THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, May 8, 2024
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 4:15 p.m. [ET] to study Bill S-243, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello and welcome to everyone. This is the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I serve as the chair of this committee.
A quick reminder to use the new earpieces, please, for the benefit of the translators and keep them as far away from the microphone as you can. Just place them upside down.
Today we have with us our deputy chair, Senator Loffreda. We have Senator Gignac with us. We have Senator Miville-Dechêne. We have Senator Deacon.
We are so pleased to welcome in person Mark Carney, Chair of Brookfield Asset Management Inc. and the Head of Transition Investing. Our apologies for the delay in starting our hearings today due to votes in the Senate. I need not remind anybody that Mr. Carney was also the Governor of the Bank of Canada and the Bank of England. We will go to you now, Mr. Carney, for your opening remarks. Thank you very much.
Mark Carney, Chair of Brookfield Asset Management Inc. and Head of Transition Investing, as an individual: Thank you very much, chair. It is a great honour to be here.
[Translation]
Thank you, Madam Chair, for the invitation to appear as part of the committee’s examination of this important bill. I want to commend Senator Galvez, the bill’s sponsor. Building a sustainable financial system is essential for Canada to manage the risks associated with climate change and seize the enormous opportunities of building a sustainable economy. Let me be clear at the outset.
Finance cannot drive this transition on its own. Finance is an enabler, a catalyst that will speed what governments and companies initiate.
The more credible and predictable government climate policies are, the more investors will finance in anticipation, creating a virtuous circle of large-scale investment, faster decarbonization, more jobs and faster growth.
[English]
For example, in my view, bank capital rules should not be changed to reflect climate goals.
Rather through climate disclosure and transition planning, key stakeholders — management, boards and prudential supervisors — should anticipate and manage the growing physical and transition risk associated with climate change.
To these ends, four fundamental building blocks are required: Decision-useful climate-related disclosure, net-zero transition plans, taxonomies that provide common definitions of transition finance, and scenario planning by financial institutions and stress testing by their prudential authorities. In these respects, Canada is lagging its international peers.
At COP 26 in Glasgow, over 40 countries launched the International Sustainability Standards Board, or ISSB, to develop a global baseline of sustainability-related disclosures built on the voluntary Task Force on Climate-related Financial Disclosures, or TCFD.
The ISSB finalized its standards last year. They have been endorsed by the International Organization of Securities Commissions, or IOSCO, and the Financial Stability Board, or FSB, and numerous jurisdictions are now implementing with coverage expected to extend to over 100,000 companies.
In contrast, Canadian climate disclosure efforts have been patchwork, delivered late and falling short of international standards. Provincial securities regulators have consulted on recommendations on a comply or explain basis and an approach that would require issuers to disclose only Scope 1 emissions. The current Canadian Sustainability Standards Board, or CSSB, consultation is expected to be finalized by the end of this year, to apply from 2025, one year later than the effective date of the ISSB, and the proposed CSSB standards further delay the ISSB’s recommended relief period for Scope 3 disclosures from one to two years such that Canada would lag the EU by two years for no apparent reasons.
Moreover, once finalized, the CSSB standards will be voluntary and must be reviewed and integrated into rules by the CSA to ensure mandatory disclosure.
I welcome the legislation’s proposed requirements that firms develop and disclose net-zero targets and transition plans. To these ends, it will be important to leverage global frameworks.
Currently, over 250 major financial firms are expected to publish transition plans this year, consistent with the Glasgow Financial Alliance for Net Zero, or GFANZ, framework described in my written submission, and there is a longer, written submission that the committee will have. The GFANZ framework is being put into effect by authorities in major financial centres, including the U.K.; the United States, under Secretary Yellen’s Treasury principles; the EU, through mandatory requirements, again detailed in my written submission; and other major jurisdictions that are implementing transition planning, including Japan, Hong Kong, Singapore and Switzerland.
Once again, Canada risks falling behind, even though in September 2022 the SFAC released their roadmap setting screening criteria and outlining 10 recommendations for a Canadian taxonomy, recommendations that remain unanswered.
Canada should adopt, in my view, a transition planning requirement and associated taxonomy for all firms in line with the GFANZ framework.
[Translation]
To conclude, the bill implicitly raises a basic challenge in financial sector oversight in Canada — the absence of explicit responsibilities for managing systemic risks.
In other jurisdictions, this macro-prudential responsibility is assigned to a specific entity — a central bank, such as the Bank of England, or a finance ministry, such as the U.S. Treasury. Then, various authorities have responsibilities to manage the systemic consequences of their actions.
In Canada, we rely too heavily on ad-hoc cooperation. Inadequate climate risk management is a specific, albeit major, example of a general problem.
[English]
These deficiencies amplify the negative impact of Canada’s slow progress in building a sustainable financial system on investment, job creation and competitiveness of our economy. Senators, we can do better. Thank you very much.
The Chair: Thank you very much, Mr. Carney. As everybody realizes here, our time is extremely short. The clock is going to rule. You will have two and a half minutes for your question and the answer, so the longer the question, the less time Mr. Carney has, and I’m going to be extremely strict so that everybody can ask their questions today.
We’ll begin with our deputy chair, Senator Loffreda.
Senator Loffreda: Thank you, Madam Chair, and thank you, Mr. Carney, for being here. An honour and a privilege to have you here with us. Too bad we can’t have more time.
It is curious that in your book, Values, which I read with great interest, that you emphasize, as in your opening remarks, the importance of financial institutions in addressing climate change. I’d like you to elaborate on the extent to which you feel our financial institutions are effectively addressing climate-related risks and contributing to a more sustainable economy. Do you feel this bill is feasible, possible, practical or achievable? Can it be successfully implemented or carried out, given the available resources, circumstances and constraints?
Mr. Carney: Thank you very much, senator. Thank you for reading that book. You have my sympathy.
I would say that, as in other jurisdictions, it is a work-in-progress, meaning specifically the ability of our financial institutions to manage these climate-related risks. There are two aspects, as you well know, the first being the physical impacts of climate change. But really, the biggest element is the transition risk and anticipating which industries and sectors will succeed in this transition and which will fall behind and where the core risk to these institutions are.
From what I can see, we are not yet at the cutting edge of scenario planning, or to put it in the terms of the supervisor — I know you’ve heard from the superintendent — stress testing by the supervisor. The stress test that will proceed will be important in helping with that and helping to sharpen the understanding of where the risks and opportunities lie. I would say good but not at cutting edge, recognizing that normally Canadian financial institutions are at the cutting edge.
I would make one exception to that, if I might. I think our large pension funds understand very well the broad aspects of transition. Not just that it is funding the green but also going where the emissions are and helping to reduce those emissions. It is solutions across economies and across the world.
Last point, which is the key of your question, is the achievability of this. Certain aspects of the proposed law are definitely achievable and actually essential. I singled out in my opening comments around transition. I wish the law and our framework could bring consistent climate disclosure and timely and comprehensive climate disclosure. We really need that in order to manage this as financial institutions, as businesses and as a country.
Other aspects, the capital proposals, as I indicated, while they’re achievable, I would not recommend them.
The Chair: Thank you very much.
[Translation]
Senator Gignac: Thank you for being here, Mr. Carney. Over the past decade, you have been quite an influential champion in raising awareness about climate change and getting the financial sector to do its part. The bill was introduced in March 2022, and, as you know, a year later, the Office of the Superintendent of Financial Institutions, or OSFI, released Guideline B-15, which includes disclosure provisions.
Here’s my question. This bill goes quite far because it imposes capital adequacy requirements. Normally, the regulatory authority does that. Is it a good thing that the bill goes as far as to require additional capital, or should that be left up to OSFI? What impact will that have, since it will come into force a year after the bill’s passage?
Mr. Carney: At the end of the day, banks are responsible for managing risks and making decisions to manage those risks. As you know, OSFI is responsible for supervising and overseeing risk management. It may be necessary to change the number allocated to capital risks from time to time.
[English]
It is, in my view, too intrusive to identify a specific risk weight for any risk in legislation, first point.
The second point is — if I may make a general point and hand you back some time — one of the things in the transition — and that is a transition to 1.5 degrees — is that there is still investment in fossil fuels for a considerable period of time. What is important is the ratio of financing that goes to the energies that will support a lower-carbon economy and those that are supporting our economy today and in transition. That is ever more important in an economy such as Canada, which has such a large sector.
Senator C. Deacon: Thank you for being with us, Mr. Carney. It is greatly appreciated.
The Intergovernmental Panel on Climate Change, or IPCC, and the International Energy Agency, or IEA, have identified that up to 10 billion tonnes of atmospheric carbon removal is required by 2050. Canada has the essential elements needed to scale direct air capture plants. What policies can Canada implement to increase liquidity in the carbon removal credit markets?
Mr. Carney: It’s a deep question. I think there are several things we can and must do as a country. The first, with just a slight nuance — it’s a big industry, as you know — is to fully develop our potential in carbon capture at the source, which is distinct, as you know, from direct air capture. Whether it’s in the oil sands, our steel sector, our chemical sector or other investments in those — and I welcome the provisions of the previous Budget 2023, which need to be put into force in order to help support the development of those technologies and ultimately the investments. I would also say that the Canada Growth Fund’s initial forays in issuing contracts for differences are helpful.
That type of policy, including contracts for differences, is a way to pull forward innovation and help pull carbon out of the atmosphere.
More broadly, though, in terms of direct air capture and any form of carbon capture — and it could be a nature-based solution, or it could be a technological solution — what you alluded to, which is that we should develop a liquid market for carbon credits that have what I would term “end-to-end integrity,” and that means supply integrity. In other words, the carbon actually has to be captured, and it has to have permanence to it, but there is also demand integrity, and that is who is allowed to buy those credits. The entities that purchase those credits should be making maximum efforts on their own to reduce their own emissions. It’s not a get-out-of-jail card, but it’s a way to help smooth the broader transition.
I won’t bore you with the additional aspects. Although this committee would be interested in them, we don’t have time. We need market integrity and the plumbing of that market to be there, but I’ll hand it back.
The Chair: Thank you very much.
[Translation]
Senator Miville-Dechêne: You talked mainly about disclosure, but I’d like to hear your thoughts on double materiality. More and more these days, it’s being argued that disclosure reports should focus not only on the risks to the company and the banks, but also on the risks to people as a result of the climate emergency and its impacts.
Double materiality is central to the bill, but you seem to be saying that basic risk disclosure reporting is enough. Certainly, that doesn’t appear to be enough in Europe.
Mr. Carney: You’re right, senator. Europe is the only jurisdiction whose framework includes double materiality.
[English]
It’s the only major jurisdiction that has it, and that’s an explicit reason why the ISSB does not have it. The global baseline doesn’t have double materiality.
In my view — for speed — I would say that with respect to nature-based disclosure, which is distinct from climate-based disclosure, double materiality is most relevant. That is not part of the baseline for this at this stage.
Senator Housakos: Mr. Carney, do you support Justin Trudeau’s carbon tax, a carbon tax that seven out of ten premiers and the vast majority of Canadians feel is pummelling the working class from coast to coast to coast?
Mr. Carney: I’d say the following, to go directly to the issues that we’re discussing here today, as I said in my opening comments, the power of the financial sector, a financial sector that has disclosure, or a financial sector that has transition plans, a financial sector and an economy that benefits from a carbon credit market is that it pulls forward adjustment. It finances solutions. That’s the core of it. It manages risks, helps workers find new and better employment.
Where it’s most powerful is when there is credible and predictable climate policy. That policy can be well into the future, but if it’s credible, then the adjustment starts today, and that’s how we build a better economy.
What’s critical in policy — and there are a lot of different aspects of climate policy. There are regulations, subsidies, tax credits, carbon pricing and carbon credits, but what’s critical, in my view, as we’re building this financial system that has this power to find solutions for Canadians, is that if something is going to be changed, then something at least as good is put in its place.
Ideally, if you are going to change something, you put in place something better that still has that credibility and predictability that has the power that drives investment. We’re in a position right now where we need $2 trillion of investment at the core of our economy —
Senator Housakos: Mr. Carney, can you answer the question? Are you in favour of Justin Trudeau’s carbon tax? A yes or a no will suffice.
Mr. Carney: The point that I’m making —
Senator Housakos: I didn’t hear a yes or a no.
Mr. Carney: This is the joy of being a witness. You get to say what you think —
Senator Housakos: And the joy of being a senator is that we get to ask the question.
Are you in favour of Justin Trudeau’s carbon tax? Because to your point, Canada right now has fallen to sixty second out of sixty-seven countries in climate change index.
I ask the question again: Is the carbon tax working, and are you in favour of Justin Trudeau’s carbon tax?
Mr. Carney: It’s important that we have a forward-looking financial system that has information to manage it and that we have credible and predictable climate policy.
Senator Cardozo: Thank you for coming, Mr. Carney. Your presentations are most interesting.
I want to ask you, as UN Special Envoy on Climate Action and Finance, what is your sense of other countries who are engaging in measures such as Bill S-243?
Mr. Carney: My sense is that if I were to rank other countries, other jurisdictions, I would say that the Europeans started early, so they’re the furthest ahead. They’ve made some mistakes, in my view. That often happens when you start early. The biggest mistake they have made is that their so-called taxonomy — what is green and what are transition assets — they have been too narrow. In effect, they’ve had the effect of restricting the incentives to go where the emissions are and to provide solutions across the economy.
For example, it’s quite difficult under the European taxonomy to finance a steel company that is beginning to reduce its emissions, because it won’t be fully on that one-and-a-half-degree pathway in the near term. The Europeans are out in front.
The United Kingdom has followed the Europeans for obvious reasons, but it is now able to have some differentiation, including on the taxonomy, so I would put them next and probably in a position, potentially, to move in front.
The thing to watch is how quickly Asia is moving, and I would not underestimate the speed with which jurisdictions from Singapore through to China are moving very rapidly towards these types of frameworks, and capital is moving at speed.
My last point, because I want to read it into the record, is that embedded carbon is going to be core to trade. That is going to happen much sooner than we expect. I would draw attention to two things, if I could: One is the agreement of 45% by production of oil companies at Dubai, including from ExxonMobil to Saudi Aramco, to have zero methane by 2030 and double the efficiency. I also draw attention to the speech by John Podesta two weeks ago on the White House Climate and Trade Task Force, which was explicitly about embedded carbon in trade.
Senator Martin: I wanted to go back to my colleague’s question about whether you are for or against the carbon tax. I didn’t hear a clear answer.
Mr. Carney: I think it served a purpose up until now. I think one can always look for better solutions, and as a country, we should always be open to better solutions for that.
But the bar for those solutions —
Senator Martin: Sorry, Mr. Carney. I think that was a yes, but I will move on to my next question.
Mr. Carney: I said it’s been useful up until now. That was what I said.
Senator Martin: Yes, thank you.
Part of the Liberal government’s massive spending on climate-related projects is to help with targets referenced in this bill. I do have a lot of concerns with this bill. You’ve also said the Liberal government is spending too much, and you warn of the risk of constant spending.
I’m taking this opportunity to ask: What Liberal government programs and spending would you cut?
Senator Downe: Point of order, chair. We are discussing the legislation before us. We’re not talking about the price of wheelbarrows or other items. These questions are out of order.
The Chair: No, but it’s an open forum.
Mr. Carney: First off, you read something into the record which is not a quote of something that I have said. If you’re going to say I have said something, could you make sure the quote is correct. I’m not allowed a point of order, but I will make a point of order.
The second point is that — and this is directly relevant to this — what’s important, given the scale of what needs to be done to make our economy competitive — and part of being competitive is going to be to lower carbon — is that scarce government resources catalyze the maximum amount of private finance and investment alongside them to create jobs and to decarbonize.
Programs such as — and I referenced earlier the Canada Growth Fund and contracts for difference. That is an example where the government takes only a contingent liability, but it causes hundreds of millions of dollars to be invested — to go to Senator C. Deacon’s question on carbon capture, which is one of the industries we need as a country in order to succeed.
It’s the differentiation between spending and catalyzing investment and programs of catalyzed investment. I’ll stop here: What’s directly relevant for this is that what this bill is trying to do and what your deliberations are trying to discern is what type of financial system do we need in Canada that’s going to maximize the impact of those government programs?
The Chair: Thank you very much. We’re out of time.
Senator Yussuff: Thank you, Mr. Carney, for being here.
I do recognize that our banking sector plays an important role in this economy. It finances job creation. It finances industry to a large extent.
The bill is, essentially, putting some requirements on the banks to disclose, but it is equally putting a high degree of risk on certain — so what measurements can the government use to say that our financial sector needs to be much more resilient in regard to their disclosure but equally take into consideration the risk that they are placing when they do some of this lending to institutions that might be adversely — because of what’s happening in the economy and the shift that’s happening in the economy?
Mr. Carney: If I can reference, then — and this is my poor reading or recollection of the bill — but I think one of the elements of the bill — the proposed law — is an annual report, including from the Office of the Superintendent of Financial Institutions, or OFSI.
I think bringing together in a clear and understandable way both individual financial institutions and, collectively, the financial institutions and the position they’re in in terms of what they see as their climate-related risks — both physical and transitional — what they’re doing about that. As well, I would recommend this, and I would note that the largest financial institutions in the world — J.P. Morgan, as an example, has just decided to do this — are starting to report the relative ratio of their financing for conventional energy and emerging clean energy, because that’s a very relevant metric, both for their risk management, and it is relevant for your broader responsibilities for the economy and where our economy is going.
Senator Petten: Mr. Carney, you have stated that it’s an absolute imperative to get to net zero. How would this bill help to achieve this goal, and are there any improvements from eye level or changes that should be made to this legislation, very simply?
Mr. Carney: Yes. Finance has to be core to it. The way I would frame it is that we want a financial system — all aspects of our financial system, and I think one of the things the bill draws attention to is that it’s not just the banks. It’s the pension funds, it’s our regulators, it’s Export Development Canada, our export credit agency.
Having a plan to finance the transition if — and this is the crucial thing. It doesn’t say this in the bill, but I’m adding this now — governments put in place policies that are consistent with that, they have credibility. Then I think we can rely on our entrepreneurs, our innovators, our companies and Canadians to come up with those solutions, but you need all aspects of that.
What this bill does, and the elements I’m highlighting, the transition plan — the one thing I’ve learned about managing crises — and I’ve managed a few — is that a plan beats no plan. If we are in a climate crisis — and we are — and we are in an economic situation where we need a plan to get out of it, I think it’s reasonable to ask financial institutions to have a plan for that. It does not then follow, though, that you dictate exactly what they do. They have a plan if the system reacts.
Senator Petten: Thank you.
Senator Varone: Thank you, Mr. Carney. My background is small business. I was a home builder and developer. I always found the financial institutions to be curious animals. They would always lend us money when we didn’t need it and take it back when we actually did need it.
A few years ago, I built one of the first net-zero housing developments in Toronto predicated on a geothermal system. It was a brilliant system. It worked, and I sold it to the condo corporation, who couldn’t get financing for it.
The question I have with respect to the bill before us. You talked about carbon lending versus green lending in a ratio and time frame where they criss-cross and one takes over the other. Can you further elaborate on that?
Mr. Carney: Yes. That’s a great question.
To clarify, what I spoke to was with respect to energy only. What’s relevant to your question — and it is a highly relevant question — is something called a “taxonomy,” which I don’t think is explicitly mentioned in the bill but is central to what is transition.
If I can put it this way, there was a simple view of the world, which is you flip a green switch, and everybody moves overnight to green. That’s not the way the world operates. The reality — and where we need to be — is we’re moving across a continuum of solutions. What’s crucial is that, for the example you gave, which has — I’m going to interpret this for time — net-zero energy, it has geothermal, it has a lot of advantages, but it has some emissions related to other building materials, et cetera, but that that is recognized in the transition for what it is, which is a transition asset, and it’s just as good as a purely green solar array or a windmill.
The last point, if I may, what you have right now in the world — and this is what we’re competing for, just so the committee is clear — there’s $150 trillion of balance sheet. That’s 40% of global financial assets. It is bigger than global GDP. I can explain some other time how you can get to those numbers, but that’s what it is.
Those assets are all looking for transition assets. They’re looking to shift the proportion of their assets that are not part of the solution to those that are part of the solution. The example you just gave, financial institutions, whether it’s a Canadian pension fund, a bank or whoever, should be highly incentivized.
That’s why we need a taxonomy, and I referenced this last point in my opening comments. That’s why it’s not a good thing that the Sustainable Finance Action Council, or SFAC, recommendations have been sitting on a desk somewhere for the last two years. We need to get that in place so that it’s clear that people are incentivized to support your successors in projects like that.
Senator Massicotte: Thank you for being with us this afternoon. It’s much appreciated. Nice to see you again.
I got here late, unfortunately, but could you summarize your thoughts on the bill? We’re trying to decide if Bill S-243 is good, and if it’s not good enough, what must be changed?
Mr. Carney: If I may, to summarize quickly, I think what’s good at the heart of it is that it’s drawing attention to the need for the financial sector to be aligned with the transition.
Where I would deviate from the bill is the definition of what is aligned. Do we, through law, choose to dictate that alignment, for example, with capital rules that are punitive? And they would be punitive, in my judgment, for the present in terms of fossil fuel investment. Or do we say that we’re building this off — and this is what I would favour, and I’ve been consistent on this for years — comprehensive disclosure, transition planning associated with that, and then using our authorities — in this case OFSI and the Bank of Canada — to stress test the system and build up that expertise. Then it is the interaction of that system with climate policies. There are other things such as carbon credits that need to come into play, but that is at the core. When there are elements of the bill that get to be dictating what a financial institution in Canada must do in terms of lending or not lending, or investing or not investing, that’s where I part ways with the bill as designed.
Senator Massicotte: Thank you.
The Chair: Thank you. To further Senator Massicotte’s question about this, I guess if the government wanted to do this, we would see this either in a budget or in a separate piece of legislation from the government of the day. This is about dictating to financial institutions but, by default, we’re also, by default, dictating to consumers; that is, to people who put their money in banks and in institutions. I want to make those decisions myself, not have some fourth party make that kind of decision.
Mr. Carney: We need to recognize that we want different financial institutions to pursue somewhat different strategies. That’s where you have a resilient strategy. To put it in climate terms — sorry, you put it in consumer terms; I’m going to put it in climate terms — there is a certain amount of emissions that are still left on the carbon budget. As a financial institution, I should try to decide how I am going to attack that problem. Some financial institutions will decide they want to crowd into funding wind, solar, green power, and so on — and we need a lot of capital there; others will go where the emissions are. They could be in a circumstance where their actual emissions relative to their balance sheet go up because they have moved from, say, funding the tech sector, which has relatively low emissions; to heavy industry like autos, steel, et cetera. The expected emission reduction of those activities, if they get them right, are enormous. We need as much of that, if not more of that, in this economy if we’re going to meet our climate goals.
The Chair: The consumer, then, the investor, has to pick an institution that has subscribed to whatever needs may be incentivized by government. But if you have to say, “This is what you must do,” then it takes my choice away as well?
Mr. Carney: Yes. Obviously, Canadians weigh things differently. Some will put a high weight on whether or not their insurance company, financial institution, whomever is part of the solution, is seen as growing their contribution to the transition. That’s why we need disclosure.
Last point — and it’s in my written submission, but I cross-referenced something called the Net-Zero Data Public Utility — this is an issue for Canada. All the major jurisdictions are part of this. All the major jurisdictions will have their major financial institutions report to this. Everybody else in major jurisdictions will have free, open source, real-time access to that information. We’re not yet part of that. We should be part of it. I can get us in; others can too. We should be part of that because Canadians deserve the information to make those decisions.
The Chair: Thank you very much for that.
Senator Galvez: We crossed paths in COP. Thank you so much. We received the Governor of the Bank of Canada who said that climate change poses a high risk to the financial system and to the Canadian economy. We then received the superintendent of OFSI who said that we are behind and that B-15 stops at disclosure.
Canada is warming up, on average, two to three times faster — the Arctic is five to seven times faster — than elsewhere. That’s why we are seeing extreme weather events that are more devastating, for example, forest fires. Given that we are putting most of our eggs in the financial system into fossil fuels; and given that the cost of extreme weather events is growing much faster than the GDP, what are the risks for Canada? What are the risks if we keep lagging behind our peers, including the U.S. with the IRA, the Inflation Reduction Act?
Mr. Carney: First, having been born in the North, I have seen, as others have, the larger devastation we get from being a northern country.
Second, in terms of our competitive position going forward, in fossil fuels — whatever type of fossil fuel — to be competitive going forward, you need to be low cost. That was always the case. You also need to be from a low-risk jurisdiction, in other words, a reliable supplier. You also need to be low carbon. I will refer to the earlier agreements with the Dubai agreement with 45% on gas. There is a plan to get low carbon out of the oil sands — the Pathways Alliance and others — but we need to execute that plan and make it work to have the access.
This is a massive opportunity for Canada. We are 85% clean energy, and we have the potential to grow it substantially. Embedded carbon — and I’ll refer to Mr. Podesta’s remarks and Mario Draghi’s remarks from three weeks ago as he said the same thing, as well as the European CBAM, or Carbon Border Adjustment Mechanism, trade arrangement — will be a determinant of trade access. We need to get our emissions down. Given our trading relationships, we can become the hub for this.
The Chair: I have got to stop you there. We are way over time here.
Senator Loffreda: Mr. Carney, according to a 2021 paper by the Bank of England titled Climate-related financial risk management and the role of capital requirements, the bank stated that the regulatory capital framework is not suitable for addressing the causes of climate change. Instead, the bank suggested that the capital should be used to address the consequences rather than the causes of climate change. What are your thoughts on the Bank of England’s conclusions?
Mr. Carney: I generally agree with that. How is that? I gave you back some time. I think that is right. The challenge is on risk management. I know this from overseeing the insurance industry and the catastrophe insurance industry as Governor of the Bank of England. Past is not a prologue. It is not like credit risk, where you look at consistent data and then you have a pretty good idea of what’s happening next because it’s moving. That’s why scenario analysis and other techniques, or stress testing, are required for climate-related risks. You marry that with the disclosure to make those judgments. In the existing capital regime which is judging actual risk — risk of loss, liquidity risk, and others — is fit for purpose.
[Translation]
Senator Gignac: You said you were in favour of more disclosure and stress testing. What’s the risk if we go further on a regulatory level and the U.S. doesn’t bring its policies in line with ours at the same time? Will it have unintended consequences? If so, how significant? Is it a risk for Canada to have a regulatory framework that differs from the U.S.’s?
Mr. Carney: Yes, it’s always a risk. Currently, California’s disclosure regulations are probably more stringent than Canada’s, so the opposite is actually happening.
Senator Gignac: That’s fine for disclosure, but would it be a bad idea to have different capital requirements?
[English]
Mr. Carney: Yes, for the capital requirement, but if we stress test and they don’t stress test, that’s a massive advantage for us. It wouldn’t be the first time that Canadian banks are better at managing risk than American banks.
The Chair: Thank you.
Senator Housakos: Mr. Carney, in March you met the president of China, a country that has one of the worst environmental records in the world; a country that has one of the worst labour standards in the world — human violations including forced labour camps. Yet Brookfield is one of the most substantial investors in China. Is that advice that you have given to Brookfield, namely, to invest in China rather than to invest here in Canada? What would be the reasons other than return on investment and violating some of these standards that are so important to us Canadians?
Mr. Carney: Well, the first thing, senator, is that Brookfield follows absolutely all the conventions of modern slavery, both in the U.K., which predates those in Canada, but obviously we have them here as well, and has very clear and effective on-the-ground policies to follow through the supply chains for the provision of clean energy technology, because China — as you may know, but just in case you don’t — is also the biggest supplier of many clean energy technologies as well as, far and away, the biggest investors in those on the ground in China.
We manage our supply chains very, very carefully — and I would add that out of Canada is our procurement expertise — as well as diversify, and we are one of the biggest investors in diversifying those supply chains out of China to other jurisdictions — North America — and we would love to diversify those investments to our home country, which is Canada.
The Chair: Thank you for that.
Senator Massicotte: You have a very high confidence level that the CCS is going to work, but you realize there is a lot of experience out there with disappointing results. Are you quite confident that it will work or is it yet to be proven?
Mr. Carney: It depends. It is not universally economic. It depends on the concentration of CO2 at source or greenhouse gases at source. Obviously, the more you have at source, the closer the reservoir is, the higher probability of economics and of success.
So, part of it depends. It is still a technology that — in general — requires some form of support. In other words, it is still early days and the innovation and economies of scale are being built out.
I would say the following: I have a high degree of confidence, senator, that Canada should make a very serious and determined effort which will require all levels of government — or at least federal and provincial governments — our financial sector and our major companies in order to try to make this work and work at scale, because it is necessary for the competitiveness of the oil sands, it will be necessary if we’re going to have a broader hydrogen industry, and it is highly advantageous for heavy industry if we can make it work. But there are no guarantees. And we have more work to do, which, again, if there is a theme — and I know you are pressed for time — we are all pressed for time on these issues. It is time to build. We need to get on with these issues. We need to stop debating these issues in the financial sector. We need to put things in place, and if we’re debating serious changes in climate policy, you had better have something better to replace something that’s being taken out.
The Chair: Thank you very much.
Senator C. Deacon: Thank you, Mr. Carney, for being with us. The only way we’re getting to solutions and start to make progress is to have well-regulated markets that enable capital to flow to projects that are working in a reliable way, and we have done that in mining in the past. We have done that in oil and gas in the past. Is there anything stopping — other than how we regulate these markets — Canada from being a leader in this space into the future?
Mr. Carney: With respect to the financial sector, I don’t think so. I think what is slowing us down is that we still don’t have the agreed-upon standards that we have been discussing for the last hour. I would go further. I think that Canada has enough experience and credibility that we shouldn’t be following these discussions. We should be leading these discussions. And if I just underscore, again — this committee knows it, but I’ll just reinforce it — the amount of respect and deserved respect that our major pension funds have globally because they are willing to take risks, they provide solutions and they need this information, and, candidly, they are getting this information and approaches elsewhere, and we should be supplying it domestically.
The Chair: I’m sorry for those of you who did not get the second round, but I am appreciative of how cooperative you were on this truncated meeting that we had. To you, Mr. Carney, thank you very much for your patience and for answering so concisely. That is it for this session. We will meet again tomorrow.
(The committee adjourned.)