The European Union and China recently tabled extensive proposals for sustainable finance that will jump-start their clean innovation. While the world is moving forward, the United States is turning inwards and backwards.
Which direction will Canada go?
How Canadian industry reacts to Canada’s Expert Panel on Sustainable Finance will be telling. This federal government-endorsed panel has recommended policies and programs that will transition Canada’s financial sector towards sustainable growth. Canadian industry will either react with reticence and revulsion, or it will embrace the opportunity to play in international capital markets that reward a long-term outlook.
What is sustainable finance?
Sustainable finance is not a tax. It’s an incentive that directs the flow of capital to projects that create value for all Canadians, not just a handful of wealthy investors.
It encourages investors to widen their criteria in evaluating investments not just by the financial returns but also on environmental, social and governance performance grounds. Such criteria have been shown to reduce the investment risks and encourage long-term growth. These types of investments have incubated numerous new financial products, including green bonds, sustainability-leveraged loans and impact investments.
Currently, many investors make money off other investors. For example, high-frequency trading is estimated to influence 40 to 50 per cent of the volume of all assets. These traders “beat the market” by milliseconds. After an investor puts in their order to make a trade, high-frequency traders rush ahead of the investor’s trade, leading to a higher price for buyers and lower prices for sellers.
As well, capital markets favour short-term returns. The flight risks of short-term capital make it difficult for the corporate sector to transition to a clean economy, which often requires heavy investments in research and development and technology.
Sustainable finance helps solve both problems. It puts the real economy and the long term back into focus. It recognizes that speculative investor behaviours and short-term capital flows can undermine a resilient financial system and society.
What if we don’t embrace sustainable finance?
The failure to embrace sustainable finance will hurt all Canadians, not just capital markets. There is the risk to our economy, because it is so carbon-intensive. Canada’s economy relies heavily on natural resources. In fact, relative to all of the other G7 economies, Canada’s is the most heavily dependent of natural resources.
When the rest of the world transitions away from carbon, Canada’s corporations will be lassoed with a heavy load of stranded assets. The Carbon Disclosure Project recently reported that the world’s 215 largest companies anticipate that US$1 trillion are at risk from climate impacts. The Bank of Canada has acknowledged the risk to Canadians under different climate scenarios.
Second, there is the risk to Canadians with pension plans, given the current short-term speculative behaviours of financial markets. Short-term investments undermine long-term returns. The failure to embrace sustainable finance puts at risk not just our own well-being heading into old age, but the welfare of our children.
What if we do embrace sustainable finance?
Sustainable finance will spur innovation that will create new, agile, clean, forward-looking businesses. These businesses will enable new technologies, such as fuel cells, platform software that links buyers and sellers, and product formulations that reduce the use of plastics and toxins.
However, doing so requires Canadian investors, businesses and society to look to the future of what is to come, rather than stay locked into the past.
There is no need for Canadians to play catch-up. We can lead. Canada’s educated, healthy and diverse workforce, along with our strong capital and physical infrastructure, puts us in an enviable position to lead innovations on the world stage.
A call to government and business
There’s no question sustainable finance will redirect capital and, thereby, create winners and losers. Resources will be redistributed.
The winners will be those who create real wealth and look to the future. The losers will be those who have profited simply through arbitrage, rather than creating real value. The winners will often be new market entrants that are small- and medium-sized. These will include the young and the old, and often those who have been left out of the traditional economy.
But the likely losers have a vested interest in keeping the status quo. These people will fight sustainable finance, because they are anchored in the past.
Canadians have faced transitions before. We saw the collapse of our East Coast fisheries, the Québec and British Columbia forestry industries and, more recently, the Alberta oil and gas industry. We have shown tremendous resilience managing these previous transitions. And, through these transitions, we have found new opportunities.
Capital markets will open up such new opportunities. Sustainable finance will remove us from the day-to-day accelerating treadmill, which is exhausting business and eroding the health of the planet.
The time has come to leave the past behind and transition to a new economy that seeks long-term prosperity for all Canadians.