Climate Literacy Still Lacking in Canada’s Financial Institutions
Canada’s financial institutions are facing unprecedented, existential disruptions from the climate crisis in coming years. But judging by their lacklustre action to date, you would never know it.
While many major pension funds, banks, insurers and investors make claims to recognize the urgency of the climate crisis, the inadequacy of their approach to climate change so far simply does not reflect the rational response one would expect from institutions who fully grasp the scale of this unfolding crisis.
Take our largest pension funds as an example. Only two major funds in Canada, the Caisse de dépôt et placement du Québec (CDPQ) and Ontario Teachers’ Pension Plan (OTPP), have even taken the first baby step towards aligning their investment strategy with a liveable planet by announcing net-zero emissions by 2050 commitments. And even then, with eight months passed since OTPP announced this commitment, it has yet to release a credible plan for getting there with short-term actions and targets.
There is little time for Canada’s financial institutions to right the ship.
Two historically significant reports released this year spell out both the harsh reality we are facing and the path to relative safety. The impacts of a warming world are already here, and need immediate action.
In August, the Intergovernmental Panel on Climate Change (IPCC) released its devastating and authoritative compilation of the latest physical climate science. The report makes for very difficult reading about our future. It reveals how a worsening and cascading climate disruption is already destabilizing our interconnected ecosystems, societal systems and economies. The report shows that the dangerous heat waves, droughts, wildfires, flash flooding, crop failure and extreme weather we have faced in recent years are just the start.
Significant additional warming is already locked in. Long-term investors, lenders, and insurers are staring down a future of sudden market disruptions and headwinds to growth of the global economy. If we fail to achieve our climate goals, the collapse of the interconnected global systems that underpin our financial markets is all but inevitable. No long-term investor can credibly claim to have an investment strategy that is resilient to 3°C of warming or more.
The window to stabilize global temperature increases at levels where we have a reasonable chance of avoiding runaway feedback loops is closing fast. The Paris Agreement goal of holding temperature rises to 1.5°C was chosen specifically to reflect this least harmful pathway towards relative climate safety.
So what is required to achieve 1.5°C? That’s where the second major report comes in. In May, the International Energy Agency (IEA) released its first ever global energy outlook which models a pathway aligned with the goals of the Paris Agreement, Net-Zero Energy by 2050. It describes in detail one possible and achievable energy future where we are successful in achieving the Paris goals. It also provides a valuable definition for the nebulous (and often abused) concept of net-zero by 2050.
Here too, Canada’s financial institutions are wholly unprepared. The IEA outlook assumes ‘no new investment in fossil fuel supply’ and huge declines in the use of coal, oil and gas starting today. Staying on this pathway requires financial institutions to make decisions based on this assumption as well, including an immediate end to financing companies and projects that are expanding fossil fuels. A rapid shift of finance out of the fossil fuel sector and into climate solutions must take place. This shock transition of our energy systems is in addition to the total decarbonization of all other sectors of economies.
None of Canada’s major finance institutions, including those pledging net-zero by 2050, have fully aligned their commitments with this future. Some have adopted pieces of what is required, including new targets, pledges to increase clean energy investment, and well-intentioned efforts to engage companies, but the ambition and attention to detail is lacking. Failing to plan for climate success not only creates significant financial vulnerabilities for Canadians, but also makes achieving climate safety far less likely.
Literacy on climate means acknowledging the truth, not just of the unparalleled risks we are facing, but also of what is required to address them. Our financial institutions must lead this shift to an economy that is no longer dependent on fossil fuels as quickly as possible.
Let’s stop pretending that there is any other option if we expect a prosperous and liveable future.