The coming year is set to be a watershed for sustainable finance in Canada as the federal government and financial industry stakeholders double down on climate-conscious policies and practices. Here are three key trends that will shape Canada’s sustainable finance landscape in 2021.
The Federal Government Will Launch a Sustainable Finance Action Council
In 2019, Canada’s Expert Panel on Sustainable Finance made a series of recommendations for the federal government to align Canada’s financial system with a climate-smart future, and advised the government to establish a Sustainable Finance Action Council to help implement its recommendations. The government recently responded in its Fall Economic Statement by allocating $7.3 million over three years to create the Action Council, which will function as a coordination mechanism between the government and the financial sector.
The Action Council will be tasked with developing a well-functioning sustainable finance market, making recommendations “to attract and scale sustainable finance in Canada, including enhancing climate disclosures, ensuring access to useful data on sustainability and climate risks, and developing standards for investments to be identified as sustainable.” The Action Council will be launched in early 2021, ushering in a new era of federal support for sustainable finance.
Banking Authorities Ramp Up Climate Risk Assessment
In the spring of 2020, the Bank of Canada published a report warning of significant economic risks from climate change and the transition to a low-carbon economy. The Bank noted that delayed action would increase the risk of an abrupt repricing of assets, while earlier action would allow more time for the market to adapt.
As a result, the Bank will ramp up its work on climate change in 2021 as it convenes a pilot project with the Office of the Superintendent of Financial Institutions (OSFI). The two supervisory bodies will work with a group of financial sector stakeholders to assess the financial system’s exposure to risks from the transition to a low-carbon economy. The project will strengthen the authorities’ understanding of financial institutions’ governance and risk-management practices related to climate change.
A report on this work is scheduled for publication at the end of 2021. Relatedly, OSFI plans to launch a discussion paper on building financial resilience to climate risks earlier in the year.
We Will See the Rise of ‘Transition Finance’
‘Transition finance’ refers to financing that helps high-carbon companies transition to lower-carbon business models, bridging the gap between traditional and sustainable finance. This concept is important for the Canadian market, which is heavily reliant on extractive industries such as energy and mining. These industries need to transform their business models to succeed in a low-carbon world, but they cannot access “green” or sustainable financing due to their high emissions profiles. Transition financing tools, such as bonds with interest rates linked to meeting reduced emissions targets, will help them make the shift.
The CSA Group, a Canadian standards-setting body, is developing a Transition Finance Taxonomy – a classification system to identify business activities that qualify for transition financing. This framework is expected to become available to industry participants in 2021, unlocking a new market for transitioning the Canadian economy towards net zero emissions. The Responsible Investment Association will host Transition Finance Week from October 18th to 22nd to convene industry dialogues around this subject.