Aligning Canadian Finance with Climate Commitments

This white paper from the office of Canadian Senator Rosa Galvez examines the fossil fuel funding of Canadian financial institutions and public authorities and the resulting systemic risks to financial stability. It critically reviews key concepts and international initiatives concerning the financing of climate change and concludes with a series of policy recommendations to help Canada move from laggard to leader in ensuring a climate-aligned stable low-carbon financial system.

The paper begins with an overview of finance in the era of climate change before examining international initiatives from governments, central banks and global institutions. It then focuses on the Canadian context, pointing out that Canada is the fourth-largest emitter among OECD nations and provides the most public financial support for fossil fuels per capita among G20 countries. A comprehensive review of research on climate-related physical and transition risks to Canada’s economy and financial system is followed by an overview of Canadian sustainable finance initiatives by the Bank of Canada and the Office of the Superintendent of Financial Institutions, Canada’s banking regulator.

Key issues and concepts in international sustainable finance are then critically discussed, with a focus on gaps and limitations. Early initiatives anchored in the voluntary disclosure and risk management paradigm have not succeeded, the paper argues, calling for a macroprudential precautionary approach focused on market-shaping legislation to fully align Canada’s regulatory framework with its climate commitments. Capital requirements must account for systemic climate risks, it suggests, and all financial products must be aligned with climate commitments.

The adoption of international initiatives adapted to the Canadian context could greatly improve Canada’s dire situation, the paper concludes, offering eight specific recommendations for action. All entities, including financial institutions, must be aligned with climate commitments and the avoidance of carbon lock-in must be a consideration in all financial decisions. Responsible target-setting and planning should be mandatory and capital requirements must account for systemic climate risks generated by the activities of financial institutions.

Other recommendations include the recognition of climate change as relevant to all directors’ duties and the leveraging of climate expertise, experience and knowledge.

Written by Senator Galvez and her office staff, the paper is accompanied by proposed legislation to align the activities of federal financial institutions and federally-regulated entities with Canada’s climate commitments. The Climate-Aligned Finance Act would require the Bank of Canada to act in alignment with Canada’s climate commitments and would introduce climate-related capital requirements for Canadian banks, including a ‘one-for-one’ capital requirement for new fossil fuel projects.