Week 21, May 25: Green Finance

This is one of the 26 segments of Guy Dauncey’s Climate Emergency: A 26-Week Transition Program for Canada. Excerpted by permission.

The climate emergency poses four risks to the stability of Canada’s financial system.

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• Losses to the insurance system caused by the increase in climate-related disasters, with impacts spilling over into the financial system as a whole. In 2018, insured losses from severe weather events across Canada totalled $1.9 billion, compared to $400 million a year in previous decades. A 2019 industry survey found that professional insurance actuaries ranked climate change as the greatest risk, ahead of cyber damages, financial instability and terrorism.
• Climate liability costs stemming from successful lawsuits.
• Fossil fuel industry stranded assets of up to $2 trillion globally.
• Losses to Canada’s GDP resulting in a climate-caused collapse of financial confidence.

The Bank of Canada has expressed its concern about the dangers of a climate-driven ‘Minsky Moment’ when bull market optimism collapses into bear market pessimism. To reduce this risk:

• As announced earlier (Week 18), we will require all larger companies including banks, pension funds and insurance companies to apply climate stress tests to their assets and portfolios, and to disclose their physical and financial climate and ecological risks in their annual reports.
• We will require all insurance companies to apply a climate stress test to every type of policy, to adjust their policies and to increase premiums accordingly, and to provide their customers and clients with three years notice of climate-vulnerable coverages which may be withdrawn or increased by more than 10% a year, such as coverage against predictable floods and forest fires, and flooding caused by foreseeable sea level rise.
• We will phase out the tax-free status of charitable foundation investments in fossil fuels by 2022. 11,000 Canadian foundations have assets totalling $84.4 billion, the fossil fuel portions of which could be reinvested in Green Bonds.
• We will develop a taxonomy to define green investments and ecologically sustainable economic activity, building on work underway in the European Union.
• We will work with tax and investment specialists to make it easy for Canadians to invest in Green RRSPs such as renewable energy and home energy retrofits.
• We will give pension funds tax incentives for a minimum level of green investment.
• We will widen the mandate of the Bank of Canada, placing protection of the environment at the core of its mission, enabling it to use all the tools at its disposal to address the climate and ecological emergencies, including using Green Quantitative Easing and other refinancing operations to support and underwrite investments that contribute to Canada’s green transition.
• We will ask the Bank of Canada to act as buyer of last resort for the issuance of 5% Green Bonds, interest-free loans issued by Canada’s new network of regional public banks, PAYS loans issued by utilities, and PACE loans issued by municipalities.
• We will ask the Bank of Canada to use Green Quantitative Easing to purchase Climate Action Bonds from the government until inflation passes 3%.
• We will ask the Bank of Canada, the Canada Pension Plan and all other federal funds to cease buying assets from companies involved in carbon-intensive and fossil fuel-related industries, and to eliminate all carbon-intensive assets from their portfolios by 2022. In March 2020, the governor of the Bank of England, Andrew Bailey, said that he would seek to eliminate all carbon-intensive assets from the bank’s Quantitative Easing programs.
• We will ask the Bank of Canada to issue credit guidance to all banks, credit unions and shadow banks in Canada’s banking system, barring them from extending credit for the expansion of carbon-intensive and fossil fuel-related ventures. Financial institutions which do not comply will risk losing their access to the Bank of Canada’s overnight lending facilities and their $100,000 customer deposit insurance from the Canada Deposit Insurance Corporation.