Shift’s Executive Director, Adam Scott, testifies at House of Commons Environment Committee
Shift’s Executive Director, Adam Scott, was honoured to be invited to testify to the House of Commons Environment Committee, as part of a study on the environmental and climate impacts related to the Canadian financial system.
You can read Adam’s testimony here.
You can watch the video here (Adam’s testimony begins at 18:08:24).
Studying the Climate Impacts of the Financial System
The study was established in recognition of the clear science that demonstrates that avoiding catastrophic climate outcomes requires an immediate end to fossil fuel expansion and rapid phase-out of oil, gas and coal.
Canada is already listed by the United Nations as a “low-regulation jurisdiction” on sustainable finance. Many experts throughout the study highlighted that climate-aligned finance is the missing piece of Canadian climate policy needed to achieve the Canadian federal government’s commitment to achieve net-zero emissions by 2050.
The detailed parliamentary study began in May 2024, and others already called to testify include representatives from international organizations such as the Organisation for Economic Co-operation and Development (OECD) and the United Nations, as well as Canada’s Expert Panel on Sustainable Finance.
This study also saw the grilling in June of the heads of Canada’s big five banks when the CEOs of RBC, CIBC, TD Bank Group, BMO Financial Group and Scotiabank – among the largest financiers of fossil fuels in the world – were all summoned to testify on their complicity in funding the climate crisis.
Financing the Fossil Fuel Industry
Adam drew on his expertise in pensions – Canada’s largest asset owners – to focus on the need for new policies to align our financial system with science-based climate targets.
He highlighted that climate change poses a systemic financial risk to the financial sector:
“This crisis is already damaging the ability of our economy, and the global economy to grow – a measurable headwind to GDP growth that, without action, gets worse every year.”
Specifically, as long term buy and hold investors, pensions are acutely vulnerable to climate risks and stranded assets. Yet pension funds are continuing to invest our retirement dollars in fossil fuel infrastructure and the companies fueling the climate crisis – putting pension fund beneficiaries’ retirement safety in jeopardy through fossil fuel production investments.
Canadian Pension Funds’ Progress on Climate
Adam highlighted that while we are starting to see voluntary leadership and climate plans emerging from some pensions – which he held up as proof that credible climate plans are real and achievable – we also still see far too many major pensions, like the Canada Pension Plan, still refusing to set interim targets and continuing to make investments in fossil fuel expansion.
Adam was questioned on how Canadian pension plans compare with their international peers. Adam drew on Shift’s Climate Pension Report Card to demonstrate that Canadian pension plans (with some exceptions) are still overall lagging the leading funds around the world. Quite a few Canadian pensions have not even adopted full climate commitments to achieve net zero across their portfolios, and a number of pensions have not adopted credible climate plans to back those up and to achieve them.
When comparing the climate performance of pension funds in Europe and the United States, those leading plans have much more ambitious and more detailed climate plans – as well as clear fossil fuel finance exclusions.
This is reflected through European policies having been put in place to drive emissions reductions through the financial system – and where pension funds have made much greater progress on climate alignment. Adam reflected that global companies are already required to keep track of disparate climate policies around the world, and reflected that here in Canada, harmonization and standardization of policy with international standards should be encouraged as much as possible.
Governance, Fiduciary Duty and Conflict of Interest
We know that pension fund managers owe members and beneficiaries a duty to maximize our returns without undue risk of loss. In this light, fossil fuel expansion simply cannot be a responsible investment, with the high risk of assets becoming stranded as the global economy moves away from fossil fuels.
Adam brought one particular concern to light:
“We are also troubled by obvious governance failures on climate – in particular the prevalence of directors cross appointed to the boards of fossil fuel companies and financial institutions at the same time – creating the obvious potential for serious conflicts of interest.”
Adam was asked to provide more information on such potential conflicts of interest and this challenge to governance for large financial institutions in Canada – who are trying to make difficult decisions internally about how to change the way that they're operating in light of addressing the climate crisis.
Adam described it as “a particular blind spot” when a director for a fossil fuel producer, with responsibility to the shareholders of that company to maximize profit for that company, is sitting simultaneously on the board of, for example, a public sector pension – which we see in a number of cases right now.
“The expectation is that when discussions about whether or not the fund is going to adopt net zero plans – if they’re discussing investment screens or phase out strategies or any of the details around administering a climate plan – they’re likely in a conflict of interest situation and should be recusing themselves. Now, we don’t know if they are stepping out.”
When pressed to give a concrete example, Adam reflected on the Public Service Pension Plan (PSP), the pension provider for federal public employees. Miranda Hubbs is one of the PSP board directors, who is also on the board of Imperial Oil simultaneously. Adam reflected that PSP has yet to adopt a net-zero target:
“which is quite surprising, in 2024 for an institution of that scale and size - so we really do wonder what governance problems exist there and if this is maybe a factor.”
Adam also highlighted the very real need to ensure that “governance is fit for purpose… the climate crisis represents an existential crisis globally and a very acute financial risk for institutions of this kind.” He reflected that “real climate expertise on boards is an essential requirement” and highlighted organizations such as the Canada Climate Law Initiative which has been offering training for all directors to have a baseline knowledge of climate risk. He stated that this is something that can be improved upon through a regulatory requirement so “that these institutions have the expertise they need, to thrive in the current environment”.
Taxonomy
Adam was asked about the relative merits of the federal government’s recent announcement of a taxonomy framework. In brief, the taxonomy amounts to a voluntary sustainable investment labelling system. It sets detailed science-aligned climate labelling standards for electricity, transportation, buildings, agriculture, forestry, manufacturing and extractive industries, including mineral extraction and processing and natural gas. Natural gas of course raises major red flags for climate experts, as scientifically credible transition pathways require the replacement of fossil fuels in our energy system and natural gas cannot, by definition, be a transition fuel.
Adam has reflected previously that the taxonomy is an important part of new financial rules that are desperately needed. Adam reiterated our support for the taxonomy as an incredibly important and essential tool. He noted that the provisions under the “green” label are fairly uncontroversial and aligned well with international standards and agreed that this aspect is now long overdue and should be implemented without delay.
Adam noted that the controversial part of the taxonomy is around the transition label. In principle, the idea of transition assets makes a lot of sense – being able to finance high carbon companies through the transition is something that we absolutely need to do. But there is a risk that we're also going to be allowing inappropriate activities that are not aligned with a science based transition to receive that label. It's a fairly technical discussion but it comes down fundamentally to: does the activity align with an actual science based transition to zero emissions?
Credible Climate Plans
Finally, Adam was asked about the Climate Strategies recently released by both the Ontario Municipal Employees Retirement System (OMERS) and the Healthcare of Ontario Pension Plan (HOOPP) and what a credible climate plan looks like.
Adam set out the critical components of a credible climate plan:
You get a long term target in place, you say we're going to commit to net zero.
The next step is to say what are our benchmarks? We've been talking about five year check ins and plans – so what's the five year target to make sure that investment decisions made today are made under that framework?
You have to make sure that you have a plan to engage the companies that you own to make sure that they're aligning with your goals as well – so that's a credible engagement plan.
You're looking through making sure that all of the investment decisions going forward are made through a lens of those details.
And you want to make sure you have the expertise on board – you understand this challenge internally and know how to act on it at the board and management level.
We're also seeing funds allocating more capital towards climate solutions in their plans – and that requires a lot of skill. So that's an area where we're starting to see a lot of funds moving as well.
Adam admitted that it’s not an easy process – but those are the details in a credible climate plan for an institution.
Committee Report
As this months-long study draws toward its close, Adam urged the Committee to recommend in its report that the federal government use the tools we already have available to modernize our financial regulations on climate, namely:
putting in place a credible green taxonomy that excludes all fossil fuels from green or transition labeling;
creating strong climate disclosure rules for major companies to align with international climate reporting standards; and
implementing the Climate Aligned Finance Act introduced by Senator Galvez – a detailed, ambitious and practical blueprint for moving past disclosure into regulating alignment directly – which includes credible climate transition plans.
These changes would fundamentally revise the rules governing the key players in the financial system – to prevent greenwashing, protect against the risks that climate change poses to the financial system, and require institutions to develop and implement credible climate transition plans that align with the 1.5°C goal of the Paris Agreement.
With these changes, we might be able to use some of the enormous financial power of pension funds and banks to lead the transition away from fossil fuels that scientists and world leaders agree is essential.
You can see Adam’s testimony here.
The video of the Environment Committee meeting can be found here (Adam’s testimony begins at 18:08:24).
Here is the policy Roadmap for a Sustainable Financial System in Canada that Adam referred to in his testimony.