisse de dépôt et placement du Québec; and Barbara Zvan, Chief Risk & Strategy Officer for the Ontario Teachers’ Pension Plan – was asked to focus exclusively on climate change, rather than broader issues of sustainability and long-termism.
As a basis for many of its other recommendations, the panel says the federal government should prioritise the development of a concrete plan for Canada’s transition to a low-carbon economy, including 2030 and 2050 targets. Working with provincial governments and the private sector, the “capital plan” should outline the amount of investment required, sector by sector, to “give a concerted nudge to the adjustment process and help connect the dots between our country’s climate objectives and investment imperatives”.
National and regional governments should then review their broader policies to make sure they’re aligned with such a plan. In relation to carbon pricing – something that has been almost entirely overlooked in Europe’s sustainable finance package – a “clear pricing outlook” for coming years and decades is recommended in the report.
Another priority for the federal government should be the creation of “a single national hub” for climate-related data, called the Canadian Centre for Climate Information and Analytics (C3IA). This body would overcome challenges around cost and availability of climate-related data in the market by “synthesizing key information from Canada’s consortia of climate, economic, academic and decision analytics”. The centre could start by developing two or three model climate scenarios (including a 2°C or lower option) to support stress-testing in alignment with the Taskforce on Climate-related Financial Disclosures (TCFD), as well as analysing physical climate risk and tagging financial products.
On the TCFD, the recommendations urge the government to phase in a “mandatory comply-or-explain’ regime” for alignment with the recommendations, starting with requirements around the easiest parts – governance, strategy and risk disclosure – and moving on to climate metrics, targets and scenario analysis. Scenarios can be based on the work done by C3IA and “from there, individual issuers and industry groups can customize the scenarios and build out proprietary analysis,” the report suggests.
Large firms and investors should have five years to comply with the TCFD, it adds, while small and medium ones should have a further two years.
More specifically, it says the existing Canada Business Corporations Act should be updated to require companies to include climate-related disclosure in their annual reports; and, at provincial level, training requirements should be updated to include aspects of the TCFD, and regulatory bodies should harmonise regulatory expectations in line with the TCFD.
In a snipe at the development of the EU’s green taxonomy, the panel says that current efforts beyond Canada to develop classification systems for green projects “seem to exclude opportunities for GHG emissions reductions brought by innovation within heavy resource and industrial sectors”.
“This restrictive scope could exclude some of Canada’s core economic sectors from certain investment mandates, benchmarks, funds and accreditation standards – even if companies in these sectors are pursuing projects and strategies that lead to better environmental improvements than approved by pure green projects”, it says. As a result, the report suggests that Canada adopts “a single, internationally-aligned taxonomy encompassing not just green definitions, but a broader mapping of transition and resiliency-linked economic activities and asset classes”.
“Because such a taxonomy is unlikely to come forward in the near term, Canada should begin by adopting an international green taxonomy that aligns with its global investment and trade priorities. It should then work either independently, or with other countries with similar resource endowments, to develop supplemental coverage for industry transition activities that are essential to Canada but not captured under the current criteria”.
Over the last six months, the EU’s green taxonomy has shifted from a binary ‘green v. not green’ approach, to one that is more sensitive to the transition. However, RI understands that Canada is thinking of working with Australia to create a second taxonomy which will include heavy industry that won’t be included in the EU equivalent.On the back of the taxonomy, in much the same way as Europe, the Canadian group recommends developing product labels and standards. To bolster retail investment and pension savings into such products, the report recommends creating tax breaks for eligible investments. Pension providers “should be encouraged to offer default plan options that invest in climate-conscious investments”, it adds.
To help with the development of the taxonomy, and other policy interventions, the panel proposes the creation of a Canadian Sustainable Finance Action Council with public and private sector members, to work on the technical implementation of new rules.
It calls for more blended finance models to help leverage private investment into key areas of the transition, and for the government to seed an “oil & natural gas cluster” made up of government and industry representatives, alongside institutional investors, NGOs and academics, to “pool capital and expertise” to develop decarbonisation solutions. The oil & gas industry should also be required to disclose more robustly on climate performance, the report says.
Reinforcing the panel’s focus on climate ‘transition’ rather than a green economy, the report points to the need for Canada’s government to work out how to “supply global markets with cleaner, more responsibly-produced oil & natural gas”.
Another controversial suggestion is for supervisors to assess the potential for changes to capital requirements for green projects.
“The panel heard that current capital treatment might be impeding economic activity that contributes to emissions abatement, climate resilience and clean innovation, and conversely underpricing risk activities more exposed to shifting climate and environment-related outcomes,” the report explains. Changing capital requirements for banks that lend to eligible green projects was initially a focus of the European Commission, but it was so controversial that it dropped it from its top three priorities last year, and will wait until the development of its taxonomy to revisit the idea.
“The Panel does not suggest that risk weights incorporate ‘green discounts’ simply to influence certain activity, but it does encourage Office of the Superintendent of Financial Institutions to consider whether current treatment accurately reflects asset default characteristics in light of the evolving nature of climate risks”, the authors point out.
Mirroring moves made by the UK, Australia and the EU, the recommendations urge the The Minister of Finance to clarify that climate factors are “firmly within the remit of fiduciary duty” and launch a legislative review on the topic. Furthermore, the panel proposes that laws should be updated to force federally-regulated pension funds to disclose their climate considerations in their Statement of Investment Policies and Principles.
“Investment fiduciaries should also disclose the considerations behind their chosen index benchmarks, given the influence of those choices on the broad asset selection and risk concentration,” the report adds.
And the federal government should identify an appropriate body to lead the development of a Canadian Stewardship Code.
On the fixed-income side, the panel recommends that the country’s banks and asset managers develop “benchmark transition debt transactions” to boost lending to eligible climate-related projects and that the federal government “should consider time-limited fiscal incentives to offset cost concerns” around issuing green bonds.
The panel also calls for Canada’s asset management community to establish a “national investor-led engagement programme, akin to Climate Action 100+,” to engage with Canadian issuers.
Additional recommendations linked to real estate standards and access to bank loans for retrofitting buildings were also put forward. On infrastructure, the panel says the government must create and publish a long-term sustainable infrastructure strategy and capital plan. It should support the development of a pipeline of high-quality, climate-aligned infra projects for co-investment with the private sector. Eligible projects should be “fast-tracked” when it comes to public permits and funding, it adds.
The recommendations are the result of just over a year of consultation with the market, including the publication of an interim report in October, laying out some of the challenges to the Canadian market on ramping up climate-aligned finance.
“In the panel’s view, planning and preparation for every recommendation in this report can begin immediately,” the four experts conclude. “All but a few can be implemented, or moved forward substantially, within the next year”.