ESG Country Snapshot: Canada

A ‘Maple Leaf’ HLEG and pension funds issuing green bonds show market development

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The latest in our ESG Country Snapshot Series.

Sustainable finance in Canada has — arguably — been slow to mature. But recent developments suggest this is changing… and don’t discount the Carney Effect!

There have been developments within both government and finance – ranging from a Canadian interpretation of Europe’s High Level Expert Group (HLEG) on sustainable finance to green bonds issued by pension plans – that signal growing momentum.

A ‘Maple Leaf’ HLEG

At the national level, the country has convened a small-scale equivalent to the HLEG, which saw the European Commission, capital market participants and civil society create a set of recommendations now feeding into a European Sustainable Finance Action Plan. Canada’s counterpart, the Expert Panel on Sustainable Finance, is due to complete its work and make recommendations to the national government by the autumn.

On the four-person panel is Kim Thomassin (Vice-President of Legal Affairs and Secretariat, Caisse de dépôt et placement du Québec or CDPQ), Barbara Zvan (Executive Chief Risk & Strategy Officer for the Ontario Teachers’ Pension Plan), Andy Chisholm (board member, Royal Bank of Canada) and Tiff Macklem (Dean of the University of Toronto’s Rotman School of Management and former senior deputy governor at the Bank of Canada).

The panel sees its remit as to build on the Taskforce for Climate-related Financial Disclosure (TCFD), engage with business experts about investments that benefit the environment, and explore the opportunities and challenges for companies facing voluntary standards for corporate disclosure of the financial risks of climate change.

Working voluntarily, though, the group’s resources are limited, and their meetings to date have been chiefly focused on establishing its own mandate and work plan, according to sources close to the group.

Tasked with taking on what is a new topic of interest in the Canadian context, this ‘Maple Leaf’ HLEG represents progress and it will be interesting to see how much it will drive new sustainable finance regulation.

G7 Presidency

Presiding over the G7 this year, Canada has convened discussion around: inclusive growth; jobs of the future; gender equality and women’s empowerment; climate change, oceans, and clean energy; and world peace and security.

The country has seen pressure from some corners to prioritise climate finance, ahead of France – a global champion of the topic – taking over the helm in 2019.

In September, the G7 Ministerial Meeting on Working Together on Climate Change, Oceans and Clean Energy will be held in Halifax.

Carbon markets
Both federal and provincial governments have put in place important developments in emissions reduction-targeted carbon markets.

The country has committed to reduce emissions by 30% by 2030, compared to 2005 levels. The largest emitters are Alberta, Ontario, Quebec, British Columbia and Saskatchewan. Before 2016 there had been key carbon market developments in Canadian provinces, with the implementation of “cap-and-trade” regulation in Quebec, Ontario and Alberta, and a carbon tax in British Columbia and Alberta. In British Columbia, the carbon tax rate is C$35 per tonne, rising annually by C$5 per tonne, until it reaches C$50 per tonne in 2021. In Alberta, the carbon levy rose to C$30 this year. Carbon is priced at C$19 a tonne in the cap-and-trade market in Quebec and Ontario.

In 2016 provinces and federal government announced the Pan-Canadian Framework on Clean Growth and Climate Change (PCF). This included a national carbon pricing strategy, under which provinces that do not implement either a cap-and-trade system or a specified level of carbon tax will have a federal-level pricing backstop imposed. Provinces must submit an outline of their plan to the federal government by September 1, and Ottawa will work with them to ensure the plan meets their standards. The new carbon pricing plans will come into effect in January, with the backstop at C$20 per tonne of carbon dioxide equivalent emissions, scheduled to rise by C$10 per year until reaching C$50 per tonne in 2022. The scheme’s plan for “emissions intensive and trade exposed” (EITE) sectors was amended at the beginning of August, so as not to put firms out of business only for international competitors to take their place.

Resistance movement
The system has run up against resistance, however, from Ontario’s new conservative government, led by Doug Ford. In his first month as premier, Ford scrapped Ontario’s cap-and-trade scheme, which had been linked with California and Quebec under the Western Climate Initiative.

This was a controversial move, not least because businesses had purchased carbon credits that they are now unable to redeem – bringing a new meaning to climate-related regulatory risk for those firms affected.It also meant the end of several environmental initiatives funded by the programme. Among those scrapped was a scheme offering rebates of up to C$14,000 for residents who bought electric vehicles – which has prompted the Canadian arm of Tesla Motors to attempt to sue the Ontario government.

Despite this uncertain political landscape, the financial sector is making moves around climate risk, perhaps natural in the context of a resource-based economy where the divestment narratives prevalent in Europe are less of an option.

The Carney Effect

Yet some niche fund managers and even the large commercial banks now offer fossil free funds, and the divestment movement remains strong at Canadian universities.

United Nations-facilitated efforts to collaborate around new practices in climate disclosure and risk assessment have seen a strong presence from Canadian financial institutions.

Last year, TD Bank Group and the Royal Bank of Canada were two of 16 international banks to join The UN Environment Programme Finance Initiative (UNEP FI) in a TCFD pilot group aimed at developing tools and indicators to strengthen assessment and disclosure of climate-related risks and opportunities. Then in March this year, Addenda Capital, Caisse de Dépôt et Placement du Québec and Desjardins Group were among nine leading investors to announce a second TCFD pilot reporting project. The groups’ findings are expected to be influential and agenda-setting in the Canadian markets.

Laura Zizzo, founder and CEO of climate-oriented consulting firm Zizzo strategy, says the role of Canada’s own Mark Carney in pushing the TCFD initiative was a catalyst in getting financial markets moving around climate risk.

“Canadian banks hold him and his recommendations in very high esteem,” she says. “This was no longer a not-for-profit pushing for this – it was Mark Carney.”

Aside from the pilot schemes, the majority of banks have come out in favour of the recommendations, Zizzo says, “as a way of getting the thing on the agenda” and a number are looking into scenario analysis and coming up with climate strategies. A number of the other banks have published climate disclosure statements, though none have fully integrated them within their financial statements. But, according to Zizzo, “the lack of targets doesn’t mean a lack of commitment”.

The TCFD has spurred movement on the regulatory front, too, with the country’s provincial securities regulators examining the recommendations. This was announced in April in a document published by the Canadian Securities Administrators (CSA), the umbrella group of 13 provincial and territorial securities regulators. The regulators would be developing climate disclosure guidelines focused on listed companies, considering whether investors need further disclosure to inform investment and voting decisions, and continuing to monitor the quality of issuers’ climate change-related disclosures, best practices in this area and developments in reporting frameworks.

Actuaries and financial juggernauts

Unlike their counterparts in France, the UK, and the Netherlands, the federal banking and insurance regulator – the Office of the Supervisor of Financial Institutions (OSFI) – has not yet engaged in formal interviews with Chief Risk Officers at the largest banks and insurers on the climate risk theme. Sources suggest that until this happens, it is unlikely that substantive action will take place at the country’s financial juggernauts in the banking and insurance sectors.

In July, Canada’s Office for the Chief Actuary (OCA), who sits independently within OSFI, said it was “ready to conduct work on the 2-degree stress test” for the Canada Pension Plan (CPP), the country’s earnings-related social insurance program.

Green bonds

Green bond issuance in Canada has been largely dominated by provincial governments, but recently issuers such as insurers and municipalities have dipped their toes into the market. But things really got interesting in June when the C$356.1bn Canada Pension Plan Investment Board (CPPIB) – which invests on behalf of one of the world’s biggest retirement funds – becoming the world’s first pension fund to issue a green bond. Proceeds were earmarked for financing or refinancing of the fund’s own investments in wind, solar, sustainable water and wastewater management and energy efficient buildings.

The fund priced C$1.5bn of green bonds – a record size for a single green bond transaction in Canada. The 10-year bonds, sold via CPPIB Capital Inc, were sold at a spread of 71 basis points over similar-maturity federal government bonds and offer a 3% coupon. They attracted 79 buyers with demand at C$2.7bn, according to a CPPIB statement. The sale was led by CIBC World Markets and RBC Dominion Securities. CPPIB confirmed to RI that it does not “anticipate this issuance to be a ‘one-off’”.
The role of the big pension players

In late 2017, CPPIB created a standalone Power and Renewables Group to expand its renewables portfolio, telling RI “it is critical to have a dedicated team focused on this space”. At the time of writing, CPPIB had invested C$3.6bn in renewables, with acquisitions including a portfolio of Canadian wind and solar power projects acquired from NextEra Energy Partners, wind parks acquired in a joint venture with Brazil’s Votorantim Energia, and investment in India’s ReNew Power.

CPPIB told RI: “We view climate change as one of the world’s most significant physical, social, technological and economic challenges. Given our exceptionally long investment horizon, we actively address climate change to increase and preserve economic value in accordance with our mandate.”

Meanwhile, Ontario Teachers’ (OTPP) also issues bonds and invests in climate-related assets, making it a potential candidate to follow CPPIB’s lead. Its Barbara Zvan said the fund had “been following the growing popularity of green bonds in recent years”, but could not comment on the likelhood of future issuance. Like CPPIB, OTPP has established a dedicated team to evaluate opportunities in renewable energy, and at the end of 2017, held C$1.6bn in direct clean and renewable energy investments.

In October last year, CDPQ – already major investor in renewable energy – overhauled its entire investment strategy so as to “treat climate change in the same manner as we treat risk: as fundamental in our decision-making process”.This was accompanied by a decision to slash the carbon footprint of its portfolio by 25% by 2025, as well as increasing its investments into low-carbon technologies by C$8bn over the following three years – a 50% increase on their prior commitment. It remains to be seen if the CPPIB and other Canadian public sector pensions will follow the CDPQ’s bold lead.

The legal risks

Two Canadian academics have published what’s claimed to be the first comprehensive legal assessment of directors’ and trustees’ fiduciary obligations in Canada regarding the transition to a sustainable economy. Professor Cynthia Williams of York University released ‘Disclosure of Information Concerning Climate Change: Liability Risks and Opportunities’ while Dr. Janis Sarra of the University of British Columbia released ‘Fiduciary Obligations in Business and Investment: Implications of Climate Change’. They also co-wrote a summary; the reports were developed as part of the Commonwealth Climate and Law Initiative (CCLI).


With the clock ticking on Canada’s G7 presidency, the Expert Panel will be under some pressure to deliver leadership on sustainable finance on a compressed timeline. For the Expert Panel to succeed, Canada’s globally significant institutional investors across pensions, banking, and insurance will have to line up behind a shared vision of the future of finance that looks very different from the present.