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Will Canada lead the world in the transition to a more sustainable financial system?
This was the question raised at a high-level meeting in London in earlier this year on the future of sustainable finance at the G7 hosted by law firm Norton Rose Fulbright. The meeting was convened in response to Canada’s G7 presidency. This July, Canada will host the heads of the G7, a group including France, Germany, Italy, Japan, the United Kingdom and the United States. The European Union sits as an observer. These countries are the largest advanced economies in the world, representing over half of all global financial wealth, so their annual G7 meetings to set policy priorities matter. Canada has set an ambitious agenda for its presidency, but the plan has not yet engaged with the financial sector on key sustainable finance and energy transition targets.
Sustainable finance and long-term prosperity
Sustainable finance refers to the realignment of investment and savings to support long-term, inclusive growth that also delivers on environmental and social goals. Following the global financial crisis, policymakers and pension savers around the world have had to reassess the purpose of finance and its role in society: should the financial system function as a profit machine for the few, or should it serve the long-term public interest?
According to economist Nicholas Stern climate change is “the greatest market failure the world has seen”, and the world is now looking to Canada for leadership to puts its financial sector muscle to work correcting this. In order to address climate change and related risks to global growth, leaders including Mark Carney, former Governor of the Bank of Canada and Chair of the Financial Stability Board, are calling for a fundamental shift of the financial system away from being a short-term private profit machine towards a system that addresses the long-term financing needs of a sustainable, low-carbon, and climate-resilient economy.
Addressing short-termism in capital markets and in the boardroom
There is an urgent need for Canadian policymakers and financial sector leaders to realign governance and incentive systems to support long-term prosperity for all. The boards of directors and corporate treasury departments at Canada’s largest businesses must overcome a preoccupation with short-term profits at the expense of long-term prosperity and productivity.
From Scotiabank CEO Brian Porter’s slavish commitment to oil pipeline financing to the bread-price fixing cartel, price gouging by our national telecoms oligopoly, and allegations of manipulation of key interest rates by Canadian banks, short-termism still rules the roost in Canadian corporate finance circles. As president of the G7 in 2018, Canada has a strategic opportunity to address this, and to show global leadership to better align the financial system with long-term economic and sustainability goals. In doing so, Canada can build on pioneering work at the European Commission and elsewhere to grab a leadership position in the Americas on sustainable finance.
Global leadership starts at home
As Canada intensifies its efforts to shift from a fossil fuel-based energy system to a greener, wealthier, and more sustainable one, the current structure of the financial sector needs to change.
According to economist Nicholas Stern #climatechange is “the greatest market failure the world has seen”, and the world is now looking to Canada for leadership to puts its financial sector muscle to work correcting this. @lordstern1 @G7
According to Ray Dhirani, head of the sustainable finance program at WWF, “Canadian capital markets players are sophisticated global investors who should be able to re-align their investments with climate change and broader sustainability targets, but leaders must now step forward. Together, the largest public sector pension funds and six large Canadian banks control over $6 trillion in global assets. With a financial industry of this scale, Canada should help lead the world in the transition to sustainable finance.”
Assets should shift away from the fossil fuel sector and associated infrastructure into more productive forms of renewable energy and other sectors of the economy. Achieving this shift without negatively impacting growth and job creation is already a key public aim for policymakers and business leaders. Yet action to date has been limited.
Sustainable finance expert panel could set the stage for Canadian leadership
The four-person expert panel on sustainable finance announced this morning by Minister of Finance Bill Morneau and Minister of Environment Catherine McKenna is a first step in bringing together financial sector leaders and civil society, drawing on the model of the European Commission’s High-Level Expert Group on Sustainable Finance. Convening the expert panel ahead of the G7 presidency in July of 2018 could facilitate agreement on core principles required for a re-engineering of the financial system necessary for it to become sustainable from an economic, social, and environmental perspective. With the world expecting Canada to lead the sustainable finance dialogue in 2018, leaders in finance and government must properly seize the opportunity with action.