THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, November 22, 2023
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 4:14 p.m. [ET] to examine 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 to everybody in the room and to those of you joining us online. Welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy.
My name is Pamela Wallin, and I will be serving as the chair of this committee. Let me now introduce the members of the committee: Senator Loffreda, Senator Bellemare, Senator Deacon, Nova Scotia, Senator Gignac, Senator Marshall, Senator Miville-Dechêne and Senator Petten. That is the group with us today.
We will begin our meeting today with the examination of Bill S-243, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts. On our first panel, we have the pleasure of welcoming today our colleague, Senator Galvez, who is the sponsor of this bill, and she is accompanied today by Ms. Karine Péloffy, Parliamentary and Legal Affairs Advisor, Office of the Honourable Senator Rosa Galvez; and Mr. Amr Addas, Adjunct Professor of Finance and Strategic Advisor for Sustainability at the John Molson School of Business, Concordia University.
We welcome you all. Thank you for joining us here.
Senator Galvez: Colleagues, I extend my gratitude to you and to Canadians following this debate for dedicating time to delve into S-243, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts.
Today, climate action, food security, energy transition, affordability, cybersecurity and healthcare stand as global risks demanding our immediate attention. Addressing climate change can positively influence five of these issues.
The potential damage inflicted upon the global economy by climate change over the next 50 years could soar to U.S. $178 trillion. In Canada, failure to plan for a smooth transition may result in U.S. $100 billion of stranded assets. The pertinent question for decision makers is not the cost of transition, but rather, whether the price of inaction is affordable. Nearly half of our GDP is linked to natural resources, ecological services and biodiversity. By the end of this century, the cost of our inaction could skyrocket to $5.5 trillion.
While predicting the occurrence of specific catastrophic extreme weather events on a balance sheet is radically uncertain, their inevitability is a certitude. Essential infrastructure is being destroyed, financially compromising all levels of government. Home insurance premiums are swelling in an increasing number of regions, while food prices spike. The cost of climate inaction surpasses our current affordability crisis.
However, we can create a better future. Swift and transformative action can avert major financial fallout. New economic models, such as the knowledge, care, digital, low-carbon and circular economies, are emerging globally. Our pension plans, insurers and bankers must have clarity, predictability and transparency to play a catalyzing role in this ongoing transformation.
Canada could lead in the race to Net Zero. We possess the assets to become a clean energy superpower, fostering sustainable development and creating an astonishing 2.2 million sustainable jobs by 2050. To live up to our potential, we need to provide clear guidance to the financial sector. Without it, we will continue to lose the much-needed capital to more forward-thinking trading partners like the U.S., the EU and China.
The numbers prove a reality we can no longer ignore: Transforming our economy to confront today’s climate change is the right thing to do; the economically rational thing to do. The U.K., the EU and the U.S. have issued clear policy and regulatory signals. While peer economies diversify and increase funding in clean sectors, we remain heavily invested in outdated industries and approaches that weaken our competitiveness and productivity.
Most climate-finance proposals focus on voluntary disclosures to identify and quantify the financial risks and opportunities for individual businesses. However, as a former Bank of England economist described it:
Just discussing risks, and assessing risks, does not mean we are actually transitioning to net zero. Many firms may discuss risks — and do exactly nothing to advance the transition.
The Climate Aligned Finance Act, or CAFA, represents an accountability and transparency framework guiding the financial sector through seven specific actions to mitigate climate inaction risks, unleash financial potential and report on progress toward climate commitments. CAFA is about driving action, the plans and the progress toward achieving decarbonization by making decisions based on the best available science and equity and by being mindful to conserve biodiversity and ecosystems, reduce pollution, maintain food security and reconcile with Indigenous peoples.
Beyond ordinary disclosure, CAFA is a comprehensive, structural, technology-agnostic policy that ensures capital flows in Canada’s financial system is fully aligned with climate commitments. CAFA results from collaboration with numerous national and international experts grounded in climate science, financial expertise and the best international regulatory and voluntary practices and is backed by more than 120 civil society groups, MPs from four parties in the Commons and a multitude of citizens yearning for a better tomorrow. CAFA is Senate sober second thought in action.
Presented to hundreds of experts in over 100 national or international events since 2022, CAFA is seen as the missing piece of policy that the financial sector needs to align its activities with a climate-safe future.
Colleagues, while we cannot alter the biological, physical or chemical laws governing our planet, we can, undoubtedly, amend federal laws to future proof our financial system for the prosperity of our generation and future generations.
Thank you for undertaking a rigorous, fair and open study of Bill S-243. I look forward to your questions that I will answer with the assistance of key collaborators joining me today.
Thank you.
The Chair: Thank you, Senator Galvez.
Senator Loffreda: Thank you, Senator Galvez, for being here. Several banks are working on implementing the climate-related disclosures developed by the Task Force on Climate-related Financial Disclosures, the TCFD. The financial system in Canada is building and incorporating multiple reporting frameworks with similar objectives that would benefit from harmonization. Wherever possible, these should be aligned with global reporting frameworks like the TCFD. Would this bill not lead to duplication or lack of harmonization?
Senator Galvez: Absolutely not because they are not using the same approach, nor looking at the same objective. What you referred to is mainly disclosure. As I said in my opening remarks, disclosure is assessing, quantifying, identifying risk and making it public, but it stops there. It doesn’t request, ask or demand that the banks remove their greenhouse gas emissions.
In fact, references abundantly say that while banks are pledging interesting net-zero commitments for 2050, up to now they have seldom given details as to how they will attain their targets. Maybe you want to complete this.
Karine Péloffy, Parliamentary and Legal Affairs Advisor, Office of the Honourable Senator Rosa Galvez, as an individual: We distributed our white paper. In the white paper, we tried to collect all the best information we could find on the topic. Also, you will find a report by the Transition Pathway Initiative who did an overview of 26 global banks and found disclosures were still partial and selective and only 35% had targets aligned with the 1.5-degree scenario. That’s global banks.
Canadian banks rank poorly compared to their peers. They all are in the bottom third of a Bloomberg New Energy Outlook report in terms of the ratio of how much they invest in fossil fuels versus renewable energy.
We know a Canadian bank is the world’s number one funder for fossil fuels. Maybe we have more to do than the rest of the world. As Senator Galvez said, our approach is different. We try to focus only on decision-useful information for humanity, which is what you are doing to align with the only scenario where the climate remains stable enough for civilizations to remain.
Senator Loffreda: How large is the climate-related financial risk due to Canada’s current banking rules, which is mostly unaccounted for externality today? And what type of approach does Bill S-243 utilize to address the climate-related financial risks?
Senator Galvez: The banks are having difficulty internalizing their externalities. This is pollution like greenhouse gas emissions but it is also the tailing ponds and methane. Any pollution is externality.
Right now, by partially collecting disclosures, we are at the level of collecting data. With climate-related risk, the issue is that we need to look forward. There is no historical data that will allow us to predict and to find a trend that tells us exactly what risks we are facing.
It’s interesting to think that you have the physical risk and you have the transition risk, so you have different scenarios. According to several organizations, right now Canada, based on its national determined contributions and based on the current policies that are in place today, we are heading to a hothouse scenario. The risk is very high.
There are multiple factors that are not accounted for, especially in the transition risk, which implies changing technology, changing risk to reputation, changing regulations and legislation, and stranded assets. It is very difficult to model how much of it is the climate-related risk, but we are already feeling it because every year there is a certitude that we are going to have extreme-weather events that are going to destroy infrastructure before the end of their lifetime.
Senator Marshall: Thank you, especially to Senator Galvez, my colleague, and Ms. Péloffy and Mr. Addas.
I found the bill to be quite complex. My first question is very general in nature. I’d like to know if there were any type of consultation process with the organizations that are going to be impacted.
But before you answer that question, I notice going through the bill that there are deadlines established for the reports and the guidelines, et cetera. As you know, Senator Galvez, I’m always asking Senator Gold when I’m going to get a certain report because it’s due by a certain deadline. And it seemed like some of the deadlines are very tight. For example, there is one on page 22 that says you have 20 sitting days after receiving the report, the report must be tabled. I know that the Public Accounts of Canada have never met that 20-day time frame. And another one, 60 days after the financial year climate commitments alignment report must be prepared. So 60 days didn’t seem like a lot of time.
Can you just talk about the consultation process and how you came up with the time frames that are established in the legislation?
Senator Galvez: I will address the question of the timeline and I will ask Professor Addas to explain the process of consultation.
As you know, the government is always late procuring the reports that we need. We felt that it was important, because of the urgency of the situation, that we keep a short time for them to really feel the pressure. But, of course, those are timelines that are proposed. If you feel that there is something that is completely not reasonable, it is not realistic. But what I can say is these reports are expected from the entities. It’s not really from the government, but it’s from the entities. The entities are the banks, the businesses, the pension and the insurance. They are very much accustomed to these annual reports and this reporting.
Senator Marshall: I thought that a number of the time frames there were unrealistic, relative to the government’s performance to date. Since there are legislative requirements, I agreed with you to put the pressure on them, but based on their past performance, I don’t think they will be able to meet the deadlines there.
Mr. Addas, if you will talk about the consultation process, I’d be interested in hearing what the organizations said with regard to the preparation of these guidelines and the preparation of the reports and whether they felt there was sufficient time to prepare some very comprehensive documents.
Amr Addas, Professor and Strategic Advisor for Sustainability, Concordia University: Thank you, Senator Marshall, for the question. We did several rounds of consultation early last year with members of the financial industry, people from pension funds, asset managers from banks and also from the academic side. I know that Senator Galvez also had some consultations with regulators here in Canada and a conversation with the Bank of Canada.
I do not believe we specifically addressed the timeline issue within those consultations. It was mostly about the content of the bill and how we can make it more palatable and digestible to the investment industry.
Senator Marshall: Was there any comment on the complexity of the legislation and the requirements that are embedded in the legislation?
Mr. Addas: There were some comments, of course, on the complexity, but the nature of the task at hand requires complexity. Dealing with climate change is a whole-of-economy approach and requires that we address this. It cannot be done in a very simple manner.
Senator Marshall: It just seemed that if corporations are given six months to get in their audited financial statements and reports on this legislation are required within two months, it seems like it might be a tight fit there.
Senator Petten: When I reviewed the bill, I didn’t see a reference to wildfires. Was that an oversight? Is there a reason why that’s not included in part of your clause?
Senator Galvez: I don’t know where to start to tell you the issue with that. Actually, wildfires are happening for, it seems, many years now. The number remains the same, but what has changed in the last couple of years is not only the amount of surface that gets burned but also the intensity, the temperatures that the fires attain.
Full disclosure, my daughter works for SOPFEU and she was explaining to me that the intensity levels of the fires since last year are going straight to category 5. In category 5, they don’t even look to stop the fire. The worry is just evacuation.
For sure, this is another climate-related risk that is rising very fast. It comes and confirms the fact that climate change is accelerating and that there are compounding factors that are not accounted for in the normal and traditional models.
Senator Petten: So it was intentionally left off?
Ms. Péloffy: Yes. In the white paper, we talk a lot about the wildfires that happened this year. It’s definitely one of the key physical risks that we seek to avoid by mandating rapid and ambitious action. We do take it into account, I hope, in defining climate commitments. In Bill S-243, the section on definitions of climate commitments, subclause (e), states:
. . . enhancement of the capacity to adapt and reduce vulnerability to actual and expected impacts of climate change . . . .
We definitely want to include adaptation in what needs to be in the minds of financial institutions and reporting entities when they make plans.
[Translation]
Senator Gignac: I want to congratulate my colleague Senator Galvez for her involvement and leadership in the fight against climate change.
I want to continue in the same vein as my colleague Senator Loffreda on the Office of the Superintendent of Financial Institutions. We know that guidelines were issued this past March. I heard your answer. Your bill will apply only to Canadian financial institutions; that’s normal. Don’t you think the right source is not really being addressed?
I will explain what I mean. Financial institutions are financial intermediaries. Therefore, if too many constraints are imposed on banks with caps, fossil fuel oil and gas companies in Canada will end up getting financing through the big Wall Street firms, including J.P. Morgan. Ultimately, we won’t necessarily achieve the desired result without convergence, harmonization between the major industrialized countries and these financial intermediaries.
Our financial transactions are not subject to GST, and there’s a good reason for that. Are they intermediaries? I understand the objective, but the Office of the Superintendent of Financial Institutions is already involved in risk measurement. Don’t you think there’s a danger that all this will shift financing to Wall Street banks?
Senator Galvez: Thank you very much for the question. It’s very insightful. I have some nuances to make regarding your assumptions.
One of our consultations enabled us to speak with central banks elsewhere in Europe, as well as with parliamentarians in the United States, including those responsible for the Inflation Reduction Act and the Jumpstart Our Business Startups Act. We also spoke with the Inter-American Development Bank, the Asian Development Bank or the International Monetary Fund, and all these banks are moving towards the Paris Agreement, to limit global warming to 1.5 °C by 2050.
You say the Canadian oil companies will look for money. I can show you an exclusion tracking record, which is a worldwide initiative listing the companies that will no longer be able to seek financing from the same major banks you mentioned. I don’t want to name them, but four of our oil companies are on that list. What are the concerns? They include activities contributing to climate change, against human rights, for the promotion of cyberterrorism, and so on. There are global organizations that have helped draw up a list of high-risk companies.
Senator Gignac: From the outset, you said in your opening remarks that Canadian banks are, proportionately speaking, much more involved in corporate financing or in the fossil fuel industry. Canadian banks are a reflection of the Canadian economy. Canada is an exporter of natural resources. Don’t you think it’s a bit hasty to demand that this be implemented after just one year? We’re also talking about emissions from cement plants, the steel industry, and so on. One year is a very short time to adapt. Is there any flexibility on your side in terms of a longer time frame?
Senator Galvez: Absolutely.
[English]
Mr. Addas: Thank you. I’ll just say a few comments quickly because I know we’re on a tight deadline. The European Banking Authority has recommended that European banks assign capital charges for lending to heavy-carbon-emitting sectors. There is $43 trillion of capital committed to divesting from fossil fuels. There is an estimate of $100 billion of stranded assets by 2026 for Canadian banks by lending to heavy-carbon emitters. Ultimately, that becomes a risk to the banking sector and potentially to taxpayers as well.
Senator C. Deacon: Thank you very much, Senator Galvez and team, for being here.
I want to focus on Part 3 of the capital adequacy side. It builds off what you were just saying.
The Office of the Superintendent of Financial Institutions, or OSFI, did a project with the Bank of Canada, I think, several years ago that identified that moving slowly in addressing climate risk is far more disruptive to the economy and far more costly to the economy than moving swiftly. I align entirely — and I think OSFI aligns entirely — with your objective here.
I wanted to focus on the one thing that was in the Fall Economic Statement about trying to get better reporting. I think the section was “Sustainable Finance Action.” The complexity of the bill, as you and I have said, I have found it hard to sell something that was a much simpler idea — that’s taken me four years in open banking.
I’m wondering about the extent to which the same principles could be applied through OSFI, because they’re working hard to try and quantify risk, but the detailed data from each of their clients on each of their risks are necessary to start to manage this at a higher level.
There are challenges around that. We’re still getting there, and we need to get there faster. I’m not debating that for a second. That will drive the market away from these investments. If you’re having to have more capital assigned in the bank to a less productive asset, you’re going to be moving to more productive assets, right?
The objective I agree with entirely, but the data isn’t there yet. Shouldn’t we be focusing more of our attention on something that is, perhaps, more achievable, which is in the Fall Economic Statement? But we know how slow it is to get things done, which is getting better information that the regulators can push through existing structures.
Senator Galvez: We can talk about OSFI’s Guideline B-15 on Climate Risk Management, and we’re going to talk about taxonomy. Ms. Péloffy will start.
Ms. Péloffy: It is great to see OSFI moving in that direction this year. I would note the Commissioner of the Environment and Sustainable Development said that not enough was being done. It’s not using capital requirements as a tool, and it’s doing nothing to incentivize a transition to a low-carbon economy, which is the main proposition of our bill, that the simplest way to minimize the risk that climate poses to the financial system is to minimize the risk that the financial system is posing to the climate. That’s our main proposition.
Yes, we did consider whether we could just put lower capital requirements for green technologies or things like that, but they could default on their payments just as much. I think the bulk of the intellectual work done behind it is to increase capital risk for what we know with certainty is dangerous, and that will redirect capital flows toward less dangerous things, hopefully.
Senator C. Deacon: But the underlying data still isn’t there on a consistent basis across the clients of the banks. Is there not a faster way for us just to focus on making sure those data are there, and Guideline B-15 at OSFI is a tighter, tougher rule?
I’m looking at where we focus our attention.
Mr. Addas: Guideline B-15 is a wonderful guideline. I think the consensus within the industry is that it’s a very encouraging step forward.
The deadlines within Guideline B-15 and the timeline is that Scope 3 is delayed by one year versus everything else. We’re quickly exhausting our carbon budget globally and, obviously, in Canada as well. I think the risk is that we need something to spur the acceleration of this process; whereas, the OSFI guidelines will take five years to have measurable data before we can act on that data.
[Translation]
Senator Bellemare: Good afternoon and thank you for being here. I congratulate you on this effort. I, too, find it complex. To help us understand a little better, let’s project ourselves into the future and say that your bill has been passed. What happens tomorrow morning? Who takes control of this bill? How will this bill be implemented?
Senator Galvez: I will ask my colleague to answer.
Ms. Péloffy: We must dream big! Nothing would happen tomorrow morning, as we’ve delayed implementation by a year to give everyone time to get organized. In the meantime, we hope that the Minister of the Environment, with the advice of the Net-Zero Advisory Body, NZAB, will prepare tools to help everyone comply with the disclosure requirements. It is hoped that they will make an order to define negligible emissions to exempt a wide range of small businesses, so that it is not too difficult for them to comply with this legislation.
The Office of the Superintendent of Financial Institutions, OSFI, will work on new guidelines on capital requirements. It already requires transition plans, but the requirements will now be a little more stringent. We’re going to give them a little more time to establish capital adequacy guidelines because we recognize that it’s a complicated subject. Otherwise, the rest of the world has a year to get organized, so that the bureaucracy would become more effective in dealing with the climate emergency.
Senator Bellemare: What are the “teeth” in this legislation should someone fail to comply?
Senator Galvez: We’re senators. We have to be very creative. We don’t have any carrots or sticks to offer. However, with an improved toolbox, OSFI will be able to impose sanctions or penalties. At some point, a discussion will be held with the government; it could drop the taxonomy, which is different in our bill. In taxonomy, there are winners and losers; our bill is agnostic. If you prove you’re going in the right direction, that’s fine, but taxonomy can lead to saying, “Here are some very green projects.” There will be carrots for them, but these are transitions.
Senator Bellemare: I’m sympathetic to the objectives of the bill, but I’m not sure it belongs in the Senate. I think this kind of bill is much more about the executive, about governments, about bureaucracy. Even if there are no costs attached to it, it’s not a primarily legislative bill. There’s a very strong link with execution, with the executive. My question pertains to that. Have you approached a minister? The government would have —
Senator Galvez: That’s a very worthwhile question. Precisely, the arguments I heard were that you need someone neutral and independent who can impose fair rules, which help select a project based on transparency, clarity and the absence of conflict of interest. This is quite the opposite of what a government normally does by picking winners and losers, as we’ve just discussed with regard to any project approved in this or that province.
We are trying to be as neutral as possible. We want to be a guide to explain the process, the up-to-date science and technological advances that are at scale and working today, and also to create a plan to report on the progress we’re making in reducing greenhouse gases — not just on risk diagnostics, but also on progress — to determine how much progress has been made compared with the previous year in terms of emissions.
Senator Miville-Dechêne: Welcome, Senator Galvez. Thank you for your ambition. I was looking at subclause 6(3)(b). My understanding is that climate alignment plans cannot rely on future technological innovations or carbon capture and storage systems.
However, it seems to me that these technological innovations, and carbon capture in particular, are at the heart of the Canadian oil industry’s greenhouse gas emission reduction strategies.
So, is this realistic? Does this mean that, since all oil companies are capturing carbon, it shouldn’t be considered? Why should these technological improvements be specifically excluded from future investments?
Senator Galvez: That’s what works right now, and it can continue to work; we have nothing against it. If it works, wonderful, and we will support it. The problem for us lies in the promise of much more advanced technologies that are in the labs, that are small scale and still need a lot of time to be developed. Why? It’s because of the urgent need to reduce our emissions. There are several projects we’re hearing about. As an engineer and scientist, I look at all that, and there are plenty of ideas. That said, however, some of them are too costly and it could take 20 or 30 years before the price comes down.
There’s also the legislation issue: The laws state that we can use them, but if they don’t work, we face a liability issue. Then there’s the question of carbon: It gets captured, but then it has to be moved somewhere. So we need infrastructure. Who will pay for the new pipelines? Where will the carbon be sent? Will it be on land belonging to Indigenous peoples? Will permission have to be sought? Carbon will have to be moved. There’s a lot of uncertainty. We want to work on what’s real, what’s here, what’s proven to work.
Ms. Péloffy: I’d like to add something. We can’t rely on future promises to maintain or increase oil and gas production, but it’s allowed for all other sectors. We recognize that cement plants are struggling and that there are industrial sectors where it’s very difficult to decarbonize. For them, carbon capture remains a possibility to meet reduction targets, but we’re asking them to demonstrate that they are putting effort into keeping their promises. We’re seeing a lot of empty promises at the moment that certain technologies will exist one day, and that they can therefore continue to emit carbon today. It’s very dangerous to do that.
Senator Miville-Dechêne: How can all that be verified? I hear you, and this is quite complex. Who can verify that the right technologies, those that are effective and proven, are actually being used in investments? We’ve reached a certain level, given all the tools available to us in general.
Senator Galvez: That’s why the greenhouse gas progress report is very important; it shows the reality of things. What counts is reducing greenhouse gas emissions. If we’re not seeing any reduction, it means that the technology used isn’t effective or it needs more work. On the other hand, there are many organizations today whose job is precisely to check into these things.
Senator Miville-Dechêne: Thank you.
[English]
Senator Martin: Senator Galvez, I agree with some of my colleagues about their comments on the complexity of the bill. I’m not an expert in this area.
I was just curious, what would be the expected cost for the federal government to implement this bill? I know you said it will take about a year in order to have this ready for implementation. Have you thought about the cost that it would take?
Senator Galvez: What we have been told is that the things that we request from the different government levels, it’s within their mandate. For example, what we asked OSFI to do is within the mandate of OSFI. Maybe there are costs associated with that, but it’s within what they have to do.
The entities who will be having to make this report, they already make annual reports that are presented to their shareholders and they are already preparing for Guideline B-15, which is a requirement from OSFI, to disclose their risk. There is already big infrastructure that is being constructed there, assistance.
As Ms. Péloffy mentioned, the government has the Net-Zero Advisory Body that is also within its mandate to bring these guides to guide industries in their plan to reduce their greenhouse gas emissions.
I want to mention something about being complex. We should be proud that we have a complex project in the Senate because one of our duties is to take some subjects that the other house cannot look at in detail. We, the Senate, have the duty to be the sober second thought and to dive into the details of complex issues and try to understand them. Complexity could be seen as not a bad thing, but it should be seen as a point of interest, provoking debate, and educating, raising, and elevating the importance of the subject at hand.
Senator Martin: I’m not suggesting that complexity is bad. It’s more in terms of implementing this bill, what the cost will be to the Crown. As you know, a Senate bill cannot have that impact. I was wondering about whether a Royal Recommendation may be required if that’s something you have thoroughly looked into.
Senator Galvez: Yes, we have. We have asked all these questions.
Ms. Péloffy: I’m here because I was the lucky person who took the expert advice and talked to the law clerk. I’m a lawyer by profession and this was one of the key restrictions in mind, to never incur costs to the Crown, but we were told we could ask the Crown to do more than what they already have. We’re telling OSFI they can use their existing powers and duties to do this, so we’re not incurring a direct cost to the Crown.
I would flip the question. If we don’t do anything, what are the costs? What are the key assumptions about time, scale and what you put in the model, but some have estimated that the cost to the Canadian economy if we do nothing is $5.5 trillion by the end of the century. Every other cost of compliance pales in comparison to that.
Senator Martin: With regard to the reporting entities under the bill, what types of challenges would businesses — and, in particular, small businesses — face in trying to comply with the regulation?
Mr. Addas: If I may elaborate on what Ms. Péloffy said in terms of the costs of inaction, that was a study from the Institute for Sustainable Finance at Queen’s University that estimated $5.5 trillion by the end of the century for Canada’s economy.
In terms of small businesses, as you mentioned, the impact of climate change is something that will affect the whole economy, all sectors of the economy. Every business in the economy has to manage their exposure to climate change.
It’s important for us to emphasize that it’s not only risks and challenges, but it also presents tremendous opportunities to transition to a low-carbon economy.
Senator Martin: I’m talking about small businesses that are already stretched. There is a lot of demand from all levels of government. What sorts of challenges will be experienced by the small businesses to comply?
Senator Galvez: Entities are divided — they’re negligible emissions and non-negligible. It’s the government who will decide. If they have negligible emissions, they won’t be required to do these reports.
Senator Yussuff: Good to see you on the hot seat. Thank you for all your work and more importantly on the climate file in general. Equally, I agree with my colleagues. You read the bill and have an understanding of some of these issues which I have been dabbling in, whether it is Net-Zero Advisory Body or transition of coal to electricity. These are complex issues, but they require solutions, to be frank about it.
The bill touches on a number of things that are very important in the context of how we can take a look at how we meet our climate change objective by 2030 and 2050, because there are two targets, not just one target.
The Office of the Superintendent of Financial Institutions, in the context of regulation of the banks, has an important role, and it should be acknowledged that they are doing things. It’s not like they are not doing anything. The question and pace — we could argue how fast could they go, and more importantly, what they need to do.
But given what the bill is trying to achieve, it is important to note that it has different impacts on regional parts of the economy in Canada versus some other parts of the country. The oil and gas sector will be heavily impacted by this bill because the reality is that it’s in the West, and more importantly, that’s reality. There are also jobs linked to that, and we can have a debate about transition.
In that context, given that there is not an impact study as to what the impact might be on that part of the economy, do you think it’s necessary for us to have, at least, an understanding of that, because this will impact workers and provincial economies on a large scale, and it has an overall impact on the tax base for the country?
How do we measure some of those things, because there are many entities that want to know? The final point that I would like to conclude with, which is a concern of mine, is on pension plans. There are some requirements here to look at, and each pension plan has different oversight and guidelines as to how they’re managed. You’re making some very important observations about what pension plans could or should be doing, starting with the Canada Pension Plan. How do we achieve that, given that they have their own oversight and are already trying to figure out their issues on their own without any kind of direction such as that which the bill provides?
Senator Galvez: I will start with the pension plans and will leave my colleagues to answer your first question. It is interesting because when I have talked to managers of pension plans, they have told me what the partition of their investment is inside and outside Canada. It is very interesting to see that our pension plans invest in China and around the world; they own highways in Mexico and have offices all over the world. Here in Canada, the investment is not diversified. Here in Canada, the investment is mainly in oil and gas. When you ask them why that is, they say it is because of the lack of regulations, clarity and signals regarding where the economy of Canada is going. This is what they have told me. I won’t say any names, but it’s interesting.
It’s very rare to see a sector that says, please implement some guidelines and regulations, but that is what they are doing. They are saying, we need to know where Canada is going, and that’s because they are already feeling the pressure coming from our trading partners I mentioned — the U.S., Europe and even China. We especially have to change that with respect to pension plans.
The other thing about pension plans is that they represent a long-term vision because workers are going to collect their pensions in 30 years. Therefore, they should be prioritized over short-term revenue. They are saying, we have this potential, but we cannot diversify because of all the uncertainties around this.
Mr. Addas: Very quickly, there is a study from Clean Energy Canada showing that 2.2 million sustainable jobs can be created in Canada through the development of the clean energy sector. It is also important to highlight the cost of inaction. The longer we do not address these challenges, the bigger the cost for all aspects of the country in all regions within Canada. So, it is the opportunity aspect that we should focus on.
The Chair: Before we begin our second round, I would just like to say that I’m listening to the comments, and you’ve got some figures on the cost of inaction or what you believe that will be. But to Senator Yussuff’s and Senator Bellemare’s point, we need some numbers on what the impact of doing this will be, particularly the regional impacts. I was a little concerned by your opening remarks, in which you said that climate action is more important than the affordability crisis and that legislation should supersede economic and public interest. It is our job to make sure that legislation is in the interest of the Canadian public. That is who we serve. So I’m just suggesting that is something you may want to think about.
Senator Loffreda: Senator Galvez, thank you to you and your team for being here and for your work. Climate change is concerning to all of us. You mentioned a few times the idea of doing nothing and the cost of doing nothing, but I want to stress a point, and it is an important point. Canadian banks have proven to be among the best risk managers in the world. They have proven to be that. Canadian banks take their role very seriously in the fight against climate change and are engaged with regulators, the federal government and global climate risk initiatives. You mention independence, but the Bank of Canada is independent and OSFI is independent. There are many global regulators and institutions that are independent. We are not the only ones who are independent. My question is about the fact that the objectives laid out in the bill are already on their way to being achieved through other means. I can supply a list, and you know we’ve discussed this personally. I’ve discussed this issue with the banks, and as you know, I have spent a lifetime in banking.
Don’t you feel harmonization is needed to ensure a global set of standards for all financial institutions? Isn’t further guidance unnecessary and could it lead to fragmentation and unintended consequences? I think the chair is going to stop me if I start going into the unintended consequences, so I will abstain from that. I can go further. It will adversely affect and impact certain parts of Canada. Many Canadians will be immediately and drastically affected, and we’re here for all Canadians, not just the people we represent. I’ll end with this: the Paris Agreement also supports a just transition. I have believed in climate change — you know that — from the very beginning. But this is my question to you.
Mr. Addas: I think just transition is a very important word to mention here, and it applies to preparing our economy for the 21st century rather than focusing on what has worked over the past few decades in this economy. There are studies from a number of institutions that conclude that Canada’s banks are not in great shape and that they’re overexposed. Again, $100 billion of potential —
Senator Loffreda: Where is the proof? They’re the best risk managers in the world. Who are we to tell them how to manage risk?
Mr. Addas: They are the best risk managers in the world for the issues and challenges they have faced in the past. Climate change hasn’t yet manifested, so nobody has really seen it. You can only rely on future projections about how it’s going to impact the economy.
Senator Loffreda: I can give you many reports I have received from every bank on climate change, and how they manage the risk. I have them and can furnish you with them. They’re very active in managing their risk.
Senator Petten: My question is: To what degree are the current lending reporting practices of banks in line with your bill or at odds with it? Can you review a little bit of that?
Mr. Addas: Right now, there is, of course, no mandatory disclosure except when OSFI comes into force, and, as I mentioned earlier, it will take some time for the full content of that disclosure to become available. So the banks at this moment are reporting some of their exposure. The biggest challenge that they face — and I understand, of course, that it is not easy — is scope 3 emissions, which is ultimately what matters for banks; not their direct emissions or their scope 2 emissions, but where the money goes and the carbon emissions associated with that. I think that’s the biggest challenge that’s not aligned right now.
Senator C. Deacon: Thank you for the work that you’ve done. I want to go to part 4, appointments, conflicts of interest and duties. I think that with regard to the suggestion of appointments, governance is key, and you don’t know what you don’t know. So having people that are qualified in terms of climate expertise and actions that are necessary, I think, is really a — I like that section.
How do you see that flowing into the financial institutions themselves, the regulated entities? We’ve dealt with this in other ways in terms of getting boards to demonstrate greater levels of diversity. It’s a practice that we’ve started to adopt to get better governance. Just explain how you see that flowing out a little bit more than maybe is shown in the description.
Senator Galvez: We came to information during our consultations that was a surprise for us — the fact that you can put 500 people in a room, people who sit on the boards of banks, pension plans and petroleum companies. To be very honest, I didn’t know this.
Since then, we have come into knowledge of several reports that put all of this into statistics. You are right. Governance is very important. Sometimes it explains why things are not moving. We will give some time. It is not coming into force right away.
The other issue with respect to that point of conflict of interest is the expertise. Sure, I have talked to banks. For sure they are very strong on risk. But a big question is this: If you were the worst predictor of crises, what happened in 2008? Why didn’t you see that? We can go to the past and look at that.
Senator C. Deacon: Have you seen this done elsewhere in other parts of the world?
Senator Galvez: Yes.
Senator C. Deacon: Thank you.
[Translation]
Senator Miville-Dechêne: I’d like you to speak briefly about conflicts of interest. In your bill, why did you feel it was essential to talk about boards of directors and the risk of conflict of interest, which must be mitigated?
Senator Galvez: When you travel abroad and visit other jurisdictions, you can clearly see that in Canada, the oil and gas industry lobbying issue is much bigger than the effect it has on the economy. We’re talking about 4% of our GDP, but the influence it has on the whole is disproportionate. When you take a closer look, you realize that some people sit on the board of directors and on another board at the same time. How do you split yourself up, how do you wear different hats when you sit on the board of directors of an oil company, a bank and a pension fund?
Senator Miville-Dechêne: That’s happening?
Senator Galvez: Of course it is. We wrote a lot about it in our white paper; we included the references, it’s common knowledge.
Senator Bellemare: Which countries have adopted these practices? You said there were some. Do you have proof that it’s effective compared to other alternative strategies?
Senator Galvez: We can already look to Desjardins, for example, which is quite advanced when it comes to aligning itself with the Paris Agreement. There are a lot of examples in Europe; some countries are doing it on their own, but there’s also the European Union.
Senator Bellemare: Which countries? Do they have national strategies?
Senator Galvez: For example, England changed the mandate of the Bank of England to account for climate concerns.
Senator Bellemare: Do they have a reporting system, as required in—
Senator Galvez: Of course not. We’ve taken the best practices from everything we’ve seen and made our own ideas that we’ve borrowed from different countries in Europe and the United States. If you look at the legislation in California, it contains—
[English]
Senator Yussuff: Very briefly, OSFI, again, is the regulator, the Office of the Superintendent of Financial Institutions. With some confidence, they have been doing things and addressing the arguments that you’re making, saying we need to do a better job with our overview and oversight of banks. Should they move ahead with additional regulations or recommendations? How do you see this affecting our bill? Where should we put our efforts?
The Chair: That’s very complicated.
Senator Galvez: Net zero is a race. We want to be there first. They have the time and the tools to go. If they are not going, then we will go.
Senator Yussuff: Thank you.
The Chair: Senator Galvez, Mr. Addas and Ms. Péloffy, thank you very much for being here today.
Senators, for our second panel, we have the pleasure of welcoming from the Canadian Bankers Association, Darren Hannah, Senior Vice President, Financial Stability & Banking Policy, and Bryan Radeczy, Director, Financial Stability.
Thank you both for joining us. You’ve heard the earlier testimony. We will hear your opening statement and then return to questions from senators.
Darren Hannah, Senior Vice President, Canadian Bankers Association: Thank you for inviting the Canadian Bankers Association to appear this afternoon to participate in the committee’s review of Bill S-243.
Climate change is a critical issue of our time, and banks in Canada are committed to doing their part to address it. Banks understand that the financial sector is central to securing an orderly transition to a low-carbon economy while also ensuring the continued resilience of our country’s financial system. Canada’s banks have climate action plans that set specific targets to meet the demands of energy transition. This includes working with clients across industries to help them decarbonize and pursue energy transition opportunities.
By financing climate transition, banks are helping Canada meet its net-zero ambitions while also helping society meet interim energy demands in a volatile global context. Our six largest banks have also participated in the federal government’s Sustainable Finance Action Council, which has made considerable progress toward developing a taxonomy which is foundational to building a sustainable finance marketplace.
I want to take a moment to provide clear and accurate information about the amount of bank credit extended to the non-renewable energy sector. Total credits outstanding to non-renewable energy-related firms or related services represent 5.3% of Canadian bank business credit outstanding, down from 6.1% in 2017. If I broaden the aperture further to include the entire lending book — both personal and commercial — credits outstanding to these firms represents less than 2% of total credit outstanding.
While banks’ capital market subsidiaries are active in underwriting securities and corporate debt issuance in the energy space — and these are often the figures you see referenced publicly — this is very different from actual bank credit.
This brings us to Bill S-243. We are not supportive of the bill. While we are broadly supportive of the objective of ensuring that climate risks are properly captured in financial institutions’ risk modelling and that investors are given sufficient information to make informed choices about exposures, this bill will, unfortunately, not accomplish that objective.
In the area of capital, the bill calls for the Office of the Superintendent of Financial Institutions, or OSFI, to develop new guidelines for capital adequacy in respect of climate commitments for financial institutions, including the highest-risk weight of 1,250% for any long bond or derivative exposure to new fossil fuel resources or infrastructure, as well as 150% or more for credit to any firm with a nexus of connection to non-renewable energy.
Let me be clear on what that means in practice: At a minimum 8% capital requirement, a 1,250% risk weight means that for every dollar invested in an energy-related exposure, a bank must raise one dollar in equity. Put another way, this is a de facto ban on lending to the energy sector.
At present, the only investments that attract this risk weight are speculative venture capital equity investments and cryptocurrencies. In effect, a 1,250% risk weight is the regulator’s way of saying, “Treat the investment as an immediate write-off with zero cash flow and zero value.” That is simply wrong. It is also fundamentally unfair to the thousands of Canadians who work in the energy sector and the energy companies that are building transition paths to a low-carbon future. They deserve the opportunity to be supported on that journey.
This would ultimately increase costs for most Canadians that rely on their vehicle for day-to-day needs or many who rely on hydrocarbon fuels to heat their homes, even with no transition plan. This bill will limit the tremendous amounts of capital that will be required for a transition. It is telling and instructive that the European Parliament reviewed and rejected the very same proposal earlier this year.
Informed work is being done on capital requirements to manage climate-related risk. OSFI has issued Guideline B-15 on Climate Risk Management and is introducing climate-related risk returns and a standardized climate scenario exercise for federally regulated financial institutions. The regulators deserve an opportunity to complete their work and make informed decisions about the value at risk, the likely time horizons and how to manage those risks.
In the area of reporting, Bill S-243 calls for a climate commitments alignment report with various requirements. This is duplicative of what is already being undertaken. Under OSFI Guideline B-15, all federally regulated deposit-taking institutions will be required to disclose their greenhouse gas emissions, targets, performance against those targets and any public commitments.
Moreover, the six largest Canadian banks are members of the Net-Zero Banking Alliance and already prepare annual climate and sustainability reports with detailed requirements, such as emissions, targets and progress toward achieving those targets. Investors are looking for international comparability in disclosures to facilitate comparability.
More generally, I am unaware of any other piece of legislation in Canada that seeks to override the authority of the regulator to specify risk weights in law.
For these reasons, we do not support Bill S-243. This legislation, while well intended, would work against the progress that is under way both internationally and domestically to tackle climate change in a phased manner, complicates an already crowded space in the area of reporting and sets a dangerous precedent by legislating risk weights.
The Chair: Thank you very much for those opening remarks.
Senator Loffreda: Thank you for being here.
You did mention climate change is a critical issue, and we, along with the banks, are committed to fighting it. All the banks have climate action plans, and they do take their roles seriously.
Can you further elaborate on why you feel harmonization is needed to ensure a global set of standards for all financial institutions, and why further guidance is unnecessary and can lead to fragmentation and unintended consequences?
I brought that up, if you heard me in the previous panel, and one of my colleagues already asked me, “Could you give me those unintended consequences and get back to me with the statements you have made?”
Maybe if you could answer us in a few minutes. If not, get back to us with what those unintended consequences are.
I have a short supplemental after.
Mr. Hannah: I’ll take them in reverse order. I’ll talk a bit about the unintended consequences, and then I will have my colleague Bryan Radeczy talk about the value of harmonized reporting.
Unintended consequences. It’s telling that this is why, ultimately, the European Banking Authority recommended against this in Europe, because of the unintended consequences. The challenge is that you’re applying risk weights in a way that they were never intended to be applied, and they’re capturing things in ways that were never intended to be captured.
A gas station is a great example. It’s energy infrastructure that we all understand. A lot of them are being built right now, because they’re transitioning. They’re moving to bring in charging stations to meet new demand.
If they’re a small business of between 75% — perhaps 100%, depending on exactly the nature of the size — under this bill, new energy infrastructure, that would be 1,250%.
What would that mean for that borrower? Well, if they could get credit — and at 1,250%, I’m pretty sure nothing would ever happen, because that would be uneconomic for the borrower and probably for the lender, too — theoretically, if they could, and if they had, say, a $5 million loan, which is not unusual for a gas station, their interest costs would go up by roughly $300,000 a year, which means chances are the thing never gets built to begin with. The irony is that the charging stations don’t get built either to finance the transition.
Another interesting example is natural gas lines. There is a lot of discussion and concern, obviously, about housing development and the need for more and better affordable housing. Under this particular piece of legislation, the natural gas line would represent new energy infrastructure. It would attract a 1,250% risk weight, which effectively means the bank cannot actually use any deposit funding to fund the loan, which, de facto, means the bank can’t actually provide lending for the natural gas line to extend it out.
These are the sorts of unintended consequences you go into pretty quickly when you start trying to legislate the risk weights this way.
Mr. Radeczy, do you want to talk briefly about reporting and harmonization?
Bryan Radeczy, Director, Canadian Bankers Association: Sure. Thank you, Mr. Hannah.
So on harmonization, I guess it would start with the Task Force on Climate-Related Financial Disclosures, or TCFD. They actually published their final report in 2017. Many of our largest banks have already been implementing those disclosures in the areas of governance, risk management, strategy, metrics and targets.
In terms of harmonization, OSFI is now embedding those TCFD disclosures in Guideline B-15, which has been mentioned already, again, trying to avoid duplication in terms of reporting.
Then the International Sustainability Standards Board, or ISSB, released their final rules in June of this year, and they’re also based on those same TCFD recommendations. We expect OSFI to be looking at the ISSB standards as well as considering what else they might want to implement in Guideline B-15.
I guess there is an example there in terms of harmonization. Using the TCFD as a starting point, which was voluntary and is being mandated in Guideline B-15 by OSFI — and similarly the ISSB standards are centred around the TCFD.
The Basel Committee on Banking Supervision also released climate principles, and OSFI has embedded those into Guideline B-15. In fact, OSFI has gone ahead of Basel in terms of climate disclosures. Basel will only be consulting on climate disclosures expected this month.
Senator Loffreda: I’ll go to the second round.
Senator Marshall: Mr. Hannah, I know that you don’t support the bill. I know that your answer to my question will probably be impacted by you not supporting the bill.
In your opening remarks, you referenced the climate commitments alignment report proposed in Bill S-243. There’s a whole section in there that says what you have to include in it. Are you saying that you already prepare reports that include all of that information laid out as required by the bill?
Mr. Hannah: Do you want to talk briefly —
Senator Marshall: The reason I’m asking is I’m looking at all the requirements and then I’m looking at the requirement that you have 60 days after the end of each financial year to prepare that climate commitments alignment report. It seems like even though you don’t support the bill, if the bill does come into effect, you have to comply with this and you have to do it within 60 days. Can you set aside that part about you not supporting the bill. I know your answer will be affected by that, but are you able to comply with all of these requirements within the 60-day time frame? How realistic is it?
Mr. Radeczy: I would for OSFI’s Guideline B-15, they give banks 180 days after the fiscal year end to implement the disclosures. There is time needed for banks to collect data. There are challenges with data. We talked about that earlier in the testimony, challenges with data from third parties like the bank’s clients.
They need sufficient time to collect the data, do their calculations, verify and be able to produce their reporting. We feel 180 days is a reasonable amount of time that allows for production of the climate disclosures per B-15.
In terms of some of the reporting, the banks will already be required next year, mandated by OSFI, to report on their targets, progress against targets and the commitments they’ve made. As mentioned, under TCFD, some of our larger banks have already been doing that voluntarily when that report was first published in 2017. I think our banks have done a lot so far. It’s just they’ll be mandated to do that starting next year for our largest banks with OSFI and B-15.
Senator Marshall: Any costs associated with that?
Mr. Radeczy: I think there could potentially be an extra cost if there’s maybe similar but not the same requirements overlaid through the current bill under discussion.
Again, we like more harmonization and alignment, so the banks avoid additional burden, especially for the small- and medium-sized banks with limited resources to devote to this. Perhaps the importance of harmonization might be even more important for them to limit the burden that’s imposed on those smaller- and medium-sized banks.
The Chair: I want to follow up a bit on that because you’re talking about smaller financial institutions, but also getting this information or the information you need from smaller clients. Is that a complicated process now? Is it going to become more complicated?
Mr. Radeczy: Certainly for private companies, that’s why we noted in the Fall Economic Statement yesterday the possibility of mandatory climate disclosures for private companies, especially for smaller companies. That’s something we’re interested in learning more in terms of the details of what the government might be proposing there. I would agree that it can be challenging in terms of getting data from small companies, private or public.
Mr. Hannah: Ultimately, senator, we like to work with our clients. If you’re a banking institution, you want to work with your clients. You want to do that collaboratively. You want to be able to do that as well in a way that’s the least disruptive on the client. You have to have a regard for the fact if you’re working with small businesses, they only have so much capacity and time they can lend to you as opposed to doing what they’re trying to do to serve their own customers and make money. You have to be patient.
Senator Gignac: Welcome to our witnesses. Your testimony is very important. I’ve worked for many years in the banking sector, so I’m familiar with the concept of weighting assets. As you mentioned, it’s very unusual that we override the regulators on that approach.
Back to the first hour with the senator who sponsored the bill, is it a risk that if it’s adopted as it is without amendment; basically, it’s just that the clients, oil and gas industry, for example, would now deal with banks from Wall Street since that bill applies to the Canadian financial institutions, so they will be just a recipe for lower market share for banks? Is that a fair statement?
Second quick question; I will go with both immediately. Could you be more specific about what the reason is and when in Europe they declined such an approach? Thank you.
Mr. Hannah: To your first question, is it a risk? Frankly, it would be a reality because it would have to be. At a 1,250% risk weight, effectively, if you’re a Canadian bank that is captured by this, you effectively then can’t lend to a new energy project. Absent closing up business, they would have to go somewhere else.
To your second question, my understanding is that the 1,250% risk weight proposal was rejected, I believe, in March, and then the subsequent 154 were rejected in June.
Senator Gignac: You referred to the European experience.
Mr. Hannah: The commission, yes, the European Parliament. The parliament did not say specifically, but subsequent to that, the European Banking Authority came out with a report looking at the issue of climate risk management. They talk about and come out strongly against the concept of using targeted risk weights to incentivize or disincentivize specific investments. They said it had two significant drawbacks. One of them is it creates financial instability. The second one is it has unintended consequences.
Senator Gignac: Thank you.
[Translation]
Senator Bellemare: If banks don’t choose to adopt an approach like this, what are you currently doing to align the activities of financial institutions with climate issues? What’s the alternative for the financial institutions that are part of your association?
[English]
Mr. Hannah: Mr. Radeczy, do you want to talk about the Net-Zero Banking Alliance and OSFI B-15?
Mr. Radeczy: Our six largest banks made the commitment to the Net-Zero Banking Alliance which requires them to annually publish reports in terms of progress against the targets they are setting. That’s captured in B-15, mandated for all the banks starting next year, starting with the largest banks. Again, our six largest banks committed to the Net-Zero Banking Alliance pledge and already have to produce those reports and set targets to 2030 and ultimately 2050 targets as well.
The OSFI’s Guideline B-15 captures those areas as well. Maybe as well in terms of what our banks are doing in sustainable finance area, they are contributing billions of dollars in support of sustainable finance initiatives, amounts ranging from $300 billion to $500 billion from 2025 to 2030, our five largest banks. They are putting the dollars behind their interest and helping the transition, both in terms of meeting commitments at the regulatory level, but also contributing from a dollar-wise perspective as well.
[Translation]
Senator Bellemare: You’re talking about the reports they produce. Do the banks produce annual reports or specific reports?
[English]
Mr. Radeczy: The banks produce a whole suite of different reports, whether it’s ESG reports, climate reports, sustainability reports and then the reports for the Net-Zero Banking Alliance commitments.
Senator Miville-Dechêne: I will follow up on Senator Bellemare’s question.
Since 2016, Canada’s big five banks have provided over $187 billion U.S. dollars in financing oil, gas and coal companies that are expanding fossil fuel production.
Could you explain exactly how climate-related disclosure — which is what you’re saying the banks are doing — how have they affected these investment decisions in oil and gas? Can you give us a specific example of a business that your members have refused to finance because of its climate disclosure? In other words, is it working? Have you been able to reduce climate change in any way because of those disclosures or is it just paper going around?
Mr. Hannah: Obviously I can’t speak to an individual client, an individual bank. That’s outside of my purview.
Senator Miville-Dechêne: It would be useful to know if there are results here.
Mr. Hannah: Let me disentangle two things here. There’s the overall climate action plan of the country, there’s the institutional role in that — whether that be banks, energy companies in other parts of the economy — and then there’s the bill. I want to separate out the three.
With respect to the overall energy transition plan, the Government of Canada has one. It goes out to 2050. There’s the 2030 Emissions Reduction Plan, there are sub-plans for every sector from what I can tell, one for agriculture, one are for manufacturing.
Senator Miville-Dechêne: I’m asking you about banks.
Mr. Hannah: I’m getting to that. From a banking industry perspective, that’s something that obviously gets factored in. We work with clients.
The question you’re asking is then how does that get factored in? It’s going to be individual, case by case. But do banks then think about that. Is that something they work through? Yes, it’s something they consider. They have to understand what the implications are for their customers and their customer base.
Under OSFI B-15, as OSFI continues to build out its climate risk management capacity and its requirements, banks increasingly have to look at that and understand how that affects what they’re doing. But it’s all going to be a case by case.
Senator Miville-Dechêne: Am I right to understand that you are saying you don’t know if any of that works? You don’t know if there’s effectively a result, and divestment in some fossil fuel project because of delegation. We had the superintendent here and he says that we’re going slowly. We’re seeing how things are going and climate change is pretty urgent.
Mr. Hannah: Perhaps there have been a large number of commitments that institutions have made to renewable energy. Mr. Radeczy, perhaps you want to talk about some of the commitments that have been made.
Mr. Radeczy: Again, in terms of numbers, the five largest banks in Canada have made commitments between $300 billion and $500 billion out to 2025 and 2030 for various sustainable financing activities. That could encompass lending, capital markets, support for sustainable financing activities.
In terms of disclosure, the banks are producing those disclosures. Investors will make the decisions in terms of where they want to place their money. We are being up front and putting out those disclosures in the area covered by TCFD voluntarily and that will be mandated by OSFI starting next year.
We’re producing the disclosures, helping people to be able to make informed decisions, and I think it’s with the investors to make those decisions as well.
Mr. Hannah: The banking industry in Canada reflects the Canadian economy. We service clients in order to power the Canadian economy.
As the economy transitions, the banking portfolio will transition and we want to enable that. But we want to reflect the economy and service the customers who are there too. It’s important. There are thousands of them, and they employ a lot of people.
Senator Yussuff: Thank you so much for being here.
You don’t like this bill. That’s obvious. But at the same time, it is important to recognize that OSFI is still the regulator. You can’t have it both ways. You are also saying you don’t want OSFI to issue more regulation that you have to comply with.
The reality is that Canadians want to have confidence in their institutions. We’ve seen many financial crises which obviously have been brought to our attention. We need to have strong oversight. OSFI has done that.
In 2008, the housing crisis in the U.S. saw a meltdown. We avoided that, to a large degree, because we had good oversight in Canadian banks, and we weren’t leveraged to the degree that the American banks were.
I recognize that climate change has unpredictable consequences. We certainly have seen forest fires this summer that we couldn’t have predicted. Is it fair to suggest if OSFI were to come up with new regulations, you would have to comply? That’s the reality.
My point is there are regulations right now. There are new ones coming in. Of course, they will probably keep changing as our country sets new directions in terms of our target.
Recognizing what my colleague said earlier, there is a commitment in the country about coal plants. We’re getting out of the coal industry in terms of coal generation.
Is the bank still thinking that lending for coal development and coal generation is a reality given that the world is going in a whole other direction in this regard? Canadians want to know. They want to have confidence in what you’re telling us. We want to know you are taking steps to ensure these things aren’t going to happen because they don’t make any political sense given the commitment to net zero.
The Chair: We need an answer, senator.
Mr. Hannah: There are a few things in there and I want to unpack them because you raise a lot of important points.
First, I do want to make it clear that I don’t think we said in here that we oppose OSFI’s guidance. In fact, we’ve talked about it at some length.
Our concern, frankly, is almost the opposite. The bill actually is prescriptive on what OSFI is or isn’t supposed to do. We would rather give the regulator the flexibility to finish its work and make that decision.
With respect to coal and other fossil fuels, you point to an important point, and that is that there is a national plan to phase out coal. There is a national plan to transition. Obviously, that’s something that gets factored into credit decisions. Banks are very good at making credit decisions. I can proudly say that we were just about the only banking sector in the world that did not need any capital injection in the financial crisis. We’ve not had a banking failure in this country in 40 years, and I believe two in the last hundred. We’ve proven as an industry over time that we’re pretty good at understanding where the puck is moving to and skating there.
What we’re trying to avoid, frankly, is doing that in a way that is abrupt, because in this particular case, you’ve got a national plan, you’ve got that industries, including the energy industry, are working toward. This is what they have in front of them, the emissions plan that the federal government has come up with. This particular bill would effectively say that banks cannot lend to that sector to help them finance their own transition plan. That feels unfair.
Senator Yussuff: Where does the bank sit on the just transition framework for workers and industry? This is a principle of the Paris Agreement, of our country right now.
Mr. Hannah: I think everybody is supportive of a just transition. These are our customers. The employees are your customer. The firm is your customer. You want to be able to work with all of them.
Senator Yussuff: Thank you.
Senator Petten: I am following up on a couple of the other comments. Your members have record profits in 2022 and in the last couple of quarters. Why are we not seeing more of those profits invested in real climate solutions that help us meet our emissions reduction targets in Canada?
Mr. Hannah: Mr. Radeczy, do you want to talk about some of the commitments that we have seen in respect of clean transition?
Mr. Radeczy: You can also look directly at the larger banks. They produce a suite of reports, usually annually, covering sustainability and environmental, social, and governance, or ESG, issues. I mentioned the billions of dollars of commitments they’ve made and they do provide further breakdown in their individual reports. Some of it is issuing bonds for raising funds toward green and renewable projects. Some of it is direct lending in that way, and some of it is capital markets-related activity. There are a lot of good examples. I’m just giving the example of our six largest banks that they produce reports and give comprehensive detail behind specific projects.
Mr. Hannah: I have them listed here. They total into the hundreds of billions of dollars. It’s a market opportunity, senator. If you’re a bank and you see a market opportunity, you’re going to try to seize on that. You’re going to work toward that. That’s how you stay in business and that’s how they’ve been so successful. As the opportunity grows, the investment grows.
Mr. Radeczy: It was mentioned in the Fall Economic Statement yesterday about the government’s Green Bond Program. I know our largest banks played a large role in getting that bond out to market and issuance done. That’s one example at a government level.
Senator Petten: Would they need to be regulated to increase their financing of renewables?
Mr. Hannah: The short answer to that is, no. They will go to where the puck is going again, so to speak. The market is there. The market is growing. The opportunity grows. As institutions that are seeking investment opportunities, new customers, new growth areas, they’re going to migrate there. That will happen on its own. They will travel along with the transition. They will enable the transition because they reflect the economy.
Senator Ringuette: It is nice to see you again.
Mr. Hannah: You as well.
Senator Ringuette: Senator Miville-Dechêne asked a question with regard to the financing of fossil fuel projects. I didn’t hear an answer. Another senator asked about the financing of coal projects. I didn’t hear an answer. The puck seems to be moving.
Let me go down to a more low-key example, and maybe we can have an answer.
You said that you were part of the Net-Zero Banking Alliance — the big Canadian six. You gave the example of new housing that will need natural gas lines.
Are you telling me that with regard to the standards that need to be applied in being a member of the Net-Zero Banking Alliance that housing project, whether it’s an apartment building or just a single home — a single home can do with a heat pump, but a building should — in regard to moving toward net zero and financing that project — move toward geothermal. Yet, you are here in front of us saying that you would approve a natural gas line, which is not a net-zero proposition.
That is a bottom-of-the-scale project. You’re talking about a natural gas line instead of geothermal and heat pumps.
Where exactly do you lie with regard to the standards for your Net-Zero Banking Alliance?
The Chair: Mr. Hannah, go ahead and answer that.
Mr. Hannah: Let me disentangle a few points.
With respect to a natural gas line, a large number of Canadians still get their heat from natural gas and will continue to do so for some time. It’s affordable. It’s a decision that the developer needs to make. It’s a decision the municipality needs to make.
I understand your point that there may be alternatives. That’s a decision they need to make.
Senator Ringuette: But you should be part of that decision making with regard to the loan that you’re providing. That’s what I’m saying. That is the responsibility of being part of this Net-Zero Banking Alliance. It is part of your responsibility. We are in this individually and collectively.
The Chair: Go ahead and answer what your role is on that; are you consulted by municipalities or provinces?
Mr. Hannah: On an individual loan, no. I dare say they are not consulted by the municipalities. They will look at the loan that is put in front of them and make a decision at that time, but in the case of a new housing development, the decision to go with natural gas, geothermal or something else is something that is made by the applicant, not by the institution.
Senator Ringuette: You’re saying it’s not part of being a part of the Net-Zero Banking Alliance?
Mr. Hannah: I can’t speak to whether an individual loan is. Probably not. The Net-Zero Banking Alliance is a much more macro thing than individual projects.
Senator Ringuette: We asked a macro question and didn’t get an answer, so I was asking a micro question.
The Chair: Alright. We are moving on.
Senator C. Deacon: Thanks to our witnesses for being here.
When OSFI Superintendent Routledge was here, one of the conversations that a number of us engaged with was around the technology and cyber-risks in our banks related to the technology deficit that has accrued over time in many of our biggest banks.
I wanted to talk about that in context with part 2, the reporting, because reporting one way or the other, through OSFI’s regulations or through this bill, does require timely information that is quite detailed in order to quantify the climate risks within each client so you can identify the climate risks of the bank’s portfolio.
To what extent is there evidence that meaningful progress is being made in connecting the bank’s own risk analysis systems directly with the ERP systems of clients at increasingly smaller companies? Start with your biggest clients and work your way down. At what point are you looking at that data sharing so that you’re closer to real-time comprehensive analysis of the investments and activities of each organization as you look at scope 1, scope 2 and scope 3 emissions and risks that those organizations face. The technology deficit, I think, was probably holding back some of that progress, but I shouldn’t assume that. I’d love to know the evidence of progress that you’re seeing.
Mr. Hannah: I’m glad you raised the question, senator. In fact, that was actually the last part of my opening remarks. It’s exactly the issue of data. If there’s one thing — while we don’t support the bill — we are pleased that the committee is looking broadly at the question of environmental risk. If you wanted to do some additional work on environmental risk data and finding a way to develop a better national framework for collecting detailed data, that would be fantastic.
Senator C. Deacon: I’m focused on how the bank is gathering its own information from its own clients. Yes, there need to be national standards, but what’s the progress in that regard?
Mr. Hannah: The bottleneck, senator, is not technology. It really is just trying to actually get the information from clients.
Senator C. Deacon: Is there evidence that those bridges are being built — the APIs where you can be sharing information from your clients directly? It speeds up the process and the comprehensive nature of understanding what’s going on in client businesses.
Mr. Hannah: I’m not aware of any specific technical bills.
Mr. Radeczy: I’m not aware, either. It may vary by client.
Senator C. Deacon: Major fintech lenders have direct data collection from their clients quite often. It allows them to analyze risk much more precisely and on a more timely basis. The banks have not been doing that, and I’m wondering what the progress is toward making that direct connection.
Mr. Hannah: It also depends on the client, senator. With a larger-scale client that is much more sophisticated and has more technology, that’s one thing. A local corner store is an entirely separate —
Senator C. Deacon: That’s what I said: Start large and move down.
Mr. Hannah: Large would be much more comprehensive and detailed. Smaller, again, you need to have regard for the burden you’re placing on the client and balance that.
Senator C. Deacon: At this point, it remains basically analog data collection as it relates to these sorts of data?
Mr. Hannah: With a large client, there’s a lot of digital information that would flow back and forth. With a smaller client, that’s a different story.
Senator Galvez: First, before I ask my question, I want to make a clarification. You said in your opening remarks that my bill mandates OSFI to do things. The reality is that the text says “to consider” — ask OSFI to consider.” So OSFI is free to consider or not to consider. That’s just one point.
You are saying that the banks are doing well, and that they’re going to be net zero for 2050, but the investor for Paris compliance and Bloomberg Finance say that, in reality, the story is a year of inertia. Banks expanded the scope of their emissions reporting and set interim targets for additional carbon intensity. However, they generally did not improve their grades related to oil and gas, and power, from last year.
When I look at the banks — RBC, Scotiabank, TD, BMO, CIBC and National — the scores go from D to a maximum of B-plus. The answer to the question of whether they are moving to reducing their greenhouse gas emissions is, no.
Given that the higher emissions are facilitated and financed emissions in scope 3, and that you are not addressing at all scope 3. You want to be net zero by 2050. Shouldn’t your sector be the first one to align? You give loans for 15, 10 or 5 years. If you wait until December 2050 to start your net zero, you have given a lot of loans and investments that will continue, so you are not helping Canada to reach net zero in 2050.
That is my first question.
My second question is regarding how easily you disconnect the economic model because you say we follow the puck, and it is completely independent of the reality of the situation. You’re talking about gas pipelines. What if there is a flood, and it just wipes out the gas pipeline? Who is going to pay for that?
The Chair: Okay. We’ll have some answers.
Mr. Hannah: Senator, I want to disentangle two things here. There is the case of transition and whether you think 2050 is fast enough, and then there is the bill.
With respect to the former, if you believe that the government has a plan, which extends to 2050, and it has emissions targets, if you believe that is not aggressive or fast enough, then you need to have the Minister of Environment and Climate Change come here and have that discussion with him.
Senator Galvez: [Technical difficulties] — 2050 because you have your scope 3 that will continue after 2050 if you wait.
Mr. Hannah: Senator, what you can do about that, frankly, is to keep having us come back as we go along and hold our feet to the fire. I mean, that’s why we’re here. What I don’t want to do and what I’m concerned about with this bill is that it would effectively cut the energy sector off from new credit without them actually knowing that it’s happening because they’re following and expecting the existing emission-reduction plan that the government has set up is the one they’re working and investing toward, and the one their employees are working toward. This bill would effectively —
Senator Galvez: What do you mean they don’t know?
Mr. Hannah: That’s what they’re working toward. What they don’t know — senator, this bill talks about risk weights, which is a very esoteric topic. But what it actually means in practice — what the risk weight does — for clarity — is that it impacts or directs, in effect, the amount of the loan that has to be funded by equity as opposed to deposits. At 1,250%, what it effectively means is that the bank cannot use any deposits to fund a loan, and given that the business of banking is to accept deposits and then make loans, effectively it means you cannot lend. The bill is structured around that phraseology. If the bill were structured in a way that said banks are not allowed to provide new credit to energy firms, I suspect you would have a much longer line of people wanting to come and have a dialogue because that would be more direct, but it would have the same effect.
Senator Ringuette: You’re saying no to this, and essentially what I heard is that you’re saying: Well, we don’t really know where we’re going with the Net-Zero Banking Alliance. What is your suggestion?
Mr. Hannah: My suggestion, senator, is that we let the regulators do their job so they are able to build out the climate risk management framework for the country. That’s what their role is.
The Chair: What he is trying to say, and I think he’s said it several times now, is that there is a national plan. If you have a separate national plan, then how do the banks and the clients know that there are two or three different plans.
Senator Ringuette: Excuse me, Madam Chair, but this gentleman just told us that they were part of the Net-Zero Banking Alliance that is part of the national plan.
The Chair: Would you like to carry on, now that we’ve just established that.
Mr. Hannah: Do you want to talk about the Net-Zero Banking Alliance?
Mr. Radeczy: Just to add, the banks that did commit to the Net-Zero Banking Alliance have been setting targets for individual sectors, including oil and gas, which has been mentioned, and they need to monitor and track progress against those targets and presumably work toward achieving them. I would say they are already making that commitment, trying to reduce and support the energy transition by making those decisions and coming up with their own targets for the sectors they’ve publicly disclosed in relation to the Net-Zero Banking Alliance.
Senator Loffreda: I’ll start with the question and maybe give you two or three preambles after that or one maybe. I would like you to discuss other technical issues that may contradict the Bank Act and the Corporate Governance Guideline. We haven’t touched on that, but that’s important because, as I said, other senators have already asked for a list on that, and it’s important to do that. I think the intentions of the bill are fine. I’ve spent a lifetime in banking on the lending side and the intentions are fine. What’s concerning is the fact that it overrides the authority of the regulator; it would be the first bill that does that. And OSFI — maybe you can give me a comment on that — has proven to have a strong international reputation, among the best in the world; our banking system is among the best in the world. We discussed the fact that the banks did not foresee 2008, and Senator Yussuff corrected that, pointing out that Canadian banks did foresee and avoid 2008, but not only because of the regulator. Many of the loans made in 2008 by the American banks were off-balance-sheet items, which the Canadian banks — as a Canadian banker — could have made those same loans. We didn’t because of the DNA, the conservative nature of Canadian banks and the bankers. I have confidence in the banks moving that needle and managing and mitigating that risk. That’s the way I feel, and I would like to have your comments on that. I do know that the portfolios were diversified in 2008, and I’m certain they’re diversified even now with respect to fossil fuels and so forth.
The Chair: Some comments.
Mr. Hannah: With respect to your first question about corporate governance and the role of directors, yes, one of the provisions of the bill would, from our perspective, contravene a director’s obligations under the Bank Act or under the provincial and federal Business Corporations Act, because the Business Corporations Act and the Bank Act requires a director to act in the best interests of the company. That’s their role. That’s their fiduciary obligation. This particular bill provides that they effectively have to focus, first and foremost, on aligning with the climate commitments. That creates, in effect, a super-priority over their broader priority or broader requirement to act in the best interests of the company. That’s the first question.
With respect to banks’ financial strength, yes, you are absolutely correct, they remain very financially strong. The regulator, to your point, is considered one of the best in the world. Banks in Canada did not require any capital injections during the financial crisis, and they were among the few.
I can’t remember the rest of the question. There were multiple parts.
What else did we talk about?
Senator Loffreda: Diversification.
Mr. Hannah: Yes — the banking industry as a national banking sector. The banking sector in Canada is well diversified as I mentioned in my opening remarks. Energy is actually a relatively small component of it, frankly, because the Canadian economy is broadly diversified. We use a national banking system, so banks work coast-to-coast, and they work with all sectors. That’s the internal strength of the industry. It works across the country. So, it works in different regional economies, and different regional economies have different business footprints, and the banks benefit from that diversification.
Senator Loffreda: Do you have total confidence in OSFI eventually moving the needle with respect to climate change?
Mr. Hannah: OSFI has made it clear, and the superintendent has been very clear that climate is one of his two principal priorities. He has said that time and time again. You can see that in virtually every statement he makes, and OSFI has done a great deal of work on this. They’ve done Guideline B-15 and are doing a scenario exercise. They made it clear from their point of view that this is a priority, and they’re going to ensure that institutions keep it as a priority, and that it’s factored into regulation and risk management because that’s a priority for them and they want to make sure the institutions do it that way. There is no doubt about that.
Senator Miville-Dechêne: In its Net Zero by 2050 report from 2021, the International Energy Agency clearly states that reaching net zero targets by 2050 means no investment in new fossil fuel supply projects after the date of the report, which was May 11, 2021, which was more than two years ago.
My question is: Have your members financed new fossil fuel supply projects since May 11, 2022?
Mr. Hannah: The short answer is, I don’t know. What I would say is, that’s where you start to bring in what the Government of Canada’s transition plan is for the economy and how we should be mapping toward that. The banking industry works with the economy. We try to help work with the actors in the economy to execute the plans they’ve put in place. That’s an important role, and that’s what we try to do. So really, the question is: To what degree has the Canadian economy made or not made investments in that area and does that align with the Government of Canada’s plan?
Senator Miville-Dechêne: But if there is a disclosure, you should know. Shouldn’t you know if there were investments —
Mr. Hannah: I wouldn’t know individual investments because the banks have literally large numbers of clients.
As I mentioned in my opening remarks, do banks still provide credit to the oil and gas business? Absolutely. It’s still an important part of the Canadian economy, and they work with them to manage that transition as well. That’s important. It employs thousands of people. They’re hard-working people.
Senator Miville-Dechêne: I know that. It’s just I’m wondering if you’re also working on the results not only on the disclosure. Are those investments made in industries that are trying to move away from carbon emissions?
Mr. Hannah: Absolutely. As we mentioned earlier, the amount of money that is being invested into renewables and alternative technologies for energy and sustainable finance generally is huge.
Senator Miville-Dechêne: So what’s the percentage? How much is invested in fossil fuel and how much in new energy among the banks that you represent?
Mr. Hannah: I can’t give you a specific on fossil fuel versus new energy, because oftentimes these things are co-mingled. What I can tell you is that the amount of sustainable finance funding provided by the six largest institutions based on their ESG reports is literally into the hundreds of billions of dollars.
Senator Gignac: I want to go back to comparisons with Europe. In many aspects, I share your concern, as well as with my colleague Senator Loffreda. In fact, it was disclosed in September of this year that Europe and the banking authority Pillar 3 would be disclosed on the ESG risk, so they have a lot of things they will be forced to be much more transparent on.
Do you believe that OSFI is behind the curve compared to what is going on in Europe, or ahead of the curve? Could you make a comparison of what is being asked here compared to what was released two months ago from the European authority regarding Pillar 3?
Mr. Radeczy: Yes, I can touch on Pillar 3. Europe did go earlier, but the Basel Committee on Banking Supervision, of which OSFI is a part, the global regulatory body, is not expected to release their consultation on Pillar 3 climate disclosures until this month, whereas OSFI has already mandated a disclosure starting next year as part of Guideline B-15. In effect, OSFI went ahead of the Basel committee, maybe not as quickly as Europe, fair comment, but on an international level, OSFI is working.
Senator Gignac: It looks like that.
Mr. Radeczy: Basel has issued and finalized the climate principles, not disclosures, and OSFI did follow those in adopting B-15.
Senator Galvez: The question that my colleague Senator Miville-Dechêne asked was, what is the ratio? It’s funny that you don’t know because Bloomberg produced those ratios, and they should be 4-1 by 2030, but they range between 0.30 and 0.4. These are very low ratios. You are not invested in renewable energy.
What about your expertise in climate change and to do the model on climate risk? How many people —
The Chair: Do you have expertise?
Mr. Hannah: Banks have very large risks to manage. They have to manage all types of risk. Climate risk is one, but they have to manage operational risk, capital risk, market risk, et cetera.
Senator Galvez: Are they climate physicists?
Mr. Hannah: They’re usually PhDs, frankly. Usually in advanced mathematics, statistics, in some cases physics, it really depends. But they are the most complex group of people to work with because they speak their own language. They’re fascinating.
The Chair: Thank you both for being with us today. Darren Hannah, Senior Vice President, Financial Stability & Banking Policy; and Bryan Radeczy, Director, Financial Stability with the Canadian Bankers Association. We really appreciate you taking all of our questions today. That brings our meeting to a close. Thank you.
(The committee adjourned.)