Canadian Financial Institutions and the Paris Agreement: An Ambitious 3-Year Plan

Posted by on Feb 13, 2019 in Blog | 0 comments

I remember hearing an astrophysicist say that there are 76 quadrillion tons of biodeposits on the earth… coal, oil, natural gas, metals, etc.  I’m not sure how accurate this number is, but I’ll take his word for it.

These biodeposits play a key role in human civilization and allow life to flourish.  They provide nutrients for plant growth which in turn feeds other animals.  The plants provide life-giving oxygen and use carbon dioxide that is increasingly more abundant in the atmosphere.  Too much of a good thing, however, can cause environmental problems (see Water Quality Concerns).

Managing our natural resources and how we use these resources has permeated modern society under the umbrella of sustainability and reduction of carbon emissions.

Sustainable Finance

The International Institute for Sustainable Development (IISD) in Winnipeg, Manitoba, issued a report earlier this year (January 2019), “Leveraging Sustainable Finance Leadership in Canada.”  It should be noted that, later this spring, Canada’s Expert Panel on Sustainable Finance will issue their report.  See the Government of Canada’s web page.

According to IISD’s website, “The International Institute for Sustainable Development (IISD) is an independent think tank championing sustainable solutions to 21st–century problems.  Our mission is to promote human development and environmental sustainability.”

Managing our natural resources and how we use these resources has permeated modern society under the umbrella of sustainability and reduction of carbon emissions.

Managing our natural resources and how we use these resources has permeated modern society under the umbrella of sustainability and reduction of carbon emissions.

Paris Agreement and Canadian Financial Sector

With the United Nations Paris Agreement as a backdrop, the IISD provides a series of recommendations.  In the introduction to their report, they state, “Neither Canada nor the world can reach the goals laid out in the Paris Agreement without significant investments of capital from the private sector.”

Suggested Legislation

In their 50-plus page report, they state, “By outlining a three-year plan for relevant stakeholders, this report first makes the case that it is possible for Canada to commit to updating laws and standards and, through these minor changes, to make climate-related financial disclosure mandatory.”

They also state, “In support of this recommendation, this report then proposes legislative, non-legislative and standards-setting updates at the international, federal and provincial levels.”

Timeline for Implementation

The recommendations in the report include a timeline for mandatory disclosure of “Climate-Related Risks” by 2021.  For the year 2019, this would include “Environment and Climate Change Canada proposes legislation for regular reporting on the assessment and mitigation of climate-related physical risk by all federal public entities.”  It also includes “Natural Resources Canada does the same for climate-related physical risk and adaptation in natural resources sectors.”

For 2020, the timeline also includes “The federal Canadian Business Corporations Act – Part XIV Financial Disclosure is updated with requirements for companies’ annual financial statements to include certain climate-change-related and environmental disclosures.”

Impact on Financials, Banks, Insurance, and Pensions

The report closes (on page 53) with the following:  “Once the implications of the Paris Agreement are fully priced into the market, oil and gas asset valuations will shift.  If this change is sufficiently large, debt covenants may be triggered in companies. This will in turn impact financial institutions, including banks, insurance companies and pension funds. Debt downgrading could ensue, and bank capitalization thresholds could be impacted.”

Managing our natural resources wisely is of paramount importance for future generations.  Managing these wisely now is also profoundly important for our current economy.  We need regulatory certainty that allows “the market” the necessary leeway to explore more and better ways to use natural resources in a responsible manner.

Stakeholders in this issue should monitor/comment on these developments in the coming months.

If you have questions or comments about this or other environmental management/ assessment/remediation issues, please reach out to me at 519-979-7300.