Canadian senators set to discuss the merits of landmark climate policy proposal, requiring financial institutions to align capital with climate action.
Having recently passed a key legislative stage, the Climate Aligned Finance Act (CAFA) is on track to pivot Canada’s finance sector toward climate action, but battles remain over board appointments and capital requirements.
“CAFA has the potential to transform Canada from a laggard to a leader in terms of climate finance,” according to Julie Segal, Senior Programme Manager, Climate Finance at environmental research organisation Environmental Defence.
“Canada is three to five years behind in implementing climate finance policies and lacks effective supervision in this area.”
CAFA edged a step closer to becoming law on 8 June after the bill was advanced to the next stage of study in the Senate. The bill will be examined by members of the Canadian Senate Banking and Finance Committee from Autumn this year.
The Committee will call on experts to outline the importance and implications of adopting Bill S-243.
“Canada is experiencing very visible effects of the climate crisis, and our banks and other financial institutions continue to invest more year over year into climate-polluting investments,” said Segal, adding that it is vital the Senate expedite CAFA’s journey given how far behind Canada is on climate finance policy.
Bill S-243 was tabled in the Canadian Senate on March 24, 2022, sponsored by independent Senator Rosa Galvez, who convened a group of expert advisors when drafting the bill, including Environmental Defence’s Segal.
Senator Galvez consulted global experts to examine the most effective parts of existing climate and sustainable finance policies to choose the “right size” for Canada, said Segal, adding that the bill is an aggregation of leading global climate finance policies “packaged together”.
Beyond disclosure
According to Segal, the intent of CAFA is to go “beyond disclosure” by requiring financial institutions of all types to align capital with climate action.
“[The bill] places assurance that financial institutions will develop transition plans that align with keeping warming below 1.5°C,” she said. “It puts climate action into practice as a fundamental part of a financial institutions business plans, rather than something ancillary on the side.
“Rather than just reporting on emissions, it aims to reduce them while considering other elements such as equity and biodiversity relationships to climate.”
However, there remain some key points of contention within the bill that have faced opposition due their “potential effectiveness in achieving the desired outcomes”.
CAFA advocates for raising capital requirements for polluting industries which, according to Segal, directly challenges the core business models of banks and affects the cost of capital for oil and gas companies.
Another area of contention relates to the part four of the bill, which focuses on appointments, conflicts of interest and duties.
According to Segal, one in five directors at large Canadian banks also serve on the boards of oil and gas companies.
“Many legal experts view this as a significant conflict of interest, as it hampers the ability to act in the long-term best interests of both entities,” she said, adding that Senator Galvez’s bill aims to impose restrictions on individuals serving on the boards of both financial institutions and oil or gas companies.
“Given the prevalence of overlapping interests and the effectiveness of this combined approach, it is likely that there will be resistance and pushback from various quarters,” she added.
Wildfires and weak ambition
The bill is progressing against a backdrop of increasing evidence of the physical risks of climate change in Canada.
Thousands of people have been evacuated, with millions more exposed to air pollution caused by wildfires across the country. However, when asked if the event had galvanised politicians to act on climate change, Segal said: “Regrettably, not enough.”
“The wildfires serve as an acute example that must be linked to the systemic investment in polluting activities and the lack of investment in green initiatives,” she said.
“Given this situation, it is imperative that the Senate Banking Committee promptly takes action to advance this policy to the next stages.”
In February, the UN Principles for Responsible Investment (PRI) called Canada a “low-regulation jurisdiction” by international standards, with sustainability-related reporting and disclosure of stewardship activities by Canadian investors remaining “overwhelmingly voluntary”.
“This demonstrates that Canada being ‘behind the eight ball’ isn’t just anecdotal but supported by research and agreed upon globally,” said Segal, adding that Canada must rectify the situation if it is to become a global partner on net zero.
Civitas Resources, a company privately owned by the Canada Pension Plan Investment Board (CPPIB), announced on 20 June that it will invest C$6.2 billion (US$4.7 billion) to increase its oil production by 60%.
The CPPIB owns 21% of Civitas’ common stock, making it the largest shareholder in the Denver-based company. Acquiring new fossil fuel assets is not aligned with the CPPIB’s commitment to achieve net zero greenhouse gas emissions across all scopes by 2050, according to Shift Action for Pension Wealth and Planet Health, a charitable initiative that works to protect pensions and the climate.
“As Canadians from coast-to-coast choke on smoke, evacuate their homes and suffer through the worst wildfire season on record, the CPPIB is allowing its growing portfolio of fossil fuel companies to spend C$6.2 billion to acquire 335 million barrels of oil in Texas and Mexico,” said Patrick DeRochie, Senior Manager of Shift.
“The CPPIB is risking our national retirement fund on stranded assets and investing in a future of ever-worsening climate disaster.”
