Enacting Climate Commitments Bill

Bill to Amend--Second Reading--Debate Continued

May 12, 2022


Honourable senators, I rise today to speak to Senator Galvez’s Bill S-243, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts.

I am particularly drawn to this bill because it combines two issues that interest me, namely finance and the environment.

Given my past work in financial institutions, and particularly my experience as former president and CEO of L’Alliance des caisses populaires de l’Ontario, I fully understand why Senator Galvez is looking to redefine financial risk management to account for environmental risks, using a systemic approach.

This bill targets the big players, those with the greatest interest in the financial stability of our country. These are federally chartered financial institutions and other entities, including the Bank of Canada, the Office of the Superintendent of Financial Institutions and certain pension funds. In managing and assessing risk, financial institutions are concerned about so-called “black swans.” A black swan is an unpredictable event that, if it occurs, could have serious consequences on financial markets. Examples include the COVID-19 pandemic and its impact on the global economy or the 2007 commercial paper crisis, which represented a $33 billion financial risk for Canada.

In environmental matters, we use the term “green swans” to refer to the risks associated with climate change. Again, these are risks whose impacts are extremely difficult to predict or manage, but which can have catastrophic consequences for our country. These catastrophic consequences are not always of a nature to disproportionately affect financial markets; think of forest fires, floods, wind storms, ice storms and the like. Over the past five years, these climatic events have cost insurance companies more than $13 billion, but have not destabilized the financial markets. The question then becomes whether a weather event could have a high enough impact to cause a financial crisis.

The legislative framework Senator Galvez proposes in her bill is innovative because it covers risk management to mitigate these green swans. This is an excellent solution for financial institutions and other targeted entities.

We need to be careful, though. This proposed legislation would fit into a unique economic context in which financial institutions are resistant to change and slow to get on board with more effective environmental risk management. Why are they so resistant?

The pace of our green transition is important and needs to be evaluated in terms of transition-related risks.

Transitioning toward a new environmental risk management approach is difficult in part because major financial system players are also the entities that finance major polluters. I will come back to this.

Throughout my time in financial institutions, financial risk management was omnipresent. We had to identify significant activities and evaluate our business practices, analyze our financial position, determine our risk profile and have the funds in reserve to remain profitable under any circumstances. Over the years, and with advances in environmental science, our understanding of climate risk has evolved significantly. Today, we better understand the interrelationship between climate change and the economy, and many environmentalists are sounding the alarm — the green swan alarm.

At the same time, certain industries whose practices do not always align with climate commitments are the livelihood of many Canadians and, in the same vein, Canadians are in large part dependent on these industries. How do we reconcile this dichotomy?

In finance, the “transition” risks associated with an accelerated transition to a low-carbon economy coexist with climate change-related risks.

The relationship between these two types of risk factors that, on the surface, appear contradictory should be taken into account and studied by a committee so we can make sure the measures proposed in Bill S-243 will ensure a sustainable and inclusive transition. We have to try to strike the best possible balance between the risks and the opportunities presented by climate change.

Senator Galvez is proposing an ambitious, thoughtful and comprehensive legislative framework to allow the big players to manage risks upstream rather than have to pay the price downstream. Let’s remember that if we don’t compel entities to act, the status quo remains and nothing changes. Bill S-243 invites us to reflect, and proposes and invites these entities to step out of their comfort zone and act to bring about change. Thus, in order to ensure market stability in the medium- and long-term, it is incumbent upon the federally regulated financial sector to adapt their operations in a way that mitigates climate change or, at the very least, does not exacerbate it. When this bill is studied in committee, I think it will be important to consider the following elements.

One is assessing the economic impact of the transition on Canada’s GDP. Canada is an oil-and-gas-producing country and part of its economy is based on this sector. How will we finance the transition from oil and gas to other energy sources, and what will the economic impacts be? How fast can this transition take place? Are the timelines reasonable? Realistically and honestly, this transition will take longer than environmentalists would like. How long are we talking about?

The current geopolitical situation has just destabilized the global oil and gas balance. How does this affect decisions made in Canada? What role will Canada have in the global oil and gas supply market? What are the impacts of Europe’s dependence on the transition to clean energy? All of these issues deserve special attention.

While the objective of the bill is laudable, it must also be assessed in a context that takes all factors into account.

Assuming that Canada is serious about the environment and climate change, resistance from key stakeholders can easily put this project on hold indefinitely.

Senator Galvez’s bill proposes seven separate measures. The first concerns the consideration of climate risks. The second is about the alignment of various organizations with climate objectives. The third measure is an obligation for setting targets, planning and reporting. The fourth concerns climate expertise on boards of directors. The fifth has to do with establishing capital adequacy requirements. The sixth is about aligning financial products with climate commitments. The final measure concerns the public review processes on the progress made.

Senator Galvez did an excellent job presenting these measures in her speech, and I invite you to refer to them. I thank her for her leadership and for all the work she does to educate us about the environmental situation in Canada and elsewhere in the world. We have a duty to support her work, which can help ensure a better future for our children and grandchildren. I urge you to vote in favour of this bill at second reading and refer it to the Standing Senate Committee on Banking, Trade and Commerce for study. Thank you for your attention.

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