Transition finance key for Canada’s greenhouse targets, LB Says

Canada’s financial industry needs to expand access to capital markets to help transition the country with the world’s third largest oil reserves to a low-carbon economy, according to a Laurentian Bank note.

That’s because the economic costs are expected to rise “exponentially” if governments fail to act and temperatures rise over 2 degrees Celsius – the upper limit set in the Paris agreement, Laurentian Bank analysts including Dominique Lapointe, Maya Kabbara and Andres Quintana said, citing a Bank of Canada’s staff discussion paper released earlier this year.

“These findings make it imperative for the financial sector to develop and expand capital market tools to foster the transition towards a low-carbon economy,” the analysts said in a report released Wednesday. “The introduction of ‘transition’ bond frameworks come to serve that purpose by allowing entities, usually operating in high-emission sectors such as transportation and oil & gas.”

The Canadian Standards Association set up a committee in February to build a taxonomy for transition finance that would consider specific characteristics of the Canadian economy, the Laurentian Bank report said. Having a functioning sustainable debt market not only for activities typically identified as green, but also for heavy polluters transitioning to cleaner technologies, is key for Canada, because energy – mostly oil & gas – account for around 20 per cent of the country’s exports.

In that sense, the federal government is working on a Greenhouse Gas Offset System, which will expand options for large emitters to reduce their overall carbon footprint by implementing a certain set of projects, the report said.

That also “would provide ESG investors a dose of confidence that the proceeds go towards mitigating climate change and that a thorough evaluation process (monitored by the government) is in place, avoiding perception of greenwashing,” the analysts said. It remains to be seen if the capital investment part of an offset system could access ESG funds through a transition framework, the report said.

© 2020 Bloomberg L.P.

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