Julie Segal, Senior Manager, Climate Finance at Environmental Defence, explains why Canada needs a Climate-Aligned Finance Act.
This March, Canadian Prime Minister Justin Trudeau told a sustainable business forum in Vancouver “things have changed” since the country signed up to the Paris Agreement on climate change.
He argued policymakers no longer see the “fight against climate change simply as a social responsibility” but instead have come to realise that “climate action and the economy really go hand in hand”.
Trudeau said: “In the last six years, Canada has proven to the world that you can take meaningful climate action while building a strong, growing economy.”
Since 2019, every jurisdiction in Canada has imposed a price on carbon pollution. This year, Canada introduced its 2030 Emissions Reduction Plan, which aims to achieve 40-45% emissions reductions below 2005 levels by 2030.
The result, according to Trudeau, is “not, as some foretold, the end of the Canadian economy as we know it. In fact, quite the opposite. The price on pollution continues to mean more money in the pockets of Canadians and less pollution in our air. And for businesses, it means it’s easier to invest in their own low-carbon future”.
Lagging behind
However, Julie Segal, Senior Manager, Climate Finance at Environmental Defence – a Canadian environmental advocacy organisation that works with government, industry and individuals to defend clean water, a safe climate and healthy communities – says without rules to ensure buy-in from the financial sector, Trudeau’s climate ambitions are unlikely to manifest.
Segal says: “We can only deliver climate commitments with alignment from the financial sector. Canada has committed to advance climate action and has a reputation for a strong, well-regulated financial system. But where climate and finance come together there is a policy void.”
According to research from Environmental Defence, Canada’s federal government gives C$15.582 billion (US$11.36 billion) in direct subsidies, tax breaks and financial support to the fossil fuel industry.
Segal says: “Canada still subsidises new oil and gas which falsely inflates its business case. We must end these subsidies – and Canada committed last year to do so – and step up with financial regulation to ensure both public and private dollars align with climate commitments.”
Segal argues that Canada’s policymakers and regulatory bodies have failed to align the country’s financial sector with a “safe climate and stable economy”, leaving little incentive for companies, financial institutions and asset owners to pursue sustainable investment strategies.
“Finance is still an overlooked frontier for climate policy in Canada. Canada’s climate finance regulations lag international best practices. While other jurisdictions like the UK and EU recognise that voluntary initiatives alone are not spurring action at the level needed. Canada is way behind.”
Segal points to the UK’s introduction of mandatory reporting requirements under the Task Force on Climate-related Financial Disclosures (TCFD) which were brought in this April for major corporates.
While New Zealand’s Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 requires companies to report on their emissions and climate business strategies, and the EU’s Sustainable Finance Disclosure Regulation (SFDR) expect investors to report the adverse impacts their investments have on the environment and social justice.
Segal says: “In Canada, there is only attention on how climate change impacts an institution, company or the economy and not enough emphasis on how the decisions they make impact the environment. Canadian policy remains, for some reason, lukewarm to the idea of double materiality.”
But she continues: “All investments are impact investments. If an investment is not having a positive impact on the planet and society, it is likely having a negative impact. Financial regulation must consider the impacts from investments, not just the risks to them. Investments are not value neutral – they shape whether we cut emissions and maintain a liveable world.”
World-leading legislation
However, Independent Senator Rosa Galvez’s Climate-Aligned Finance Act (CAFA), Bill S-243 could, Segal hopes, catapult Canada from the bottom to the top of the league table on progressive climate legislation.
Segal has been instrumental in informing the detail of CAFA which – if passed – would require all federally-regulated financial institutions to have credible plans to meet Canada’s climate commitments.
It would also address conflict of interest on the boards of federally-regulated financial institutions and build climate expertise on the boards of major Crown corporations, government-owned organisations with both commercial and public objectives. Examples include Bank of Canada and Canada Pension Plan Investment Board. There would also be bans on carbon lock-in, recognising the existing legal rights of Indigenous Peoples.
Segal says: “CAFA would make Canada’s financial sector a leader that aligns with international climate commitments. It goes beyond transparency or disclosure to instead ensure the financial sector cuts carbon and builds resilience. Canadian policymakers should implement this to ensure finance becomes truly sustainable – not just in name.”
In May more than 85 investment firms, academic organisations, and environmental groups from across the world including Environmental Defence, which represent nearly three million members, sent a letter to the Canadian administration demanding it “step up and pass policies that align the financial sector with climate action”.
Support has grown to 90 organisations in recent months, while 12,000 individuals have signed petitions in support of clearer climate rules for finance.
In addition to CAFA, Canada’s Office of the Superintendent of Financial Institution (OSFI) recently published draft climate-related risk guidelines and a consultation closed on 30 September.
The guidelines would ensure that financial institutions consider their investments’ emissions footprint in line with TCFD’s Scope 3 emissions.
Segal says OFSI is attempting to catch up with Europe and the UK, viewing its proposals as “a first step for the market to have the right information about climate-risks and pollution”.
But she adds: “That’s only for climate disclosures. It ignores that some investments are still enabling climate change. It misses the bigger picture. The guidance tries to address risk to individual institutions or investments, but climate risks are not discrete – they are systemic, cascading, and interrelated.”
Segal also notes that the guidelines do not require climate information to be included in financial statements “which is what the people in charge really focus on”.
“This is key to making sure executives think about climate as a key part of the business strategy,” she adds.
Roadmap to sustainable finance
Despite welcoming the possibility of stronger climate finance regulation in Canada, Segal would like to see a more coordinated effort from policymakers.
This October, Environmental Defence, in collaboration with environmental law charity Ecojustice and pensions awareness organisation Shift: Action, will publish a report, ‘Roadmap to a Sustainable Financial System in Canada’.
The key recommendation is that all federally regulated financial institutions, pension plans, and financial Crown corporations devise and implement a credible climate plan that align their investments with 1.5°C.
The report says that plan should “formalise, standardise, and extend commitments that many Canadian financial institutions have already voluntarily made”, including through the Glasgow Financial Alliance for Net Zero initiatives born out of last year’s COP26 Summit.
Other recommendations include having an open process for a Green Taxonomy that aligns with keeping climate change to 1.5°C, clarifying fiduciary duty, and strengthening advertising rules to deter greenwashing.
Segal, who co-authored the report, says it lays out the key financial policies needed to align Canada’s financial sector with a safe climate and stable economy.
“We digested the most current climate science and economic analysis to outline what needs to happen in public policy and in an organisation’s investment policies. They need to make emission reductions targets and firm those up across their policies and procedures. Then regulators need to ensure organisations have set the right level of ambition and are held accountable.”
The roadmap also focuses on environmental justice, which Segal says is “often overlooked” by financial institutions and companies that perpetuate a risk-based approach to ESG and are unwilling to acknowledge the disproportionate impact of climate change on the poorest countries and individuals in the world.
She says: “These questions about justice and climate action are the most important things in our society. But they are also financially material, even more so when you consider double materiality and universal ownership. That led me to realise we need policy change.
“Financial policy is public policy. It must be treated that way – finance is a service industry, and policy must be put in place to keep finance in line with the public good.”
