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Alyson Slater is the Senior Director of Sustainable Finance at the Global Risk Institute. She leads the institute’s sustainable finance initiatives with the aim of supporting Canada’s financial sector in the transition to a climate smart economy and a sustainable future.
She brings 20 years of international experience to this role with expertise in climate change, inclusive finance and sustainable development gained through her work as a senior executive at the Global Reporting Initiative and the Alliance for Financial Inclusion. Alyson brings the ESG perspective to her role as a member of the Continuous Disclosure Advisory Committee of the Ontario Securities Commission and represents the financial sector perspective on the Sustainable Development Advisory Committee of Environment and Climate Change Canada.
She received her master’s degree from the University of British Columbia and an Honours Bachelor of Arts degree from McGill University, both with a focus on environmental management.
Peter Guay: Thanks so much for joining me, Alyson. It’s really great to have you and be able to chat with you about these issues, coming from your extremely well-informed and experienced perspective. So, I will dive right in. It is timely as we are recording this – Canada has just announced its emissions reduction plan, which is a big step. You’ve said one of the key questions is: ‘How do I know if the assets I’ve invested in are going to remain competitive through the changes that plans like this are going to bring about?’ How should people be thinking about that?
Alyson Slater: Well, this is a key strategy that they have released and it gives us a bit of a glimpse into the government’s priorities and plans for reducing carbon emissions by 40% in the next eight years. This will be a massive structural change that we will undergo. Up until now, we knew that they had this target set, but we didn’t know which sectors would be the winners and losers. This plan starts to shed some light on where the priorities will be; the amount of investment and fiscal measures that will be in place to help support this; and where we can expect new policy and regulation to develop.
So, some of the winners will be electric vehicles and decarbonizing transportation, for example, and all the value chain behind the development of those electric vehicles. Other winners will be carbon capture and storage. This is a new clean technology that is emerging. Canada is a world leader in that space and they want to scale this up to literally capture carbon dioxide emissions from the atmosphere and store them underground. There are other provisions in place in this plan for agriculture and even infrastructure. So, it’s good to have a look and interesting to see how this will shape our future over the coming decade.
PG: Part of that plan is also the price of carbon and carbon markets. It’s obviously a politically sensitive question in Canada, but also a really important element of how we’re going to get there. Do you have any thoughts about that?
AS: The federal carbon tax is a cornerstone of this plan. The government has said that it is taking steps to make sure that the carbon tax scheme that’s in place—mainly right now just on oil and gas—will continue no matter which government is in power over the next 10, 20 years. This the plan. They are trying to make sure this is legislated in a way that is rock solid. Right now, Canada’s carbon tax is going to be high. It’s going to reach up to $170 per tonne of carbon equivalent emitted. But it’s on a very narrow scope. It’s really on oil and gas. The idea is to really push consumers like you and I away from things like combustion engines in our vehicles and oil heaters in our homes. To really incentivize us to move off those high emissions technologies and embrace lower emissions or green technologies in our daily lives. That’s the goal with that. But I think it’s important to understand that [for] the carbon market globally, the big news at the end of last year was the world did agree on some fundamentals around a global carbon market. This is a global issue. Carbon—whether it’s emitted in one country, it still impacts you in other countries. So, this is really something we need to agree on globally.
I think right now there’s something like 120 different carbon pricing schemes all around the world. There are prices as low as $6 a tonne in China, which is the world’s largest cap-and-trade program by the way, up to I think the European Union cap-and-trade market prices carbon just over 70 euros a tonne now. A lot of economists project that it would need to reach anywhere around that US$200 mark in order to see real change in behaviour and people moving away from fossil fuels as a result of this carbon market.
So, I think it’s something that’s coming down the pipeline. Our heavy emissions industries are going to feel a hit, whether it’s here domestically through our own policies or through border adjustments, which the EU, for example, has already announced. If we go to trade some heavy emissions products—and I’m not talking about fossil fuels but other products that have a heavy carbon footprint—and we try to trade those into the EU, and Canada hadn’t taxed those products, they will in the EU slap it with a tax to try to make that even and balance that up. This is something that’s going to be part of our economy coming down the pipeline and we’re seeing some momentum here in Canada and abroad around that pricing.
PG: This is a big element in the evolution of globalization as we go forward. As what are ultimately tariffs come into place. Right? Canada is obviously still a very resource-based, primary economy. You’ve mentioned this concept of transition financing. How should we think about transition financing in relation to our economy and what we’re doing in Canada?
AS: Because we are a high emissions economy, we need a tonne of investment in order to move some of our existing industries and business activities away from high emissions towards low emissions. Right now, the conversation around green finance and sustainable finance is around bolstering investment for green activities like wind farms and solar. But what about transportation? I mean shipping, trucking. What about all the retrofitting that would have to go on in infrastructure? How do we upgrade and retrofit activities and infrastructure to, again, move towards this lower carbon or zero carbon emissions? This a field—the broader sustainable finance market—that we project will grow rapidly. I think we did $1 trillion in a sustainable debt market last year between bonds and loans. And that was double from the year before. So, this is growing really, really fast.
But we haven’t seen transition finance take off yet, I think, because of the concerns around greenwashing. What we need is some very clear lists and definitions, and what we might call a taxonomy or standardization, about what counts as transition finance. What really would qualify as something that would be eligible for transition finance? And what is just financing dirty activities? In the absence of that right now, a transition finance market has not started. But Canada is need of that and I think the government’s plan is a great step in the right direction. [It starts] putting some bookends on what that transition finance market would look like and its priorities. I do think we will see a standard for that evolving in Canada and in other high emissions markets as well in the next couple of years.
PG: We will come back to the question of how investors should be thinking about their portfolios and concepts like greenwashing. But before we go there, Canada has just announced their plan and we’re all digesting it and trying to figure out what it means. Where would you say large corporations in Canada are [on] progress towards delivering credible plans to reach net zero? Do you think the corporate space has made significant progress there? What are you seeing?
AS: Well, we saw a rash of commitments to net zero by 2050 made last year in the lead up to an important international meeting called COP26. That’s when the whole world comes together and negotiates around the climate file.
PG: This was the one in Glasgow, right?
AS: Yes. In Glasgow in November. And it was a milestone meeting. That’s where the world really agreed on these net zero targets. All the major economies agreed on this net zero by 2050, including China and India, although they asked for 20 more years, respectively. But they have made the actual commitment, which is amazing. And so, companies, especially financial sector firms, were asked to align their portfolios, and for companies their work, with these net zero targets. It doesn’t make a lot of sense for the government of Canada to have a net zero target and then have the financial sector continuing to fund non-zero, moving us in the wrong direction. So, the big banks and the pension funds have made these net zero commitments last year. And we have seen uptake happening broadly across other sectors, including the heavy emissions sectors in Canada, targets set by most of our key, top companies here in Canada.
The question will be: What will be those net zero action plans and those interim targets? When are we going to see the rubber hit the road and how that really translates? How do we reverse engineer back from that net zero by 2050 goal and figure out what it means for our business and what we need to change and develop and invest in and move away from and embrace in the coming decade? Right now, I feel like we’ve seen the targets and filling in the blanks is what will happen in the next year or two as companies put those transition plans into place.
PG: Right. There’s still a lot of groundwork to be done to make those realistic plans. Do you think the pandemic has had a significant impact on the progression of these questions?
AS: It’s interesting to see how world events like the pandemic, and now the war in Ukraine, are definitely impacting and having an effect on the climate space. If you look at the pandemic, I think there are both winners and losers. On the one hand, carbon emissions were cut back dramatically as the world was grounded. But what I always say to people is: Can you imagine the entire economy was shut down, global travel and transit was shut down, and we still only reduced carbon emissions by 7% to maybe 9% during that first year? So, that goes to show how ingrained fossil fuels are in our everyday lives through all of systems and all of our economies around the world. That level of shutdown made a dent, but we need that level of cut year on year for the next decade or 15 years in order to get to where we need to be to meet these net zero goals. And we can’t do it in the way that we did it in the pandemic, which was causing so much economic disruptions. We need to get those level of reductions but in a way that also keeps our economy humming. This is the challenge that we face.
On the other hand, the pandemic and its response showed us that it is possible. We are able to do things globally and in Canada when we face an emergency and can take drastic steps quickly – things that seem unthinkable before they actually happen. That gives me some hope for the sorts of policies and things we need to see happening quickly around the pandemic.
Maybe just a quick comment on the Russia-Ukraine situation. One of the big stories from day 1 has been especially European dependence on Russian oil. And, of course, the Europeans [are] the leaders on climate with the most ambitious goals [and] for this to be revealed – that 40% of their energy comes from Russian oil – was a real eye-opener for a lot of people. They’re not able to switch off overnight. But I would say it has accelerated their clean transition plans, funding and the way the economy is structured in places like Germany and others to move off Russian fossil fuels far more rapidly, in this case because of geopolitical reasons, than they would have if this war hadn’t broken out.
PG: Let’s switch to the investor point of view now. Broadly speaking to start, what are, from your point of view, the ways that investors should be thinking about aligning their portfolios with their values and their environmental priorities?
AS: Step one – look at your portfolio through the climate lens if climate is one of your priorities. I mean a lot of people just haven’t looked at their assets and portfolios through that lens before. Where do you see opportunities? Do you have opportunities for growth in some of the industries that will be dominant in the future? And where is your exposure? Where are you holding assets that may become stranded assets in the future or lose their value rapidly as we start to approach some of these structural changes?
So, step one is just to know what you’ve got from a climate perspective. And then, step two is just taking the action. We see this at the individual level but also at the institutional investor level. Some choose to move away from high-risk assets. They make that choice. Whether it’s capital D divestment where you make a big policy where you say: ‘I will not fund coal any longer’ – most big western institutional investors have moved away from coal. But that extends to things like the Arctic. Unfortunately, here in Canada we’ve been hit by divestment from oil sands because of its high emissions intensity. Or, is it the lower-case d divestment? Where you’re just looking at your mix and saying: ‘Okay, I’m going to move away from some of these sectors or some of these regions because of that climate risk.’ It doesn’t mean I have a whole divestment policy, but I’m just sort of rebalancing my portfolio with climate risk in mind. It might look a little bit different.
Ohers are engaging. In fact, shareholder resolutions are already double what they were last year on climate. Institutional investors engaging with companies and even filing shareholder resolutions on climate. They want to know more information. They want to see these transition plans. They want to see better reporting. They want to know that the boards of directors of these companies are climate fluent, climate literate, and have this on their radar. All sorts of things going on. So, being an owner of some of these portfolio firms, you can also engage. You can be part of that conversation. You want to see that company succeed in a low carbon future, and you can be part of the conversation. So, those are some of the ways I see investors getting involved.
PG: Part of that discussion is: Are investors getting good information and are there standards from which to make these decisions? You’ve spent a chunk of your career at the Global Reporting Initiative where this was very front and centre. How would you comment on the progress in standardizing reporting among companies on environmental issues?
AS: Reporting on ESG as we know it – environmental, social and governance issues has largely been voluntary for the last 20 years or so. And, actually, most major companies do some form of ESG or sustainability reporting in the public domain. This is normally, maybe, more through their public relations exercise or a communications team. But over the years, this is starting to have some teeth.
The IFRS, which sets the international financial reporting standards which Canada embraces, has actually expanded and created a new board called the International Sustainability Standards Board, which is putting out very shortly their first prototype on climate-related financial reporting. This is not so much your impact on the climate, although that is a question. It’s more about how climate change impacts your business. What is the financial risk and opportunity that you as a business are facing? Either because of greater storm damage or flooding or some of the physical climate risks we’re expecting to see or that the low-carbon transition may bring onto your business. And so, this is the important, sort of business relevant reporting that we’re seeing evolving to become mandatory and standardized worldwide through the IFRS. Canada is taking steps to align with that. The Canadian Securities Administrators have looked at upping their environmental reporting requirements, aligning with this international movement. And I know there’s a review underway of the Canadian accounting and audit standards that is also looking to align and, possibly, create a Canadian sustainability standards board that would liaise with the IFRS body to make sure that we are aligned here in Canada with this sort of reporting.
So, those firms that have this underway already voluntarily are going to have the leg up and are probably going to be able to meet these requirements faster and with greater ease. [For] those that haven’t started at all, it will be a journey. We’ve just seen the SEC put their draft of the same sort of climate-related financial reporting requirements out for public comment. Of course, it’s caused a huge firestorm of those for and against. But, if even the U.S. is doing it, this is really coming down the pipeline. Most companies, large and small, are going to have to figure out how to measure, manage and report on their climate risk.
PG: Do you think public companies and boards of directors are doing a good job of building governance around these things and making sure audit committees are on top of it and that they’re taking action on this. Where do you think in general – I’ll start with Corporate Canada – if you have thoughts on Corporate U.S.A. [as well] – but are boards in Canada doing a good job of integrating these new requirements?
AS: Well, I think they’re on the learning curve. I do think that those firms that are bit more exposed are moving faster because they have the pressure. Or they have folks on the board that have that leadership and that vision – so it’s a little bit of both. For example, some of the bigger banks in Canada, we’re seeing the boards very proactively educate and build-up their climate credentials and then put those governance systems in place using existing committees, usually.
So, what does the audit committee have to do on climate? Well, they have to be ready to have to review progress against targets [and] be sure they are able to review and approve data that goes out to the public. So, they need to be fluent on this stuff in order to make sure that what’s going out is right. Risk committees are front and centre here, helping not only banks but other listed entities improve their climate risk management. They have responsibility for climate risk oversight. It’s a new skill set. It’s using what they know but expanding out into some of these new issues and new techniques. Investment committees – same thing. The best practice is to integrate climate risk right through the governance structure and ensure that people are equipped to take this on as a new issue, just as they do with any business issue. You know, they’ve had to do this with cybersecurity. They’ve had to do this with the talent crisis we’re facing today. So, it’s just another issue and they’re just using the systems that are in place to try to have that oversight and leadership that’s needed.
I have to say that it’s generally early days for a lot of corporate boards and that learning curve will be pretty steep. But I am seeing a lot of interest. We do train boards of directors, and I am seeing a lot of interest, a lot of engagement on this issue across Corporate Canada.
PG: You mentioned financial institutions in your answer. What role are financial institutions going to play in bringing about change or in evolving Canada’s economy around these questions?
AS: Well, they are such an important player in this whole thing because of their exposure to pretty much every sector across the board. And I think they’ve been identified very early on both at the international level and here in Canada as playing a special role in helping to accelerate the low-carbon transition and protect against the physical climate change risk that we will face anyway because of historical emissions that are already in place.
The Bank of Canada has said that they are concerned that climate change poses a risk to financial sector stability. Because of that, it has now the attention of OFSI, the financial sector supervisor and regulator, which wants to make sure that our institutions would be part of helping the financial system and the economy stable through any crisis and they themselves wouldn’t collapse if a crisis is caused by climate change, whether that be acute or chronic overtime. And so, you are seeing the regulator coming with questions: ‘Do you have enough capital allocated for climate risk? Is climate priced into your credit model?’ These are tough questions. ‘Have you stress-tested your portfolio against climate risk?’ These are the new sorts of techniques and methodologies that are coming to the fore, and how we are seeing these being integrated into the risk management side.
It’s not only about risk, of course. The upside opportunity is there. And I think a lot of the banks have been early out of the gate on the opportunity side, seeing a new market developing for sustainable finance, whether it be retail or commercial clients. [They are] really interested in getting on board there. Green investments of all kinds are going through the roof. And that’s been a real opportunity and a growth space for financial-sector firms over the last three-to-five years.
PG: Alyson this has been a fascinating conversation. I want to really thank you tremendously for taking the time to share your insights and the benefit of your experience. I mean a career that has taken you from a risk management perspective, from a reporting perspective and from a financial inclusion perspective – you really come at these questions with an incredibly broad perspective on what’s happening, and where we’re at, and how much more we have to do. So, thank you enormously for taking the time and I really appreciate it. I look forward to talking to you again soon and hopefully see how these things evolve over the coming year and more.
AS: Thanks so much, Peter. It’s been great to have this conversation with you. I appreciate it.
This interview has been edited for length and clarity.