Financial institutions

New Senate bill targets financial institutions that ‘fuel climate risk’

Federal financial institutions and federally regulated entities should align their investment activities with Canada’s climate commitments under Bill S-243, the climate-responsive finance act introduced yesterday in the Senate by Senator Rosa Galvez (ISG-Quebec).

“We have to deal with the elephant in the room: our financial system continues to fund activities that fuel climate risk,” Galvez said in a statement yesterday. “Canadians are asking for legislative solutions that will help accelerate the transition and achieve our goals. The only scenario in which our financial sector will thrive and prosper for generations to come is when we pursue a consistent and orderly transition.

The legislation would make meeting Canada’s climate commitments a matter of “overriding economic and public interest” for the financial sector, Galvez said in an interview this week. It would be :

• Hold directors, officers and corporate trustees accountable for meeting the country’s climate commitments;

• Require the Federal Office of the Superintendent of Financial Institutions (OSFI) to incorporate climate targets into its oversight role;

• Mandate companies’ action plans and climate objectives with annual progress reports;

• Ensure that boards have the climate expertise they need and that there are no conflicts of interest; and

• Base financial institutions’ capital requirements on the climate risk generated by their business activities.

These provisions would “guide the Canadian financial sector through an orderly transition to a low-carbon economy” while “protecting the financial system from systemic risks posed by climate change,” the statement said. A white paper released by Galvez’s office says the bill would also make carbon lock-in avoidance a factor in every financial decision, and require targets and planning consistent with a global carbon budget, consistent with the goals of the Paris climate agreement. .

While the financial sector initially attempted to address climate risk with voluntary measures, these efforts “unfortunately failed to unravel the vicious cycle in which financial systems are trapped,” the white paper says. “Indeed, investments in emissions-intensive sectors contribute to climate impacts which, due to their cumulative, irreversible and radically uncertain nature, pose a threat to the stability of the financial system.”

This makes sustainable finance “the key lever for influencing and delivering sustainable outcomes by integrating climate change knowledge at the heart of financial decision-making,” the document adds. “The best way to minimize the risks that climate change poses to the financial system is to limit the risks that financial institutions pose to the climate system.”

One of the main aims of the legislation is to address the disconnect between financial institutions’ net zero reporting and their continued lavish investments in fossil fuels and other high-carbon industries. Galvez’s briefing materials for the bill include details of Canadian banks’ fossil investments since the signing of the Paris accord in 2016, including $208.2 billion from the Royal Bank of Canada, 157, $5 billion from TD Bank, $148 billion from Scotiabank and $126.4 billion from Bank of Montreal.

“One of the gaps we identified in our consultations was that the people who make very important financial decisions don’t have climate expertise on their board,” Galvez said. The energy mix. What many of them have, however, are glaring conflicts of interest.

“It’s just one big family,” she said. “I’ve heard that we could put in one room the 500 people who sit on the most important boards of directors in Canada, and that 80% of them would have direct or indirect relations with the fossil fuels. So it’s not working, and one of the reasons is that the financial sector has obstacles and barriers to fix.

Galvez, an environmental engineer who previously headed the Department of Civil and Water Engineering at Laval University, said she expected scrutiny and multiple amendments to the bill. She gave it a 50-50 chance of becoming law, adding that she hoped to see it clear in the Senate and move to the House of Commons for consideration by the end of this year.

“We know it’s bold. It’s complex. But we need to have this conversation,” she said. “We need to go way, way beyond voluntary disclosure of climate risk. We know the transition is here. We know it’s inevitable. We know the window for action is closing. So we must act. »

She added that other senators were seriously considering the bill.

“I’ve talked to some of my colleagues who are bankers or who work in the investment field, and to be honest, they all said, ‘You’re right. These are the shortcomings. We have to solve these problems,” Galvez said. “No one told me the banks weren’t ready for this.” And insurance companies “are very much in line with what we’re saying” after facing the financial costs of climate disasters.

In the House of Commons, Galvez noted that four parties — the Liberals, New Democrats, Bloc Québécois and Greens — had elements of sustainable finance in their election platforms.

“The comment we’ve heard so far is that it’s very rational, the approach is elegant, strategic and comprehensive,” she said. And with the stability brought by the three-year supply and confidence agreement announced by the Liberals and New Democrats earlier this week, “hopefully we can have a thorough discussion about the content of this draft law and amendments.