We can’t solve the climate crisis unless private finance flows in a new direction. But Canada’s largest financial institutions still fund fossil fuel expansion projects and are too slow to invest in climate solutions. Why is this?
Canadian financial institutions have taken baby steps to advance climate-aligned finance. But regulations for sustainable finance still lag behind international best practices. The federal government launched an Expert Panel on Sustainable Finance in 2018 and recently appointed a Sustainable Finance Action Council. Although Canada’s big banks and pension funds are signing onto commitments to align with the net-zero transition, these voluntary measures set the bar very low. Canada needs regulation that raises the bar to ensure finance becomes truly sustainable – not just in name.
Climate change is considered “the greatest […] market failure” of all time – which means voluntary measures and minor modifications won’t address the core problem. Canada’s approach to sustainable finance should not just catch up, but leapfrog, international best practices.
We need ambitious regulation for four reasons:
Regulations would ensure all capital shifts in the green direction
Not all financial institutions are voluntarily aligning with climate goals. Yet the whole financial system has to pivot to address the risks posed by climate change. Institutions who have pivoted their strategies to prioritize sustainability in their portfolios are reaping the benefits and seeing strong returns. Canada has regulated traditional finance since the early 1900s to ensure consistency. By enacting new regulations, all financial institutions would be encouraged to shift more capital in the “green” direction.
More ambitious action needs to be taken to stop greenwashing in the financial sector
Many Canadian financial institutions who claim to be shifting towards sustainable finance are merely greenwashing. These institutions are only focusing on the risks climate change poses to their investments instead of looking at the impacts their investments have on climate change. For example, many investors fund climate solutions, like renewable energy, but they also need to stop funding projects that cause the climate crises. Canadian financial institutions can’t claim to be moving towards net-zero while still funding new fossil fuel projects. Shouldn’t mitigating the problem be step one? Governments can tackle this greenwashing by mandating that sustainable finance follows the scientific pathways that limit warming to 1.5 degrees. We need ambitious rules so investors prioritize “zero” instead of “net”.
The financial sector needs to learn the definition of sustainability from those who have the expertise
The financial sector needs guidance to understand how capital and sustainability intersect. Most institutions are experts in finance or economics, not environmental sustainability or climate mitigation. They must listen to the experts to learn the definitions put forward by scientists, governments, and civil society. Finance and economics are criticized as lacking a central guiding value, say experts like Kate Raworth, the author of Doughnut Economics. If the financial sector is serious about contributing to climate action, the sector needs guidance. Finance can and should learn from environmental experts and activists about what’s scientifically needed and in the public’s best interest.
Regulating climate finance is in the public’s best interest
Regulating climate finance is in society’s best interest – and even in the best interest of the financial sector. Fossil fuels and finance comprise a significant portion of Canada’s current economy. As the world transitions to a decarbonized economy, these assets will become stranded with no financial value. We need to ensure a planned and just transition to a new economy. Consider the economic crisis of 2008-2009. In the lenient regulatory environment for the decades leading up to the crisis, financial actors competed for increasingly high-risk loans. Economists agree that stronger regulation would have protected borrowers and prevented the bankruptcies that discredited the financial system. Fossil fuel investments are increasingly recognized as posing a similar risk to financial markets. Unsustainable investing could “trigger a financial crisis that dwarfs that of 2008”.
Even financial institutions agree that the Canadian government is too far behind on regulating sustainable finance and are asking for governments to set the goalpost. We need checks and balances to ensure all investments contribute to a green future and maintain the security of Canada’s economy.