The Canadian financial industry needs to lead the wind-down of high-carbon assets, but more regulation would help it along the way.
As the Intergovernmental Panel on Climate Change (IPCC) highlighted last week, we are in the midst of a climate emergency. At the same time, Canada’s financial system continues to pump billions of dollars into fossil fuel developments. This cannot continue if we are realistically going to achieve the goals of the Paris Agreement and keep global warming below 1.5°C. Canada needs to adopt a package of financial regulations that will drive down carbon emissions and shift billions of dollars toward investing in clean technology and renewable energy.
The latest federal climate plan – introduced in early 2022 – points toward tightening regulation of the oil and gas industry. And hopefully, today’s federal budget will send strong signals to the financial sector that enables it. A commitment to phasing out fossil fuel subsidies would be a good start.
Until now, financial regulation has been a major gap that has left Canada lagging several years behind other G20 countries. New climate rules introduced earlier this month by Canada’s financial regulator – the Office of the Superintendent of Financial Institutions (OSFI) – are a long overdue effort to bridge that gap.
The new OSFI guideline will require banks and insurance companies to disclose the financial risks they face in a world hit by climate change impacts and shifting toward a low-carbon future.
Mandatory disclosure will help to drive down carbon emissions by reducing the pool of those willing to supply financial backing and so increasing the cost of capital for the riskiest fossil fuel assets.
Around the world, finance is shifting away from fossil fuel investments. We are already seeing capital flee from Alberta’s oil patch. This will only accelerate as Canada’s financial system is forced to reveal how dangerously exposed it is to climate risk.
Some have argued that these rules are enough on their own, but Canadian financial institutions must also be required to align their portfolios with climate goals. Disclosure alone will not be sufficient. Crucially, OSFI’s new rules could require financial institutions to not only count carbon emissions, but also cut them.
Fossil fuel companies may seek out alternative funding sources, but the laws of supply and demand will make that an increasingly pricey prospect.
In addition to disclosing their climate risk, financial institutions will be required to develop a “climate transition plan” to manage those risks. While the details are yet to be fleshed out, OSFI can draw from a growing body of international guidelines when selecting the essential ingredients that make up a credible plan.
Getting those details right will be critical if they are to support Canada’s climate goals and tackle rampant greenwashing in the financial sector. A credible plan forces financial institutions to think beyond short-term risks and address the “tragedy of the horizons” that too often hinders timely climate action.
Environmental groups have developed proposals that draw from global best practice to distill the essential elements of a credible climate plan. To be credible, a transition plan must buttress a long-term emissions target – such as reaching net-zero by 2050 – with more meaningful five-year targets. Those targets should be synched with Canada’s legislated targets and its goals under the Paris Agreement.
A credible climate plan must commit to action that will achieve those targets. Canada’s oil and gas industry does not have a viable pathway to net-zero, so climate transition plans need to acknowledge that reality. Engagement is too often a fig leaf for inaction. A responsibly managed wind-down would free up capital that can be better invested in the clean technologies that we know are essential in a 1.5°C world.
And plans must be subjected to regular scrutiny by the public, investors and, crucially, regulators like OSFI.
As the IPCC reminded us last week, climate change requires coordinated action from every level of government and in every sector of the economy. The climate emergency gives every government department and regulator an implicit mandate to manage the climate transition. All regulators must be de facto climate regulators. Climate change poses a huge risk to the Canadian financial system, putting climate change squarely within OSFI’s core mandate as a prudential regulator. By issuing climate rules and establishing a specialist climate-risk unit, OSFI is recognizing that reality. But other regulators must follow.
We need a network of regulators armed with the mandate, skills and capacity to protect investors and consumers from rampant greenwashing by corporate Canada. For example, the Competition Bureau needs to protect consumers from misleading climate advertising, such as RBC’s claim to be committed to the Paris Agreement while doubling down on fossil fuel expansion.
To ensure a coordinated and consistent regulatory response across Canada, the federal government needs to take the lead. Until now Finance Minister Chrystia Freeland has been missing in action. We will be watching today’s budget for any signs that the federal government is ready to rein in both the fossil fuel industry and the financial giants that feed it.
Alan Andrews is the climate program director at Ecojustice, where he leads a team of lawyers across Canada who use litigation and law reform to combat climate change.
