THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, May 2, 2024
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 11:30 a.m. [ET] to study Bill S-243, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts.
Senator Tony Loffreda (Deputy Chair) in the chair.
[English]
The Deputy Chair: Hello, everyone, and welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Tony Loffreda, and I am the deputy chair of this committee.
[Translation]
Before we begin, I would like to remind all senators and other meeting participants in the room of the following important preventative measures.
[English]
To prevent disruptive and potentially harmful audio feedback incidents during our meeting that could cause injuries, we remind all in-person participants to keep their earpieces away from all microphones at all times. As indicated in the communiqué from the Speaker to all senators on Monday, April 29, the following measures have been taken to help prevent audio feedback incidents: All earpieces have been replaced by a model which greatly reduces the probability of audio feedback. The new earpieces are black, whereas the former earpieces were grey. Please only use an approved black earpiece.
[Translation]
By default, all unused earpieces at the start of a meeting will be unplugged. When your earpiece is not in use, please place it face down in the middle of the round sticker on the table, as shown in the image.
Please consult the card on the table for guidelines on preventing acoustic incidents.
[English]
Please ensure that you are seated in a manner that increases the distance between microphones. Participants must only plug their earpieces into the microphone console located directly in front of them, not under the table. These measures are in place so that we can conduct our business without interruption and to protect the health and safety of all participants, including the interpreters. Thank you all for your cooperation.
I now invite committee members participating in today’s meeting to introduce themselves.
[Translation]
Senator Bellemare: Diane Bellemare from Quebec.
Senator Gignac: Good morning. Clément Gignac from Quebec
Senator Galvez: Rosa Galvez from Quebec.
[English]
Senator Petten: Iris Petten, Newfoundland and Labrador.
[Translation]
Senator Miville-Dechêne: Julie Miville-Dechêne also from Quebec.
[English]
Senator Yussuff: Hassan Yussuff, Ontario.
Senator Varone: Toni Varone, Ontario.
Senator C. Deacon: Colin Deacon, Nova Scotia.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Martin: All the way to the West Coast, British Columbia, Yonah Martin. Welcome.
The Deputy Chair: Thank you, senators. Today, we will continue our examination of Bill S-243, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts. For our first panel, representing the Insurance Bureau of Canada in person, we welcome Jason Clark, National Director, Climate Change Advocacy; and Phil Donelson, Director, Catastrophic Risk and Climate Change. Welcome to our meeting, gentlemen. We also welcome Thierry Philipponnat, Chief Economist, Finance Watch, who is joining us by video conference. Welcome, Thierry.
Welcome and thank you for joining us today. We will now hear your opening remarks. Mr. Donelson, the floor is yours.
Phil Donelson, Director, Catastrophic Risk and Climate Change, Insurance Bureau of Canada: Thank you, chair, and good morning, senators. I’m here today with my colleague Jason Clark, our National Director of Climate Change Advocacy. We’re pleased to be here today on behalf of the Insurance Bureau of Canada, or IBC, and its members to speak about our advocacy on climate change as it relates to Bill S-243, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts. IBC is a national industry association representing Canada’s private home, auto and business insurers. Our members make up the vast majority of the private property and casualty, or P&C, insurance market. For 60 years, IBC has worked with governments and insurance regulators across the country to help make affordable home, auto and business insurance available for Canadians.
Canada is not adequately prepared for the level of risk we face from extreme weather events as a result of climate change. To date, regulatory discussions concerning climate risk disclosure often inadequately consider physical risk and overemphasize transition risk in relative terms. For a country where natural disasters have consistently disrupted economic activity in recent years, this emphasis must be reversed. Let me explain.
In 2023, Canada faced the worst wildfire season in its history, with over 6,000 fires that burned more than 18.5 million hectares, forcing the evacuation of at least 155,000 people from their homes, at a cost of $1.4 billion — just to fight the forest fires. The challenge we are faced with in 2024 is that this year could be worse.
We are also seeing that flooding events are becoming more severe. As of today, 1.5 million households in Canada are built in areas with a high risk of coastal, riverfront or urban flooding. These households lack affordable and adequate home insurance. Over the past eight years, IBC has advocated for a low-cost national flood insurance program for high-risk households in partnership with the industry to help close this protection gap. We were pleased to see progress on that in Budget 2024.
In total, last year, severe weather events in communities across Canada caused $3.5 billion in insured damage, one of the highest annual totals in the previous four decades. But unlike in 2016, when the massive wildfire in Fort McMurray occurred, the losses weren’t attributed to one primary catastrophe. In fact, they were spread across Canada; we were seeing climate disasters in every part of the country. Because of the threat of more frequent and intense natural disasters in all parts of the country, IBC supports the spirit of Bill S-243 and believes this bill represents an important shift that sees the federal government and insurers working closely together on climate change and its impacts.
We do have concerns that the bill duplicates ongoing work and would create additional regulatory burden for P&C insurers who are already working closely with the Office of the Superintendent of Financial Institutions, or OSFI, on both physical and transition risk plans and disclosures. Our concerns stem from the unique makeup of the private P&C insurance industry in Canada, which is composed of 196 companies representing both large multinational firms and small local financial institutions. Many of these smaller companies have fewer resources, less capacity and will already be challenged to meet OSFI’s requirements annually starting in 2025.
P&C insurers have been at the front lines of climate change for many years, sounding the alarm with governments and regulators, proposing policy solutions and pricing and managing climate risks. In fact, OSFI recently highlighted the industry’s leadership in their What We Heard report following the survey of financial institutions on readiness to implement Guideline B-15. The report notes that P&C insurers are further ahead than other institutions in establishing climate-related risk reporting and metrics, and further ahead in formalizing climate-related roles and responsibilities for board members and for senior management. IBC has worked closely with OSFI on Guideline B-15 and related climate initiatives to ensure that they produce meaningful results, are harmonized with international standards and can be implemented by insurers large and small on reasonable timelines.
As we transition to a net-zero economy, Canada must urgently improve its climate defences. This includes investing in new infrastructure to protect communities from floods and fires, improving building codes, ensuring better land use planning and increasingly creating incentives to shift the development of homes and businesses away from areas with the highest risk. That’s why IBC co-founded Climate Proof Canada, which is a national coalition that played an important advisory role in helping to establish the country’s first National Adaptation Strategy.
For more than a decade, IBC has been warning governments about the need to be better prepared for severe weather events as a result of climate change. We believe Canada must play both offence and defence when it comes to climate change and take action today to protect Canadians from the growing threat to their homes and well-being. We look forward to this committee continuing its study of Bill S-243 in light of the climate risk Canada faces and the role that property and casualty insurers can play in that effort. Thank you for the invitation to speak today. We look forward to your questions.
The Deputy Chair: Thank you, Mr. Donelson.
[Translation]
Mr. Philipponnat, the floor is yours. You have five minutes for your opening remarks.
[English]
Thierry Philipponnat, Chief Economist, Finance Watch, as an individual: Honourable members of the Senate of Canada, ladies and gentlemen, it is an honour to be with you today.
Finance Watch is a Brussels-based membership organization with the mission of analyzing and promoting the public interest dimension in financial regulation. Our mission leads us to interact with policy-makers, regulators and legislators. In doing so, we have a constant preoccupation with combining the public interest angle, the technical feasibility of our proposals and a non-partisan approach.
The climate-aligned finance act, or CAFA, which we are discussing today, is an ambitious piece of legislation dealing with the link between climate change and the financial system. Understanding this link and tackling the interdependency between climate change and the financial system is fundamental for two reasons: First, by nature, finance is the enabler of economic activity and, as such, finance is the enabler of climate change; and, second, the financial sector has by construction an exposure to the activities to which it brings capital. Given the unprecedented and irreversible impact that climate change will have on society and the economy, this mechanically creates a now broadly recognized systemic risk for the financial system. Put differently, finance makes climate change possible — importantly, this is not a moral question but a purely factual one — and it is threatened at the same time by climate change. This is a vicious circle.
Given the limited time of this opening statement, I will choose from among the different topics covered by Bill S-243 and concentrate on the question of the risk created by climate change for the financial system and how to tackle it. How do we avoid cumulating a new financial crisis on top of the growing climate crisis? Really, that is the question.
Part III of the climate-aligned finance act proposes a simple and effective solution to tackle the financial risk borne by the banking system because of climate change. It goes to the root of the problem by focusing on the exposure of banks to fossil fuel assets. Fossil fuel assets will end up being stranded because of climate change regardless of the scenario: Either governments will take measures to leave fossil fuel reserves under the ground in order to limit global warming and the unexploited fossil fuel reserves will lose their value, or governments will not take such measures, which will make global warming reach unbearable levels with a huge negative impact on economic activity and the subsequent meltdown of the value of all economic assets, including, obviously, fossil fuel reserves and fossil fuel companies. In other words, there is no scenario under which, eventually, the value of fossil fuel assets is not doomed. It is clearly a question of the time horizon here, but this is the situation we’re facing.
As recognized by a panel of 50 international experts, in partnership with the United Nations Environment Programme Finance Initiative, or UNEPFI, the capital requirement measures contained in the climate-aligned finance act would be the most impactful and feasible possible to ensure the resilience of the Canadian banking sector to climate change.
I insist that this is a question of the resilience of the banking sector and therefore a risk-management issue.
Applying a risk weight of 150% on the standard Basel capital requirement of 8% for existing fossil fuel exposure — that is, by requiring a capital of 12 for an exposure of 100 — it would follow a standard requirement of the Basel Framework for risks deemed to be particularly risky, which is obviously the case given the stranded asset context just described. It must be noted that such a risk weight is commonly applied to different categories of risk — for instance, private equity — in jurisdictions such as the European Union applying the Basel Framework, and that it does not prevent banks from providing credit to those activities.
The second measure contemplated in CAFA is applying a risk weight of 1250% on the standard Basel capital requirement of 8% for future fossil fuel exposures. This would mean full equity funding of those exposures and would respect one of the most fundamental risk management principles of finance: very risky projects must be funded out of equity to avoid financial contagion if the project collapses. Given that the proven reserves of fossil fuel in the world already represent five times what mankind can afford to burn to limit global warming to two degrees, it is certain that all new reserves explored in the future will end up stranded and the money invested will be wasted — hence the full equity funding logic for new reserves.
Central banks recognize that, as stated by the European Central Bank in October 2021:
. . . current capital buffers do not capture climate-related financial risks owing to underlying risk weights that do not yet, reflect climate-related risks to the full extent. . . .
These risks are, first and foremost, related to banks’ exposure to fossil fuel assets and activities, and it is vital for our societies to address them. I have no doubt that by adopting the capital requirements contained in CAFA, your committee would go a long way toward preserving the stability of the Canadian banking system in the face of the biggest threat banking institutions will be facing in the coming decades.
I thank you for your attention and look forward to discussing these different points with you — and other points in the climate-aligned finance act, obviously.
The Deputy Chair: Thank you for your statement. I will now open the floor to questions, reminding members to keep questions and answers concise.
[Translation]
Senator Bellemare: I’d like to clarify something for our participants. First of all, I’d like to thank them for being here, because this is a very important issue. I want us all to understand each other. Everyone here is in complete agreement on the principle that it is important for the financial sector to take climate risks into account in its operations. It’s important for society in general.
However, we are the Senate. We are required to study a bill that is not a government bill, so there is no substantial study that has been done by the departments or by the government to analyze this bill. So we have questions that may seem naive in this context, since the bill is very ambitious, as we’ve already said.
Do you believe that this bill, because of its ambitions, should be a government bill, since it would allow compensatory measures to be adopted when necessary, because in our understanding, it would cut off funding to economic sectors that are very important to Canada? We agree that the petroleum resource development sector is very important to Canada compared to other European countries. In other words, given these ambitions, do you think the Senate is empowered to pass a bill like this and ensure the follow-ups that are implicit?
Mr. Philipponnat: The senator’s question has two parts. The first is a matter of Canadian legislative procedure, on which I must confess myself incompetent. I’m not going to answer that part of the question.
On the other hand, senator, you say that the proposals contained in the Climate-Aligned Finance Act, if I may use the short title, would cut funding to the fossil fuel sectors. Having worked extensively on this issue, this is not the case for the following reasons. In the Climate-Aligned Finance Act, fundamentally — if I may summarize it in a very general way, perhaps too general — there is a first part dealing with information, transparency, so that stakeholders can assess risks and impacts. Also, there’s a part dealing with the capital requirement, which is the one I was talking about.
Let’s take the capital requirement that would be enacted by this legislation. All our banks, whether in Canada or the European Union, are subject to the Basel regime. What does a 150% capital requirement mean? It means that the risk weighting is 1.5 times the normal Basel capital requirement, or 150%. Instead of putting the number eight of capital equity in front of an exposure of 100, with a requirement of this type, there would be 1.5 times eight, i.e., 12, in front of an exposure of 100. What does this mean?
It means that there is a little more equity against a bank loan granted by a bank to a fossil fuel producing company and that, in the event of a problem, the bank will be more solid and will default less easily, even if its counterpart defaults. So it’s a question of resilience, not a question of preventing financing. It’s something very important.
As I mentioned in my statement, for example, the private equity sector is receiving such treatment under Basel. As we all know, private equity gets all the bank financing it needs when it comes to leveraged deals and the like. So it’s not a question of cutting off funding, but of ensuring that the financial sector, the banking sector in this case, is more robust in the face of certain risks with an unknown time horizon. Granted, there’s the rub.
After all, obviously, for a country like Canada, the fossil fuel sector is extremely important. We all know that, and it’s quite understandable that this should be taken into account.
Senator Bellemare: I have a sub-question. This bill, if I understand correctly, will increase the cost of borrowing for the fossil fuel sector. Don’t you think that Canadian companies will look elsewhere to borrow and that, in the end, the Climate Aligned Finance Act won’t solve the issue? People will simply go elsewhere to borrow and the issue won’t be resolved.
Mr. Philipponnat: You’re asking the right questions, senator.
A banker’s job is to put a price on a risk. The first part of my answer is to say that if the price of credit, in other words the cost, if the interest rate is artificially low because the risk is undervalued, that’s really not healthy from a financial point of view. I’m well aware that this doesn’t answer all your questions. It’s part of the question, but it’s an important one. Economically, it’s a fundamental principle. We live in what I would call freedom economies, with the freedom to undertake and develop business, but all this requires looking at the risks as they are, to be able to put the right price on the risk.
You ask a very good question, however: What happens if a capital requirement of this type exists in Canada, but not in Great Britain, the European Union or elsewhere? This is a subject we’ve been working on a great deal at Finance Watch for four years now. We’re working with the Basel Committee on this subject because it’s desirable that it be applied internationally. We’re working hard within the European Union to ensure that this measure applies to banks in the European Union. We probably don’t have time during this meeting, but there are microprudential and macroprudential measures that will ultimately achieve the same result. There’s a lot of work being done to achieve the same thing in the European Union. We are also working with the British Parliament on the budget. Some British MPs have asked us for our opinion. We can see that, in an ideal world, the resilience of the banking world would be organized on a global scale. This is the eternal question in relation to climate change: we have a global problem, but local governance. And so it is.
The Deputy Chair: Thank you, Mr. Philipponnat.
[English]
Senator Marshall: I’ll carry on with the topic Senator Bellemare raised.
One of the issues we’ve talked about a lot in this committee with regard to this bill but for which we really don’t have an answer yet is the financial implications of the bill. Mr. Philipponnat, I know you were saying that the bank would be on solid footing and there are capital requirements. But is there any way to quantify the cost of this bill? A lot of institutions will be impacted by the bill, including a lot of Crown corporations. I’m sure the government would be interested in how much extra it will cost them.
So, is there any way to quantify the bill, or parts of the bill, with regard to dollar amounts?
I’d also be interested in hearing what Mr. Donelson has to say with regard to cost implications.
The Deputy Chair: I would ask the witnesses to keep their answers concise. I’d like all the senators to be able to ask a question. Your input has been very valuable this morning, so thank you.
Mr. Philipponnat: I’m sorry if I was not concise enough. My apologies.
Briefly, Finance Watch issued a report in 2022 to quantify the implications of the capital requirements contained in the bill we are discussing today. It is referenced in my opening statement, in the text I gave to your committee, so I would encourage you to go through that report for quantification of what that means in terms of capital requirements and also the cost of credit.
Senator Marshall: Can you give us some insight into the magnitude? Are we talking millions, billions or trillions?
Mr. Philipponnat: I’m not sure I can be concise in that case.
Senator Marshall: Not to put you in a corner, but I’m trying.
Mr. Philipponnat: No, no — it’s my job, so I’m happy to do this.
Basically, the additional capital requirements — I’m speaking here about the 60 largest global banks, which have about US$1.35 trillion of credit exposures to fossil fuel assets. If the numbers we’re discussing here were applied to those 60 banks, that would represent a capital increase of between $150 and $200 billion. That’s really a fraction of the total equity of those banks. You have the proportion.
If you look at Canadian banks, out of the US$1.35 trillion global banks had in the fossil fuel sector three years ago — the numbers are three years old, but they must not be fundamentally different today — Canadian banks had $70 billion of exposure, which represented, respectively, 21% of their total equity and 1.45% of their total assets.
Those are the sorts of numbers we’re talking about.
The Deputy Chair: Mr. Donelson, do you have a comment?
Mr. Donelson: We can’t speak to the cost of the bill, specifically, but in our view, there’s a significant overlap with OSFI’s Guideline B-15. Our members are currently in a process of moving toward staffing up and getting the right resources in place to do transition planning, disclosing emissions and getting the right data. There’s a cost to that, but we have a process with OSFI to move toward that over multiple years.
That’s where we would like to focus our efforts. Our only worry on additional costs would be in terms of duplication and past worker regulations, potentially.
Senator Marshall: May I go on a second round? I have more questions.
The Deputy Chair: Yes.
[Translation]
Senator Miville-Dechêne: I have a question for Mr. Philipponnat.
You talked about what’s happening abroad on this issue. Has any country already raised its reserve requirements for certain sectors due to climate-related risks, or would we be pioneers in this sense? I understand you’re working with the Basel Committee and internationally, in Europe and elsewhere, but do you see any countries moving in this direction?
Mr. Philipponnat: Countries moving in this direction, yes, in the sense that the subject is being discussed and thought through. Obviously, these things don’t happen overnight.
To my knowledge, there are no countries that have already adopted an evolution of their capital requirements in relation to fossil fuel exposures.
On the other hand, a lot of work is being carried out within the European Union by the European Banking Authority. At the behest of the European Parliament, there are very in-depth discussions on the subject. Earlier, I quoted what the European Central Bank, which has very considerable powers and moral authority within the European Union, has to say. When the European Central Bank itself says that capital requirements do not reflect the risks that are actually taken, it’s not an injunction, but an incentive for everyone to move in that direction.
Of course, I’m sharing this experience with you because I think it’s important to integrate your work into an international movement. Canada is a very large fossil fuel country, with banks that are active in this sector. It’s imperative that Canada join this international dynamic of asking how we’re going to take these risks into account. If we don’t, it’s certain that, in human terms, we’ll have a new financial crisis on top of the climate crisis. Exposure to fossil fuels is equivalent to the amount of subprime mortgages that triggered the crisis 12 or 14 years ago. The same amounts and the same causes will produce the same effects.
Senator Miville-Dechêne: Could you send us the European Bank document or the one you referenced for this quote?
Mr. Philipponnat: Yes, of course.
Senator Miville-Dechêne: I have a question for our guests from the insurance sector. You said you support the principle of Senator Galvez’s bill. I’m having trouble understanding why you say that, in terms of implementation, you feel that the current system is much slower. We’re talking about institutions asking other institutions to send transparency reports. So things can move relatively slowly. It may not be an efficient and rapid enough process to deal with climate change, as opposed to a more ambitious solution, which is to legislate on the idea that if fossil fuel industries are financed, reserves must be made more complex or increased. They undoubtedly contribute to global warming.
[English]
Jason Clark, National Director, Climate Change Advocacy, Insurance Bureau of Canada: Thank you, senator, for the question. First, we support the spirit of the bill because we think the focus on physical risk in particular is incredibly important.
To address your concern around the inability to move fast enough, I agree. On behalf our industry, we are currently and have been for multiple years actively working on climate change, on multiple fronts and in multiple jurisdictions.
We are addressing the concern about not going fast enough in multiple ways. First, I would look at the advocacy work we have done in order to advance specific policy. My colleague Mr. Donelson mentioned the work that we’ve done around the National Adaptation Strategy in particular.
Senator Miville-Dechêne: But the results in Canada are not changing. We are last in the queue in terms of climate change.
Mr. Clark: From our perspective, the question is this: Are we doing enough to address climate change that’s already happening? The challenge is that we are not. We believe we need to move faster.
In terms of the bill itself, the process is already under way for property and casualty insurers with OSFI. In terms of this bill, we are already doing some of that work. Our members are already engaged in a significant amount of that work. We have aligned with our federal regulator. In addition, we have aligned with the International Sustainability Standards Board, or ISSB, on international standards as well.
It is important. From a physical risk perspective, as we outlined in our comments, we’re gravely concerned and actively working on that.
Senator Miville-Dechêne: Wouldn’t it make your task easier to have this bill, since it would make the transition faster?
Mr. Clark: That’s a great question. From our perspective, in terms of the disclosure of the reporting, as I mentioned, that’s already under way. We have a diverse membership. The way that OSFI has set up this work is to enable those larger institutions to move at a rapid rate and the smaller community institutions to move at an appropriate rate, which is already a challenge for them. We are committed to doing that work.
Again, from our sector’s perspective, this is already under way.
The Deputy Chair: Thank you, Mr. Donelson.
Senator C. Deacon: Thank you to our witnesses. I will focus on the insurance implications of climate change. Many of us are in favour of the intention of Bill S-243. The Bank of Canada and OSFI, in a joint report a couple of years ago, said speed is critical to minimizing the economic risks.
Last summer was kind of apocalyptic in Nova Scotia. We had fires and flooding at a greater level than we’d ever seen and significant insurance claims as a result. If you look at catastrophic climate events, it looks like a logarithmic chart but is actually a linear chart in terms of how those risks are growing globally.
Speaking just outside of this bill, how specifically are you managing dealing with those escalating risks and the reality that homeowners need affordable insurance on their homes in order to get a mortgage? How are you finding that balance through the work that you’re already doing?
Mr. Donelson: Thank you, senator, for the question. Canada is a becoming a riskier place to live and work in and to insure; because of that, the costs increase. You mentioned flooding. We’ve seen that high-risk areas of the country with respect to flooding have either had insurance rates become unaffordable or insurance for overland funding become unavailable. That’s why we’ve been advocating with the federal government, for about eight years now, for a low-cost national flood insurance program. That would be a public-private partnership focused on these high-risk areas that would allow homeowners in these areas to have a comprehensive flood product to cover all types of flooding. It would be standardized no matter which carrier you are working with and would solve the issue. Rather than having ad hoc disaster financial assistance come in after an event, when people don’t have insurance, we want them to have that insurance framework in place up front so they can get the help they need right away.
To answer your question, the effects of climate change are increasing costs across the board. That is one of the outcomes and we’re coming up with public policy solutions to try to address that.
Senator C. Deacon: A lot of families were left very much in limbo last summer because what clearly should have been covered in their policies was, in the end, not covered. Insurance companies refused to deal with that for a lot of homeowners. The Province of Nova Scotia eventually stepped in regarding that but, as a Nova Scotian taxpayer, I was troubled by that whole situation. In plain language, it was very clear that the groundwater infiltration that occurred was coincident with the biggest flooding event that had ever occurred in the province. It was surface water entering homes, and they claimed that it wasn’t associated, which is patently outrageous.
Those sorts of situations are riling up and upsetting a lot of homeowners. How are you intending to make this something that they can count on? There is a lot of lost trust in the insurance industry in our province.
Mr. Clark: I’ll take that question. Thank you very much, senator.
I’m not able to speak directly to specific policies, of course, but what we have seen in particular around the flooding Nova Scotia experienced last year is that floods are essentially the most prevalent and costly climate-related disaster events we’re facing. What is very clear is that not enough homeowners are covered.
So a key piece of our advocacy, as my colleague Mr. Donelson said, is around trying to ensure that homeowners across the country have access to affordable, accessible, comprehensive flood insurance for all these perils.
This is a key piece of our work. It’s been ongoing for eight years. We were very pleased to see next steps outlined in Budget 2024, and we are actively working on that to ensure that we can cover more Canadians. There is a significant coverage gap, and we are trying to resolve it actively with the federal government.
Senator C. Deacon: When should we expect this work to be done and homeowners to see a difference? Speed is of the essence.
Mr. Clark: I would agree.
The budget outlined a 12-month process; this program should be stood up in 12 months. That’s the timeline we’re working on. We very much hope we can, and are at the table in partnership to, deliver on that timeline.
[Translation]
Senator Gignac: Thank you to our witnesses for being here today. I’d like to continue the discussion begun by Senator Bellemare for Mr. Philipponnat. As you know, financial markets are highly integrated globally. In 2008 and 2009, I had the privilege and opportunity to work at the Department of Finance and the Bank of Canada with former governor Stephen S. Poloz and the current governor, Tiff Macklem. I also served on the G20 task force.
At that time, it was obvious that the players had to work together, since financial markets are highly integrated.
When you refer to risky assets, whether for mortgages or private equity, it would have been unthinkable for Canada to move unilaterally without the Federal Reserve or the Bank of England doing the same.
It was a working group with timelines and it wasn’t done with legislative policy-makers. It was done at the level of finance ministers and central banks with regulators.
Don’t you think it would be wiser if we drew on the best practices developed during the 2008 and 2009 financial crises and had working groups and regulators all moving at the same time, rather than thinking that Canada could move unilaterally, simply because companies will finance themselves other than with Canadian companies and the Canadian banking sector?
What would be the consequences if we moved unilaterally? Canada is highly integrated with the United States. It’s like France moving without Germany, it would be a bit weird. I’d like to hear your reaction.
The Deputy Chair: Five other senators want to ask questions and we have 15 minutes for the first round. This is a very important issue and we want to hear from you, but please be as concise as possible.
Mr. Philipponnat: I’ll be very concise.
I think we’re looking at the debate clearly. On all these questions of international regulation…. I’ve been in this business for a long time; I was a banker for 20 years and I’ve been in my current job for 15 years now. I always hear the argument, which is totally well founded and true, that says, “Yes, but someone else in the world isn’t doing it, so I’m going to lose business.” That’s the question of the planned level.
It’s a real question. No one disputes it. At the same time, I’m convinced it’s twofold. It’s essential that political leaders decide to move forward at some point, because the general interest is not just the sum of private interests. We all agree that private interests count, because that’s what economic life is all about, but the day there is — and I’m not a bird of ill omen — a new financial crisis triggered by all the banks on earth, as happened 12 years ago, the countries that have taken steps to prevent this from happening will congratulate themselves, because a country without banks doesn’t work. That’s a very important point. In your question, senator, which I understand perfectly, there’s what’s happening in the short term, about the fact that business can go elsewhere; let’s call a spade a spade. Then there’s what’s going to happen tomorrow. Who will stand up when the problem reveals itself, and who won’t?
If you put both in the equation, I think it’s the political responsibility that is incredibly subtle and it’s very difficult to weigh both. As for international coordination by the G20 — I mentioned the Basel Committee — that’s obviously why we work with them; and then there are the unsurprisingly long processes, of course.
[English]
Senator Petten: How does the climate-aligned finance act support insurance companies as they consider where to invest their assets to ensure maximum returns on investments? For example, can an insurance company continue to ensure a fossil fuel project while simultaneously investing their assets in clean energy development?
Mr. Donelson: For important context here, most of property and casualty companies’ investment portfolios are in fixed-income assets or bonds, so there is not a lot of direct investing in companies; there is some.
Overall, under Guideline B-15, our members are required to set out transition plans. Some have made net-zero commitments on their own, and this is a dynamic market that is taking place as we transition.
How we’re undergoing the process right now is really aligned with what is required under Guideline B-15.
Senator Petten: My question was more around this bill that we’re studying. Is there anything in this bill that you’ve considered that would help with all of those guidelines?
Mr. Clark: Sorry, senator. Could you repeat the question?
Senator Petten: I was referring to it as related to this bill.
Mr. Clark: In terms of our investments, I would say that under our federal regulator, our P&C insurers are quite structured in terms of the specific regulations with which we are able to invest. So that is already quite limited with respect to our regulator.
Those are regulations that we already face that limit what and where we can invest, as well as the types of investments we can make.
The Deputy Chair: Thank you, Mr. Clarke. We’re moving on.
Senator Varone: My question relates to risk. As we enter our sixth generation of Canadians using fossil fuels, we’re now looking to get off that ramp and divert to other energy sources.
If everyone in Ontario stopped putting gas in their cars and started switching their furnaces to heat pumps, we would not survive the kind of electrical grid problems that would cause. At the end of the day, the only way out of it in Ontario is building more nuclear. So, the question around fossil fuel and nuclear is this: Has the insurance industry fully assessed the impact for the province of going more nuclear? Because one catastrophic event in nuclear will dwarf whatever it is we get from other forms of climate change. I want to hear your perspective.
Mr. Donelson: That’s a great question. I would turn to the importance we place on understanding the physical risks of climate change — so if you have an asset like that, what risk it is facing from extreme weather events and that type of thing.
When it comes down it to it, we need government action on climate adaptation and resiliency to make the kind of investments that will protect key assets, neighbourhoods, homes and businesses to ensure that they’re viable going forward in the long term.
Senator Varone: You didn’t answer the question as to whether you have undertaken a risk assessment on the alternative to fossil fuels.
Mr. Donelson: I can’t say that we have. I’m sure in our member companies there are many actuaries who are looking at these sorts of macro issues, but I don’t think IBC has.
Senator Varone: Thank you.
Senator Yussuff: Thank you, witnesses, for being here this morning. Obviously, this bill is very ambitious in its orientation, and that’s the nub of the questions we have to debate regarding what’s happening with Guideline B-15 and whether Canada can move faster.
I have two questions. In regard to the point you were making earlier, Mr. Philipponnat, when the subprime mortgage crisis took place in the United States, we were to a large extent spared because Canadian banks were more heavily regulated, and we did that alone. We didn’t do it with the world. We did that on our own because we recognized that was not a way for our banks to operate in terms of taking risks.
Canada, of course, is unique as a country. The fossil fuel industry is part of our DNA and how this country is made up. Is the bill going a little too far in the weight it’s providing for how we can now put risk in these assets? Basically, we’re going to apply a very high level of weight to the oil and gas industry, to that sector, in terms of lending. Does the bill overreach? Is there a way to modify the bill that will make it more palatable, recognizing that Canadian capital still invests in the fossil fuel industry in this country?
[Translation]
The Deputy Chair: Please be concise, as we only have a few minutes left.
[English]
Mr. Philipponnat: That is an excellent question. I don’t think there is any overreach because again, this bill is about bringing transparency, and transparency is just a prerequisite for making some decisions, and the capital requirements it discusses do not prevent the banking industry from financing the fossil fuel industry. They just make the banking industry more resilient in the face of the risks that will one day materialize.
No one knows exactly when that day will be, but when it happens, the banking sector will be more resilient, so I don’t see any overreach.
I would go as far as saying if we waved a magic wand and all the countries in the world adopted such a law tomorrow morning, we would have made a great step toward making this world more resilient in the face of the daunting issues we have to solve. Obviously, this bill doesn’t solve climate change; however, it makes the financial sector more resilient in the face of it.
Senator Yussuff: Clearly what we have been witnessing over the last number of years is quite catastrophic; we have never seen anything like this. Unfortunately, you are not the ones who make the decisions about where homes are built in this country. You are on the receiving end. We’re building homes on floodplains to a large extent, and then we wake up one morning and find the floodplains will destroy the homes built there; you’re then asked to provide insurance for those homes.
It’s quite challenging to say we should now socialize the risk and ask taxpayers to take on part of that risk while we’re asking the insurance —
Should we not simply come to terms with the fact that we should not be building on floodplains in the first place? Shouldn’t that be part of the debate, as opposed to asking how we should socialize the risk in our society? It’s complete craziness to say, “You’re going to build on the floodplains. We can still insure them. As long as the public can be part of that equation, we’re fine.”
What are your thoughts and where is the industry is coming from? Because this will be a real challenge for our country if we want to maintain rates at a reasonable level so Canadians can afford to insure their homes.
Mr. Clark: Thank you for the question, senator. We completely agree, both at the Insurance Bureau of Canada and Climate Proof Canada. This is something we’ve been actively working on. Take the recent announcement of Canada’s housing plan, the federal government’s commitment to building 3.87 million new homes: We fundamentally believe that those homes should not be built in high-risk flood or wildfire zones. That will directly challenge the supply crisis that they seek to address. Looking at protecting existing communities, we outlined our work on a national flood insurance program that is designed to protect homes that were already built in these high-risk zones. We don’t think you should build new homes in high-risk zones.
The Deputy Chair: Thank you, Mr. Clark.
Senator Galvez: In the interests of time, I will just ask a question to the Insurance Bureau of Canada.
Canada is warming up two to three times faster than the rest of the world, and our Arctic is warming up five, seven or eight times faster, and that’s why we will have more extreme weather events than even Europe or South America.
The situation I don’t understand is that you and your members present the cost of the insured losses, but this is only part of the cost. I would like you to comment on the total cost. My colleagues are very interested in how much this is costing, but in order to have a reference point, we need to know how much the cost will be if we don’t do anything.
Second, on this issue with insurance — on one hand, yes, we need more transparency to reveal the floodplains and change the building codes, and everybody knows who is active or no longer active as an insurer in a given region. We have seen that in Hawaii. On the other hand, the same insurers are now secretive about who is insuring pipelines. How do you position yourself in this double materiality?
Mr. Clark: Thank you, senator. I’ll address the cost question first and then we can move on.
In terms of cost, we have seen, and the senator mentioned this, that the trend line is very clear in terms of the increasing frequency and severity of climate-related events. This is borne out in insured losses, and whether we look at 2022, which was $3.4 billion, if we look at last year, which was $3.5 billion, and that’s still being assessed so it could go higher. That is one layer of the total; that’s only insured losses. So uninsured losses — the impact to infrastructure, for example — is higher than that.
I don’t have a number on hand, but I think that is a very important question. I can say the number is significantly higher than that because that is only our industry’s representation.
The Deputy Chair: If you do have that number, it would be helpful if you could get back to us in writing.
Mr. Clark: We are happy to share our total insured losses. Absolutely, we’ll share that.
The Deputy Chair: Thank you.
Senator Massicotte: Thank you for being with us this afternoon. We all agree climate change is a major issue that we have fumbled. We’re all aware it’s a disaster.
But how do we best manage that issue? When my colleague asked you if it is important to do something, and you say that you agree in principle, but you really like what OSFI and you yourselves are doing, I have the sense that you politely respond, “Of course we need this thing, but what happens if we don’t have it?” Let’s be less polite and ask, “What happens?” Does that mean OSFI made a major error about the consequences to our society or — as a lot of us feel — is this a duplicate of something in there that you prefer not to get involved in because it’s not your battle?
Give us a sense of things there. What happens if it doesn’t happen? Is OSFI so incompetent that they would make these serious mistakes without resolving them?
Mr. Clark: Thank you, senator. I’m happy to take that question.
This bill addresses one part of the challenge. To your point on whether we are doing enough, we tried to begin our comments by saying that we are not doing enough and not ready. We’re seeing that year over year. Last year, we had the worst wildfire season in our history, and this year could be worse.
Senator Massicotte: Will this bill help?
Mr. Clark: With respect to this bill, we have said that, as it pertains to the property and casualty insurance industry, a lot of this work is already under way. When this bill was written, some of that work had probably not commenced.
Whether it’s climate-related disclosure or the scenario analysis with OSFI that’s ongoing in 2024, some of that work is happening now. Our members are already engaged in that.
Senator Massicotte: Do we need the bill?
Mr. Clark: That is for this committee and Parliament to decide. We think the bill is important in spirit. One way it could be improved would be to align the public reporting requirements with what exists at OSFI and ISSB.
Senator Massicotte: That’s a minor portion of the bill.
Mr. Clark: Not all of the bill pertains to our industry.
The Deputy Chair: We’re running out of time, so maybe we can go quickly — or maybe you can send it in writing if it’s not quick. Mr. Philipponnat, please be concise, if you can, but I don’t want to stop you for the second round.
Senator Marshall: I think I’m quoting you — in spirit, anyway — that you said that you support the bill in principle but have concerns about certain provisions. Mr. Clark just mentioned one of them, which is aligning public reporting with OSFI.
Could you send us something that would identify the clauses that you have concerns about, if we do amend the bill?
Mr. Clark: Yes.
Senator Marshall: Thank you.
Mr. Donelson: I will give you one quick example. OSFI’s reporting timelines are typically 180 days after fiscal year end. In the bill, it’s 60 days. We would rather have the 180 days as the normal standard.
Senator Marshall: Is that it?
Mr. Donelson: We can also send a more robust answer.
Senator Marshall: I was going to say — it should be more than that. Thank you very much.
Senator Bellemare: The Financial Stability Board produced a road map for addressing climate-related financial risk. How does this bill compare to what the Financial Stability Board suggests? Maybe you and Mr. Philipponnat could answer in writing also.
Mr. Donelson: We’d be happy to respond in writing. The Financial Stability Board and the Task Force on Climate-related Financial Disclosures, or TCFD, has informed not only this bill but OSFI’s Guideline B-15. We’re working within that framework.
The Deputy Chair: Before concluding, based on the questions that senators asked, are there any messages you want to reinforce? Thank you for being here this morning.
[Translation]
Mr. Philipponnat, thank you for joining us. Is there a message you’d like to deliver to us in a 30-second reinforcement?
Mr. Philipponnat: Thank you, sir, it was an honour.
[English]
My main message is that even if there is an impact on business in the short term, given the seriousness of what we’re facing, what’s at stake and the irreversible nature of climate change once it has struck, considering the short-term impact of the bill is not enough; collectively, we have to consider the medium to long term. Unfortunately, the long term is not that long anymore.
The carbon budget of the planet is five or eight years now. In eight years’ time, we will have exhausted our carbon budget. In other words, we will not go any lower than two degrees Celsius of global warming. So there’s an urgency, and the long term is becoming very close to us.
So let’s consider the eventual impact and not only the impact on business today.
The Deputy Chair: Mr. Donelson, any last words?
Mr. Donelson: I will turn to my colleague.
Mr. Clark: I would reiterate that we support the spirit of the bill and the aim of increasing sound climate risk management within the financial sector.
I will return to our initial comments to say that climate change is already here and happening. We’re already experiencing the impacts. Insurers are on the front lines of that. We are working on it on a daily basis, whether it is to mitigate those impacts at the community or home level — that’s a key part of what we’re trying to do — or our focus on flooding and wildfires. We’re happy to respond further in writing as to proposed changes that we would make. We welcome your ongoing study.
The Deputy Chair: Thank you very much. This brings us to the end of our time that we have for our first panel. Thank you very much for appearing before us today.
For our second panel today, we have the pleasure of welcoming, by video conference, Nathan Fabian, Chief Sustainable Systems Officer, Principles for Responsible Investment; and Christopher Ragan, Director, Max Bell School of Public Policy, McGill University. Welcome, gentlemen. Thank you for joining us today.
We will begin with your opening statements. You have a maximum of five minutes so that we can have senators ask questions — they all have many regarding this very important bill.
Mr. Fabian, the floor is yours.
Nathan Fabian, Chief Sustainable Systems Officer, Principles for Responsible Investment, as an individual: Good afternoon, senators.
The Principles for Responsible Investment, or PRI, is an association of over 5,000 investment organizations in over 100 countries. A key tenet of our association is that incorporating environmental, social and governance — or ESG — factors into investment decisions is integral to the duties of prudence and diligence to clients and beneficiaries.
Each of the countries our signatories operate in takes its own approach to transitioning its economy to meet sustainability targets on climate change mitigation and restoring nature. This may include a range of fiscal, regulatory and standard-based measures.
My evidence today is from the perspective of institutional investors who invest globally and seek clear, transparent and harmonized standards and regulations for capital markets and economies.
Globally, we see concrete reforms in many areas of financial system function on climate change and nature related to those in the proposed bill. PRI’s regulation database records over 300 new and revised regulations since 2019 that support or require integration of ESG or sustainability considerations into financial practices. Of these, 230 apply directly to investors, stock exchangers or other financial service providers.
Specific examples of reform include corporate and financial product disclosure obligations, accounting standards — as you may be aware, ISSB standards are already adopted in 4 markets, 13 other countries have commenced adoption processes and we expect many more countries to follow suit — and environmental benchmarks in the form of sustainable taxonomies, which are under development in 40 countries, including Brazil, the EU, Indonesia, Singapore and the Republic of Korea. There are stewardship and collaborative engagement requirements — for example, we’ve identified at least 25 jurisdictions with stewardship codes or regulations, including Japan, Australia, Malaysia, South Africa and India.
Another area of reform is investor duties, including permission and, in some cases, obligations to consider sustainability impacts. For example — as the committee has talked about insurance today — in the EU, as of August 2022, insurance and reinsurance companies are required to take into account the potential long-term impact of their investment strategy and decisions on sustainability factors as part of the prudent person principle.
These examples indicate that there has been substantial progress globally on sustainable finance reform.
Three examples that might be informative for you in Canada are Japan, Malaysia and Australia. All three markets have corporate disclosure laws and stewardship codes, and are adopting national sustainable finance strategies to guide progress. Australia has recently set a new net-zero agency and climate-related financial reporting bill, Malaysia has new guidelines on sustainable and responsible investment funds and Japan has new guidelines for its financial institutions on impact investing.
It’s worth clarifying why these policies are being implemented. The reasons include that, having set climate or nature targets at the national level, governments are considering the role and function of private finance in their economic transition. Furthermore, objectives may include increasing financial flows to transitioning economic activities and companies; ensuring risk management processes are in place in corporations; stress testing of financial risks in portfolios; and, importantly, building trust between counterparties on environmental performance relating to disclosure, targets, transition plans and claims.
These objectives and the reforms that flow from them are not new or novel. They’re well studied by groups like the Organisation for Economic Co-operation and Development, or OECD, the Network for Greening the Financial System, or NGFS, the World Bank and even the Financial Stability Board.
We know that Canada specifically has legislated its environmental and sustainable development goals through acts and policy documents such as the Canadian Net-Zero Emissions Accountability Act, the 2030 Emissions Reduction Plan and the Federal Sustainable Development Act. But at this stage, Canada’s sustainable financial priorities and framework are unresolved relative to these goals and to other jurisdictions.
It’s important to note that voluntary and risk-based decisions by leading institutions matter greatly for preparing a financial system for climate-related economic transition. There are many sophisticated institutions in Canada; however, ultimately, certainty in the rules and standardization lead to transparency, reduced transaction costs and building confidence in capital markets, which allows financial markets to scale up.
Many jurisdictions are clarifying their sustainable finance regulations; these jurisdictions will set the frameworks and standards that are followed globally.
Whatever approach is chosen in Canada, we would encourage deep consideration of the measures in the proposed bill. Thank you, chair.
The Deputy Chair: Thank you, Mr. Fabian. Mr. Ragan, it’s now your turn to deliver opening remarks, for a maximum of five minutes. Thank you.
Christopher Ragan, Director, Max Bell School of Public Policy, McGill University, as an individual: Thank you very much. It’s an honour to be here. I think I am going to end up being the odd man out and a bit of a fish out of water here. I am not here before you as a specialist in banking regulations or insurance. I’m a macroeconomist and have spent many of the past 10 years or so thinking about the economic implications of climate policy and, in particular, carbon pricing.
To begin, I strongly support policies that drive transparency and the measurement of risks in the banking sector, climate risks included. If they require adjustments in capital ratios, I think that is appropriate as well. I think this is crucial for financial stability and the resilience of our banking sector. Where I get concerned, however, is if a bill like this ends up being partly motivated or — even worse — calibrated with an objective of intentionally starving the oil and gas sector of financial capital as a means of driving a reduction in production. Here, we need to make the distinction between appropriate, prudential banking policy and appropriate, cost-effective climate policy.
I believe that my presentation slides have been given to every member of the committee. I don’t think I will have time to go through them, but let me make the key point. My slides are about an essay that two others and I wrote a little less than a year ago, which was a report explaining a prominent report published by the Public Policy Forum, or PPF, called The $100 billion Difference. The report was designed to address many calls that we hear across this country for an active phase-out of the oil and gas sector. The question for the economist within me and for the two economists with whom I wrote this report was this: Why are people advocating a phase-out of the oil and gas sector as opposed to a more sector-wide and economy-wide set of policies to drive emissions reductions?
You can see what this exercise did in the last few pages of my presentation. The modelling exercise compared two different policy approaches. One was what we called aggressive decarbonization. Think of that as an economy-wide carbon price, mostly a carbon price — there were other things as well — that rose as necessary to achieve net zero by 2050. As we have learned from much climate research in this country, there are many ways to accomplish net zero by 2050. This was accomplishing it with an economy-wide and sector-wide carbon price.
We compared that with a policy that had less carbon pricing but had an actual active, intentional phase-out of oil and gas, starting from 2035 and basically contracting the sector to almost zero by 2050.
The point of this was that these two alternative policy approaches could both achieve net-zero emissions by 2050. In that sense, they were environmentally equivalent. However, the economic costs of these were quite different. The key of what we were trying to do in this report and the PPF report was to ask that question: What would be the economic cost of using this intention phase-out policy rather than the economy-wide carbon price?
The first table in my slides shows you the difference. It shows you the average annual growth rate of GDP in the two different scenarios. It then shows you the GDP difference as of 2050. That’s where the title “The $100 billion Difference” comes from: It shows that if you actually use an intentional phase-out of the oil and gas sector, it is much more costly for the economy.
Rather than spreading the costs over all sectors and all parts of the economy, an active phase-out focuses a big chunk of the costs on one particular sector. As a result, the overall costs in terms of the emissions reductions to 2050 end up being much higher — $100 billion by 2050 is roughly 3.5% of GDP by that time.
If you remember the financial crisis of 2008-9, GDP in Canada fell by a little bit under 3%, and that lasted for a few years. This is a permanent 3.5% hit to GDP. It’s actually a very substantial cost for the Canadian economy.
The point here isn’t to say climate change is worth it. Climate change is a very important problem that we need to address, but the point of this report is to say there are multiple ways we could do it, but if you actually design policies that create what is effectively a phase-out of the oil and gas sector, the costs are very high indeed.
The point of the next slide is to come back to Bill S-243 and ask what the impact of this would be on the oil and gas sector. I think it’s important to make the distinction between what is prudential banking policy and making sure that risks are appropriately measured and clear, and that financial capital will then flow in the appropriate directions. But if a policy like this ends up, perhaps inadvertently, choking the oil and gas sector of financial capital — I’m not sure that will happen, but if it does — then it will be like an active phase-out of the oil and gas sector, and then you start getting to costs of the type that I’ve talked about and that are in the PPF report.
I’ll stop there. Thank you very much.
The Deputy Chair: Thank you. We’ll move on to questions.
[Translation]
Senator Bellemare: Thank you for being with us, Mr. Fabian and Mr. Ragan. My question is as follows. What I understand from Mr. Fabian’s presentation is that there are a lot of initiatives being taken internationally to align the financial sector with climate issues, but these are government initiatives, if I understand correctly. Governments have adopted these regulations. A Senate bill is currently being studied, so it has certain limitations. In this context, do you think that Bill S-243, which is based on somewhat more negative measures, and I put that in quotation marks, because it’s about regulation…. There’s no “carrot” in the bill; there’s no financial support because we can’t do it. Do you think this bill will succeed in its mission, if it’s not accompanied by public policy measures that also support other sectors in the climate transition, while holding them to account? That’s my question.
[English]
Mr. Fabian: Thank you, senator. I’m reluctant to comment on your internal processes, but I will say that our view is that when governments take a whole-of-government approach or view on these reforms, we get more substantial reforms that are better connected across different government functions and types of regulation. Financial actors know that disclosure, duties and stewardship only get us so far and that other types of economic policy reform are also necessary to meet climate and nature goals. So that’s why our view is that whole-of-government approaches achieve the best outcomes.
The Deputy Chair: Thank you.
Senator Marshall: I will be brief also. Mr. Fabian, you were talking about all these changes since 2019. All of these organizations and companies have had to change over the last five years. They’re making changes all the time. Just to link back to something that Senator Bellemare said, are all those standards established by government? I had always understood that other organizations would be establishing standards. For example, accounting standards — do they come out of government? Who establishes these 300-plus standards?
Mr. Fabian: Senator, it’s a range of institutions, from government departments to financial regulators and supervisors to standard-setting bodies that are formed by industry; it’s a full range. We find that there can be a process of voluntary initiatives turning into, say, regulator- or supervisor-adopted guidance, which sometimes then leads to a regulation in order to ensure a level playing field and to balance the cost of implementation across different actors. But you’re right; it’s a range of institutions.
Senator Marshall: To follow up, they aren’t always mandatory, are they? Are some of those requirements not voluntary and, therefore, it may take a while before an organization implements the recommendations? It’s not like all of a sudden everybody changes that particular year.
Mr. Fabian: That’s right. There are many techniques used that require some action or response but don’t stipulate or demand a precise behavioural response. For example, “if not/why not” obligations are used, or guidance or principles of good practice are provided, and then there’s a requirement for transparency on what actions have been taken. There are many ways to implement these requirements that allow markets time to adjust.
Senator Marshall: Thank you very much.
Senator Gignac: Thank you to our witnesses. My question will go to Chris Ragan. Chris, you are the former chair of Canada’s Ecofiscal Commission. I had the opportunity and privilege to work with you during the financial crisis, along with Tiff Macklem and Mark Carney. You have a lot of expertise. I remember that at that time, it was a G20 task force that dealt with some tougher regulations, I would say, to take risk into consideration.
Having said that, as pointed out by my colleague Senator Yussuff, Canadian banks did better during the financial crisis because, a decade earlier and contrary to Lehman Brothers and other U.S. brokers, Paul Martin refused to lift the leverage ratio to 20 to 1. So, it’s possible that Canada could move ahead on banking regulations without the U.S. and protect us from the climate crisis. Do you have any other thoughts — other than Bill S-243, which imposes tighter regulations — on how we could proceed? Is there a different way rather than going into that detail with regulation? What would happen if a government, for example, decides to axe the tax? There would be no carbon tax, and so no aggressive decarbonization, so how would we reach our 2050 net-zero goal?
Mr. Ragan: Thank you very much, Senator Gignac. That is not an easy question. First of all, there were two questions, really. The first question was this: Can Canada have different regulations? I think the answer is yes. As you pointed out, Canadian bank regulations are not exactly the same as U.S. regulations. They’re also not exactly the same as European regulations. Even though there’s some commonality between them, there can be differences. That does not concern me.
If Canada wants to pass legislation that requires corporations and banks to measure risks and be transparent about them, that opens up a number of difficulties. Many of these risks are very difficult to measure, and we haven’t quite figured out exactly what we mean by “climate risks.” We haven’t figured out the difference, really, between risks about climate change and risks to climate policy, which I think are logically distinct.
But once you start introducing the requirements, then we also start figuring it out, which is probably with a happened 100 years ago when we started requiring publicly traded companies to disclose financial risks. We then got into the business of figuring these things out.
So I’m not worried that we can’t act at least slightly differently than other countries.
Your second question, if I understand correctly, was this: If the carbon price disappears, then what can we do to address climate policy? As you know, I am a fan of a nationwide carbon price, not just because it is an effective way to reduce emissions, but because — as many economists and I believe — there are good reasons to think it is the lowest-cost way to do it. If a future government were to end up repealing the carbon price that now exists across the country, then, first of all, I would hope that government would replace it with something. That could be a higher-cost policy. I would lament that, but hopefully, there would at least be a policy that is effective at reducing emissions.
Going back to the first question about Canada acting alone in this kind of action, as outlined by Bill S-243, it’s very important to ensure that we measure and define those risks — and therefore, the capital requirements — very carefully. I’m not sure we know as much about those risks as we would like. It was suggested during the previous panel that we know assets in new oil developments will be stranded. I’m not sure we actually do know that. There is a fair amount of disagreement about where the world demand for oil will go over the next 30 to 50 years. There is certainly a lot of disagreement about how much demand there will be for Canadian oil over the next 30 to 50 years. It’s entirely possible that, even if the world experiences a reduction in the use of oil over the next 30 or 40 years, Canadian oil will continue to be produced here and sold into that world market.
So we have to be very careful when identifying what these risks are and what assumptions those risks are based upon. That is actually my concern: If you calibrate these kinds of policies without sufficient care, then you might end up driving a reduction in an industry that produces a huge amount of income for the Canadian economy.
Senator C. Deacon: Thank you, Mr. Fabian and Mr. Ragan, for being with us today.
At a strategic level, how do you think Bill S-243 aligns with global best practices, beyond transparency around quantified risks? Getting that transparency around quantified risks is crucial to drive action, and I’m a big believer in the idea that if we spend too much time trying to be perfect, we’ll never make progress. I’ve seen that too much in my life.
Can you just speak, at a strategic level, about how you see this fitting with actually making progress?
Mr. Fabian: I can respond to the senator’s question. Thank you, senator.
This bill obviously picks up on the reforms that are being implemented in other countries. Many of the same subjects are captured there. Whether this bill has appropriately calibrated the proposed reforms around what can be most effective is a separate question. My testimony has definitely indicated that these reforms are on foot in many jurisdictions.
To the extent that they make a difference, they make a difference to the functioning of capital markets in terms of whether capital and debt markets have comparable rules and standards, can be transparent and allow counterparties to understand what the alignments with climate and nature goals are in a comparable way.
Does this alone help us meet our climate targets? Of course not. The role of capital markets is to provide capital to the economy and protect the interests of clients and beneficiaries and the future value of their savings. That’s the duty. That is a partial but essential role in economic transition, but it is an essential role in economic transition because we believe in markets and want to use them to transition our economy.
It is a very important piece of the puzzle but it is not sufficient alone. Therefore, other economic reforms are also needed.
The Deputy Chair: Mr. Ragan, would you like to add something around that question?
Mr. Ragan: I wrote down your words, Senator Deacon, “actually making progress.” We have to make a distinction between making progress in terms of improving the stability of the banking system to climate risks and making progress on, let’s say, reducing greenhouse gas emissions and adapting to climate change. Those are two quite different things. They are not completely unrelated but are logically very separate things.
A bill like this, if calibrated correctly, can help in terms of banks taking risks more transparently and better knowing what their risks are, and financial flows will work in a better direction as a result. But we should not think of this as central climate policy, which fundamentally requires reducing the demand for fossil fuels. That is true both in Canada and globally.
I don’t think that’s really what the banking adjustments will do. Something like this kind of policy to help the banking sector become more resilient, coupled with policies like carbon pricing — or if you don’t like carbon price, then some higher-cost substitute for it — fundamentally has the effect of reducing the demand for fossil fuels; it is not really trying to play with credit flows directly.
Senator C. Deacon: Thank you very much.
[Translation]
Senator Miville-Dechêne: First of all, I’d like to come back briefly to this issue that we’ve talked about two or three times anyway, which is the difference between a private-interest bill and a government bill. That’s absolutely true, but we also have to bear in mind that when bills arrive in the House of Commons, it’s not unusual for the government to speak out on them and ask for changes that correspond to its expectations. There isn’t necessarily a Chinese wall between two initiatives. We can send a bill back to the House of Commons that can be supported by the government.
That said, my question is for Mr. Fabian. I’d like to have more details, because you’re either beating around the bush or being rather cautious in your opinion of the bill. The main principles of Bill S-243 — I’m talking about an important insurance policy or reserve for banks when they lend to oil companies, for example, and very important reports from financial institutions…. Do you agree with these principles, beyond the very form of this bill? Do you consider there to be any errors in the bill, or do you think it’s heading in the right general direction?
[English]
Mr. Fabian: Thank you, senator.
Banking regulation and capital requirements are not the primary focus of my organization or my expertise. All I would note is that capital requirements and the use of capital requirements is a subject that is still on foot globally, as it is still open to conversation. When the issue was studied in Europe — and it is still being studied — the use of capital requirements, either for additional costs on pollution or incentives on green allocations, quickly come into the question of what other risks or factors are present. So this, obviously, introduces some complication around the use of this tool.
I’m sharing this as an observer of the dialogue in other jurisdictions, but I’m not wishing to give expert opinion on how this policy should be played out.
The Deputy Chair: Thank you, Mr. Fabian.
Mr. Ragan, would you like to add very quickly and concisely on that?
Mr. Ragan: Very quickly — you asked, senator, whether there may be errors in the bill. Though I have not read the bill, I can guarantee there are errors in it because there are errors in most bills.
We are very much at the beginning of thinking about climate-related risks, measuring them and building them in.
My recommendation is that this bill should contain — perhaps it already does — a measure that requires a review of the calibration fairly frequently, perhaps every four or five years, because there will be developments in how we learn to think about these things. What you don’t want —
Senator Miville-Dechêne: There is one.
Mr. Ragan: Good.
Senator Miville-Dechêne: There is such a clause already.
In light of such a clause existing, are you saying that this particular bill is progress? Because there is an urgency in changing the way we are dealing with the climate, and this bill stems from this urgency. We cannot wait for everybody to slowly get to the point where they have reports and so on. I do believe there’s an emergency.
Considering all that and the fact that it would be reviewed in a few years, do you have some sympathy for this bill?
Mr. Ragan: I don’t think of this as a policy that is appropriately driven by the climate emergency. To me, that is what should drive more aggressive climate policies.
To me, the issue should be driven by concerns about the stability of the banking system. Let’s think about it that way, and let’s make sure it’s calibrated only to think about the stability of the banking system as it is exposed to climate risks.
Senator Varone: My question is for Mr. Ragan.
In your capacity as a macroeconomist, what do you estimate the total investment exposure of the finance community in Canada in the fossil fuel industry to be? Comparatively, what do you estimate the total investment of the finance community in Canada in the sustainable energy sector to be? I am looking for that delta and have had great difficulty finding it.
Mr. Ragan: And you won’t find it from me. I apologize, but I do not have those numbers at my disposal.
Senator Varone: Regarding the aggressive decarbonization policy now instituted in Canada — I’m a small-business man, and part of our business is in hospitality. We have a 4,000‑kilowatt service in one of our hotels and banquet halls. When you start getting your carbon tax bills and seeing what the reality is, you quickly say, “Where is my alternative? How do I replace my rooftop units that are consuming gas? I want to move to heat pumps.”
My 4,000-kilowatt service has a governor on it, placed there by Toronto Hydro, which caps it at 2,000 kilowatts. We estimated that this particular building’s requirement — and this is the same for a lot of small businesses in Canada — would exceed the 2,000-kilowatt governor that Toronto Hydro put on.
So, you have an aggressive decarbonization policy. As a small business owner, I’m being taxed on it but have absolutely no ability to get out from under it, even if I wanted to make the capital investment to move to electric. How do we square that corner? What is the alternative?
Mr. Ragan: I was hoping that question was going to be for somebody else, because that’s a tough one.
That is a great description of a situation where your costs have gone up as a small business and you find it difficult — and perhaps even impossible — to make the sorts of substitutions that the carbon price is designed to drive. It may be one of those situations that weren’t thought about carefully enough in the design of the system.
I thought where you were going to go was the notion — and I think it is still related — of rebates for small business. As you probably know, small businesses are not currently receiving the rebates that households across the country are. However, I believe the federal government has recently announced that they are thinking about that. That may not help you drive the substitution that would be nice, but it may prevent an increase in your costs in a situation where you can’t substitute.
I’m afraid that’s not a very satisfactory answer for your situation, but it’s the best I’ve got today.
Senator Yussuff: Thank you, Mr. Ragan and Mr. Fabian, for being here.
My question is twofold. We’re talking about disclosure in the financial sector, about their risk with regard to investment in the fossil fuel industry and how we can stabilize the banking system, recognizing that these are not public institutions. These are private institutions to a large extent, and to the degree that they exist, it’s required that shareholders continue to invest in these institutions.
The banks put an enormous amount of effort into trying to associate what risks they are taking when they lend and what risks might be involved in their lending policy, regardless of whom they are lending to.
Isn’t it fair for the public to have greater disclosure from the banks as to how much risk they have with regard to their investment in the fossil fuel industry in this country, just as basic public policy? As a shareholder in a bank, how would I find that out if they’re not disclosing it to the fullest extent possible so that the public can make decisions?
We know that a lot of other organizations are saying they don’t want to invest. I recognize that is a separate matter, but wouldn’t it be prudent for our banking system to have better disclosure so that the public can know how they’re investing? Ultimately, the public buys shares in these companies to a large extent, and I think they have a right to know.
Mr. Ragan: Thank you very much for the question, senator. Yes, I completely agree. In the same way that banks, or any other publicly traded corporations, are required to disclose many details of their businesses — not all, but many — I completely agree that this is part of climate risk disclosure, which many firms have started to do voluntarily. There is a case for making sure it gets done.
To my earlier point, we have to be careful about what exactly we mean by “climate risks.” What are we actually getting the banks to, in this case, measure and disclose? These things will change over time as we learn how to better measure risks and which risks matter more than others. I’m completely in favour of starting that process now.
The Deputy Chair: Mr. Fabian, would you like to add to that in 30 seconds or less?
Mr. Fabian: The answer to your question is yes. This is what these tools — scenarios and interim targets for corporations and financial institutions on emissions reductions and taxonomies of environmental performance — are for. Many countries are implementing these tools in their disclosure framework so that individual savers, borrowers, insurers and policyholders can understand the risks they hold in their financial products.
Senator Martin: Thank you to both of our witnesses on this panel.
I have a question for Mr. Ragan. Listening to what was discussed around the table, I worry about the impact on small businesses. They bear the brunt of all sorts of policy decisions by all levels of government; that’s a big concern of mine.
Mr. Ragan, the comparisons you made between the two policy paths and the chart were very helpful. You didn’t get a chance to speak about your second table and the number of roughly 15% of Alberta’s GDP. I’m curious to hear you speak about this table. I’d like to give the rest of my time for Mr. Ragan to speak about the second table as well as anything else you would like to.
Mr. Ragan: Thank you very much for the question, Senator Martin.
Yes, that table is there because our first table says that if you have this active phase-out compared to the aggressive decarbonization, it will be more costly for the Canadian economy. Given that the vast majority of oil and gas produced in Canada comes from Alberta, it shouldn’t be very surprising to then learn that those costs would be disproportionately focused on Alberta. Nonetheless, it is interesting to actually do the numbers.
So what you see in that table is that the cost would be about 15% of Alberta’s GDP by 2050. By the way, that is a little bit smaller than the size of the COVID recession. So the COVID recession that Canada went through in 2020 was about 15.8% of GDP — it fell by that amount — but only for a few quarters. It ended up being 5.8% for the year as a whole.
But that is a COVID-sized recession in the Alberta economy as a permanent feature.
So the whole point of this is to say that anything that actually generates an active phase-out is going to be very costly for Canada but especially costly for Alberta. While I am no political strategist, I was born and raised in Alberta, although I’ve lived in Montreal for 35 years, and I’m pretty sure that any policies that would generate that sort of focused cost on the Alberta economy would probably not be great for Canadian national unity.
Senator Galvez: My question is for Mr. Fabian.
Fossil fuels are geopolitically dependent. I just came back from Washington, where I heard from my colleagues from South America that they found out in Guyana. I heard from African colleagues that they found oil, and it doesn’t cost as much as Canadian oil to take it away. About 90% of the oil produced in Canada goes to the United States, and from there, they sell it elsewhere at much higher prices. That comes back to Canada.
The International Energy Agency and IPCC are saying that demand is going down and that we need to go further than just disclosure. Disclosure is like telling a patient they have cancer but not what to do in order to get better.
Because you have international experience and know what’s going on in the world regarding energy, could you comment on that, please?
Mr. Fabian: Thank you, senator.
My understanding is that the International Energy Agency, or IEA, has been quite clear that investment in new reserves would lead to exceeding the carbon budget for limiting warming below relatively the safe level of 1.5 degrees. I use “relatively safe” cautiously, of course. We’re already seeing climate damages, but nonetheless, I think the IEA, as the world’s energy monitor, has been quite clear that new reserves and new production will lead to exceeding those targets.
The Deputy Chair: Mr. Ragan, do you have a quick answer to that?
Mr. Ragan: I will respond only to say that disclosure is a very important first step. We can generally have faith in investors processing that information once they have it and figuring out what to do with it. It’s when they don’t have access to that information that the real problem happens.
I think the logic behind policies that drive disclosure is — and there is a built-in faith that is appropriate here — that once that information is available, the private sector knows what do with it.
Senator Massicotte: Mr. Ragan, I will address my question to you. I’ll be upfront.
I’m a bit allergic to all these schemes that come up all the time. Governments sort of buy into it, because it’s usually recommended by a third party or businesspeople who are — basically, it’s not their money. We all agree with the objectives, but is this the right way to get there? You have some organizations, including the Bank of Canada and OSFI, saying that it’s not necessary — that we’re doing a pretty good job and working out this measurement of risks and transparency.
Give me some help there. Is it worthwhile? Is it important? Is it costly? If so, is it worth the cost?
Mr. Ragan: These are great questions.
I will remind you that I am not a banking specialist. However, I spent a year as a special adviser to the Governor of the Bank of Canada and a year and a half as an adviser to Jim Flaherty, the Minister of Finance in 2009-10. I have a lot of faith in the analyses that get done at the Bank of Canada and OSFI. So if the Bank of Canada, OSFI and the Department of Finance are all saying that they are working on this issue in terms of assessing risks appropriately, I would be inclined to have faith in what they are saying. Given Canada’s reputation and performance in terms of our banking sector, I would find it hard to believe that they are not doing their due diligence on this.
So, I think I share your skepticism about this.
The Deputy Chair: Mr. Fabian, would you like to add to that? We’re almost out of time, though.
Mr. Fabian: Thank you, senator.
We see a lot of countries where, when the penny drops, they realize they’re going to need hundreds of billions of dollars in debt allocated to their economies to build out their transport, infrastructure and energy. They ask where the money is going to come from, and they realize that you can only fund part of it from the public balance sheet and need a fully engaged private finance sector.
So the question is this: How do you need your private financial markets to operate to be able to deploy capital at scale? Then, once you go through that reflection, you say, “Okay, we need clear standards and data. We need everybody to trust each other on where the money is flowing and why.” That’s why these types of reforms are being implemented around the world.
The Deputy Chair: We have one minute left, and every minute counts. Based on our questions, do you have any concluding comments?
Mr. Ragan: No. Thank you very much for having me. I don’t think I need to add anything.
The Deputy Chair: Mr. Fabian?
Mr. Fabian: The same for me, chair. Thank you very much.
The Deputy Chair: Thank you, senators, and thank you, witnesses, for your testimony.
(The committee adjourned.)