Enacting Climate Commitments Bill

Honourable senators, I rise today to speak as the critic of Bill S-238, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts.

Bill S-238 is an ambitious piece of legislation for a Senate public bill.

At the outset, it is important to note that Bill S-238 represents a continuation and refinement of earlier legislative efforts in previous Parliaments. I served as the critic of the previous iteration of this bill, where it stalled at the committee stage.

While some drafting changes have been made, the central architecture of the bill remains substantially similar, and therefore many concerns remain relevant today. I will not spend a lot of time summarizing Bill S-238 because its author and sponsor, Senator Galvez, has already done so, but I will reiterate and build upon some legitimate concerns.

Before turning to those concerns, it is worth briefly recalling what the bill seeks to do. Bill S-238 sets out to achieve two broad objectives: First, it seeks to align the activities of federal financial institutions and other federally regulated entities with the superseding economic and public interest matter of achieving climate commitments. Second, it aims to make timely and meaningful progress toward safeguarding the stability of both the financial and climate systems.

In other words, this bill attempts to protect our financial institutions from risks posed by climate change and to protect our climate from risks posed by our financial institutions.

This framing matters because it rests on a key premise. The question is not whether they exist, but how they are managed and by whom.

Financial institutions play a crucial role in providing funding and capital to industries that contribute to greenhouse gas emissions, such as the continuation and expansion of fossil fuel projects, new oil and gas exploration and high-emission transportation. If left unchecked, these investments could prolong our reliance on carbon-intensive energy sources, further exacerbating climate change.

Conversely, if our financial institutions demonstrate a lack of support for the low-carbon transition, capital will be diverted away from low-carbon or renewable energy projects. Insufficient investment in clean technologies and sustainable infrastructure would hinder the transition to a low-carbon economy and delay emissions reduction efforts.

Colleagues, there are more risks we could talk about, but suffice it to say that the risks are real. It is against this backdrop that Bill S-238 proposes to act.

At the centre of the bill is a new alignment duty placed on directors and officers. This alignment duty raises an important question regarding fiduciary responsibility. Directors and officers of financial institutions are traditionally required to act in the best financial interests of their organizations and beneficiaries. Expanding this duty to include alignment with evolving climate commitments introduces uncertainty about how competing obligations are to be balanced in practice.

This creates a fundamental ambiguity: When financial performance and policy alignment diverge, which obligation prevails?

Colleagues, this brings me to the central concern with the bill. I said at the outset that this is an ambitious piece of legislation for a Senate public bill. Senators, the problem is that, in my view, it is too ambitious. I do not quarrel with the objectives of ensuring that our financial institutions are protected from risks posed by climate change and that our climate is protected from risks posed by our financial institutions. But I do believe this is the wrong way to proceed.

There are numerous reasons why I believe this, but allow me to briefly share the most important with you.

First, the regulatory work this bill contemplates is already under way. The Office of the Superintendent of Financial Institutions, or OSFI, and the Bank of Canada are already acting in this space. Following the release of their climate scenario analysis pilot, OSFI launched a public consultation on draft guidelines for climate risk management in May 2022. Those consultations led to the release of the finalized guideline on climate risk management.

This guideline sets out OSFI’s expectations for the management of climate-related risks by federally regulated financial institutions, and it was informed by one of the most extensive consultations in OSFI’s history, receiving over 4,300 submissions from a wide range of respondents.

The guideline implements three expected outcomes for federally regulated financial institutions: they must understand and mitigate potential impacts of climate-related risks to their business model and strategy; they must have appropriate governance and risk management practices to manage identified climate-related risks; and they must remain financially resilient through severe, yet plausible, climate-risk scenarios and operationally resilient through disruption due to climate-related disasters.

The Office of the Superintendent of Financial Institutions, or OSFI, has now implemented climate risk management expectations and continues refining its supervisory framework through iterative guidance as practices and standards evolve. In other words, the regulatory machinery contemplated in this bill is no longer theoretical; it is already in operation.

The impact of this guideline effectively addresses the second objective of this bill. Much of the work envisioned by Bill S-238 is already under way through supervisory guidance, consultation and regulatory evolution. The question before us is not whether action is occurring but whether sweeping statutory intervention is necessary at this stage.

I do understand, however, that while this work by OSFI addresses the risks that climate change poses to our financial institutions, it does not address the need to protect our climate from risks posed by our financial institutions.

That brings me to my second point, which is that action on that front is also already under way. In 2021, 43 founding members established the Net-Zero Banking Alliance under the United Nations Environment Programme Finance Initiative. Today, the alliance continues to include over 100 financial institutions worldwide, including Canada’s largest banks: the Royal Bank of Canada, the Toronto-Dominion Bank, the Bank of Nova Scotia, the Bank of Montreal, the Canadian Imperial Bank of Commerce and the National Bank of Canada. These institutions have committed to setting emissions targets, developing transition plans and reporting on progress over time.

Taken together, this reinforces a broader point. What Bill S-238 seeks to do is already taking place through a combination of regulatory guidance, market innovation and voluntary initiatives. Canada’s major financial institutions are already integrating climate considerations into their decision-making frameworks.

This makes the scope of the bill all the more important. Bill S-238 would not only implement the climate-aligned finance act but would also amend the Bank of Canada Act, the Export Development Act, the Financial Administration Act, the Office of the Superintendent of Financial Institutions Act, the Public Sector Pension Investment Board Act, the Business Development Bank of Canada Act, the Canada Infrastructure Bank Act and the Canada Pension Plan Investment Board Act. It affects a lot of acts.

Legislation of this breadth would ordinarily be introduced as a government bill, supported by detailed fiscal analysis, regulatory impact assessment and comprehensive consultation. Proceeding through a Senate public bill risks bypassing all of those traditional safeguards.

This is not a criticism of the sponsor’s intentions, which I believe are sincere. Rather, it is a concern about the appropriate role of the Senate in initiating legislation of this scope and nature. In my view, this is overreach for a Senate public bill.

There is also, colleagues, a significant practical consequence to consider. We must also consider Canada’s position in a globally competitive financial environment. Capital is mobile. Imposing statutory alignment requirements risks reducing access to financing for key Canadian industries, increasing costs and shifting investment outside of Canada, at a time when capital flight is already a growing concern.

I must add this. We heard this week from the Royal Bank of Canada that in the past decade over $1 trillion has left the country, so this is a real concern. We must, therefore, be cautious about adopting frameworks that, however well intentioned, could inadvertently discourage investment in Canada or restrict financing availability for Canadian industries undergoing transition.

That said, I do not dismiss the broader purpose behind this bill. As I noted in my previous speech, quoting Senator Harder from his article Complementarity: The Constitutional Role of the Senate of Canada, this does not mean the bill has no purpose.

The exercise of soft power through initiating Senate public bills, and the subsequent discourse on the topic, is an appropriate role for this legislation, so, in my view, Bill S-238 serves a purpose. But influence is not the same as implementation.

That brings us back to the central question before this chamber. Honourable senators, the question before us is not whether climate risk matters. It does. We know it does. The question is whether this bill is the right tool.

Bill S-238 introduces legal uncertainty, duplicates work already under way and attempts sweeping reform through a Senate public bill ill-suited to its scale. If change of this magnitude is warranted, it must come from the government with full analysis and accountability. For these reasons, I urge careful scrutiny and caution as this legislation proceeds through this chamber.

Thank you.