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Sustainable Finance: A New Era Begins

Interview by Karen Christensen

The former Dean of the Rotman School Tiff Macklem discusses the findings of the Canadian government’s Expert Panel on Sustainable Finance, which he chaired.

NOTE: This interview took place in January 2020

Sustainable Finance 

At the beginning of the final report of the Expert Panel on Sustainable Finance, you state that the relationship between the economy and the environment “is at a vital inflection point.” Please describe the current scenario.

Too often, discussions about the economy and the environment are framed around one or the other. That needs to change. Our economic and environmental aspirations need to become one and the same, because fundamentally they are indivisible. We are at a pivot point right now: We are increasingly seeing the impact of climate change in the form of more extreme weather, flooding, forest fires and hurricanes. As the world continues to get warmer, these extreme weather events will become even more pervasive. Weather patterns are going to shift, and the human and economic impact will be increasingly significant.

Research by the Sustainable Accounting Standards Board suggests that 72 out of 79 industry sub-sectors will be systemically impacted by climate change — and some of the effects are already irreversible. We need to accelerate the transition to low-carbon growth to mitigate even more dramatic further warming of the planet. The scientists say we have 10 to 15 years to make a serious reduction in GHG emissions. If we fail to do that, the economic and human consequences of climate change will become dire.

The Panel recommends that we pursue solutions that are geared to Canada’s national context. What do those look like?

Resources and resource extraction have long played a key role in Canada’s economy. We are the fourth largest exporter of oil in the world and the fifth largest exporter of natural gas. In 2018, Canadian exports of oil and gas topped $125 billion — making it by far our largest export. That is our context. We are a carbon-intensive economy, and this makes us exposed.

Addressing climate change is about living up to our international commitments, but increasingly it is also a competitiveness issue. Shareholders care about this, customers care about it and employees care about it, and as a result, it is becoming a critical issue for market access, for investment and for attracting talent. 

Our economic and environmental aspirations need to become one and the same.Tweet this

At the same time, the world is still going to need oil and gas throughout the transition to a low-carbon economy and, indeed, there are some significant opportunities to reduce emissions with transition fuels like natural gas. In the Panel’s view, the way forward is for Canada to become the cleanest, most responsible and best-governed supplier of oil and gas to the world. Who wouldn’t want to buy their oil and gas from the world’s most responsible producer? But getting to that point will require more investment and innovation.

Already, our oil and gas sector has demonstrated that it is tremendously innovative. Innovation has dramatically reduced the amount of energy it takes to separate oil from rock, which has reduced the cost of producing a barrel of oil and dramatically reduced GHG emissions. Our recommendation is to double-down on the innovation strategy. There are some exciting new technologies that can really accelerate change. For example, the use of new solvents that separate oil from rock. But we need the right financial instruments to fund this innovation.

The second part of the strategy we recommend is to require a stronger commitment by industry to enhance disclosure. If you claim to be the world’s cleanest provider of oil and gas, you need to be able to back that up with evidence. The third element of the strategy — and some readers may find this counterintuitive — is that we do in fact need a pipeline to get our product to market. We have to be able to get our Canadian product to market to make our investments in innovation worthwhile. The sooner we get started on this three-part strategy, the smoother the transition can be.

You write that “Finance is not going to solve climate change, but it has a critical role to play in supporting the economy through the transition.” Please describe that role.

Finance plays at least two critical roles in our economy. First of all, it channels savings to productive investments. When you look at the high-emitting sectors of the Canadian economy — oil and gas, transportation, buildings, electricity, heavy industry, waste — they are all capital-intensive. If we’re going to transition to a climate-smart economy, there’s going to have to be a lot of investment. The role of the financial sector is to support the real economy as it goes through this transition. We need to see a lot more money going into sustainable investments. And we need to bring the ingenuity and expertise of our financial system to widen the pipe and increase the flow of savings to climate-smart investments.

The second key role of the financial system is to help households and businesses manage their risks. The financial system has a critical role to play in helping households and businesses manage the new climate risks. For example, designing products so that people have flood insurance for their homes. The financial sector also needs to be encouraging people to make investments that will improve our overall climate resilience. There is a relatively low-cost backup valve that homeowners can install in their basement that reduces the probability that it will flood if the drainage system backs up. If the insurance contract stated, ‘If you have this valve, your insurance will cost this much, and if you don’t, it will cost this much’, that would encourage people to invest in climate resilience.

On a broader scale, when we’re designing new communities, the insurance industry needs to be more engaged from the beginning, so that some very important investments are made on the front end. Particularly in Eastern Canada, one of the realities of climate change is that we’re getting more frequent and intense thunderstorms that are dropping a lot more water much more quickly. We need to make sure that our drainage systems have the capacity to handle this peak flow so that the system doesn’t back-up and flood homes, schools and office buildings. By getting the insurance industry involved up front, this type of thing can be built into the design so that insurance costs are lower and the infrastructure is more resilient.

Finance is not going to solve climate change. It’s going to take a confluence of factors: innovation, clean electricity, very low emission buildings, important investments in modes of transportation (whether it be public transportation or electric vehicles that are powered with clean electricity). But all of these things require investment — and that’s where sustainable finance comes in.

What do you see as the greatest challenge for making this mindset shift a reality for financial institutions and individual investors?

There is already a great deal of interest in these issues, but we’re just getting started. The Expert Panel had more than 200 bilateral conversations with various businesses. We held 11 roundtables across Canada, and we received more than 50 written submissions. One thing that came through clearly is that in many organizations, there is already lots of activity related to different dimensions of the environment and climate change. But in many cases, it’s not as strategic or well coordinated as it could be. 

While we were developing the recommendations for our final report over the past year, we were very pleased to see some considerable progress being made. We are seeing boards becoming much more engaged on these issues, as well as the C-suite. When climate change is embedded in an organization’s strategy, people start thinking about all the different ways that it is going to impact their business — and that unleashes a lot of great ideas and ingenuity. People start to think about opportunities for new products and services, and they can bring their experience, creativity and financial know-how to the table to design them.

Realistically, we’re not going to accomplish all of this in a few months or years. It’s going to be a journey. But I think starting with your organization’s strategy is key. We need leaders to take an enterprise perspective on the issue. Climate change isn’t just pertinent to one part of your business; it needs to be mainstreamed throughout your model. Disclosure is part of that. You need to show the world what you’re doing. Metrics are part of it, too. As we often say in business, ‘what gets measured gets done’. We need to set targets, work towards objectives, manage risks and, over time, the level of aspiration must increase so we can accelerate the change that is required to realize both our economic and environmental aspirations.

Most readers are familiar with the physical effects of climate change, but what are the financial effects?

The physical effects I mentioned earlier — from hurricanes to floods to forest fires — all have a financial dimension. We have already seen a five-fold increase in insured damage in Canada caused by extreme weather since the 1990s. Even under the best case, these losses can be expected to increase further. But the physical effects of climate change are much more pervasive than is reflected in insured losses.

Think of our biggest physical assets: our ports, roads, railways, airports, drainage systems and hydroelectric dams. Climate change is going to put more water in some places and less water in others. There will be more days with extreme heat and wind and more storm surges, and all of these changes will impact the usability and the life span of these assets. Our roads and railways, for example, were built under certain assumptions about how hot the weather is going to be. If there are more days each year that are hotter than what they were built for, they are not going to function properly and will deteriorate faster. So all of a sudden, the lifetime of these assets is shorter than we thought, and that affects their value.

Beyond our physical assets, there will also be changes in the value of our natural assets. With climate change, it is very possible that some of the known reserves of oil and gas will never be extracted. This potential for ‘stranded assets’ is something investors need to factor in today. As weather patterns shift, the value of farmland and recreational facilities will also be impacted.

However, even this vastly underestimates the financial effects of climate change. If, as we expect, almost every sector in the economy is affected by climate change, the value of most companies will also be affected. And it will also affect jobs. The physical effects of climate change all have financial and human effects.

None of this positive change can happen unless we have access to reliable climate data. Are we there yet?

One of the most consistent messages we received from the private sector was around the lack of useful climate data to inform its decisions. There is lots of climate science data out there — data on air quality, water, ground, weather, satellites, etc. — but it is difficult to access because it’s located in different places and is in different formats. We heard from even large companies that it is very expensive to get reliable and consistent climate information; and for smaller companies, the cost is often prohibitive. We also heard that while there is lots of scientific data, there is a real lack of more analytic and decision-useful climate data, and this is impeding the flow of capital into sustainable finance.

One of the Panel’s most foundational recommendations is for the government to partner with universities and the private sector to provide a centralized source of climate data and financial analysis. Specifically, we recommend that the government combine its Canadian Climate Information Portal with Statistics Canada’s economic and financial data and partner with other organizations that have critical pieces of climate information, such as the Intact Centre on Climate Adaptation at the University of Waterloo, other university institutes, and sectoral associations that have critical climate impact data. We urgently need to invest to make climate information accessible, consistent and reliable, and combine different data sources to provide more decision-useful information. We could even take it a step further and leverage our leadership position in AI. The impacts of climate change are fundamentally a prediction problem, and as we have learned, AI is a prediction engine.

The impacts of climate change are fundamentally a prediction problem, and as we have learned, AI is a prediction engine.Tweet this

Many Rotman alumni hold senior positions in financial services. What is your message to them?

My message to our alumni — and really, to everyone in senior positions — is twofold. The first part of it is, make sure that you and your teams have the knowledge and expertise required to address climate change. In some cases, that will mean hiring some additional talent, but in many cases it will simply involve getting yourself and your team up the learning curve. Lifelong learning is an important concept that we embrace at Rotman, and formal executive programs, events and conferences are certainly one way to get the required knowledge. In addition, the professional associations for accountants, lawyers, and consultants are increasingly organizing symposiums and opportunities to get the knowledge and the expertise that is needed. That is step one.

The second aspect of my message to leaders is to develop a plan and engage your board, your executive team and your employees in this quest. One thing we know for sure is that by and large employees, care very deeply about these issues — and particularly younger workers, who are early on in their careers. They will be the ones living in this world after 2050, so they bring a certain urgency and imagination to these issues. Once you have a plan, start executing against it, refine it over time and look for ways to accelerate the results.

  Recommendations of the Expert Panel on Sustainable Finance

Recommendation 1: Map Canada’s long-term path to a low-emissions, climate-smart economy sector by sector, with an associated capital plan.

Recommendation 2: Provide Canadians the opportunity and incentive to connect their savings to climate objectives.

Recommendation 3: Establish a standing Canadian Sustainable Finance Action Council (SFAC), with a cross-departmental secretariat, to advise and assist the federal government in implementing the Panel’s recommendations.

Recommendation 4: Establish the Canadian Centre for Climate Information and Analytics as an authoritative source of climate information and decision analysis.

Recommendation 5: Define and pursue a Canadian approach to implementing the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).

Recommendation 6: Clarify the scope of fiduciary duty in the context of climate change.

Recommendation 7: Promote a knowledgeable financial support ecosystem.

Recommendation 8: Embed climate-related risk into monitoring, regulation and supervision of Canada’s financial system.

Recommendation 9: Expand Canada’s green fixed income market, and set a global standard for transition-oriented financing.

Recommendation 10: Promote sustainable investment as ‘business as usual’ within Canada’s asset management community.

Recommendation 11: Define Canada’s clean technology market advantage and financing strategy.

Recommendation 12: Support Canada’s oil and natural gas industry in building a low-emissions, globally competitive future.

Recommendation 13: Accelerate the development of a vibrant private building retrofit market.

Recommendation 14: Align Canada’s infrastructure strategy with its long-term sustainable growth objectives and leverage private capital in its delivery.

Recommendation 15: Engage institutional investors in the financing of Canada’s electricity grid of the future.

An overarching theme of our report is that sustainable finance needs to go mainstream. By that we mean that it must become business as usual in every dimension of finance. Our hope is that five to 10 years from now, we won’t even be talking about sustainable finance. We’ll just talk about finance, and how it is creating a sustainable world. 

Dr. Tiff Macklem is the former Dean of the Rotman School of Management and chaired the Expert Panel on Sustainable Finance, appointed by the federal government. Previously, he served as Senior Deputy Governor of the Bank of Canada. He is also a Director of Scotiabank and an advisory board member of Georgian Partners. The final report of the Expert Panel on Sustainable Finance is available at

This article appeared in the Spring 2020 issue. Published by the University of Toronto’s Rotman School of Management, Rotman Management explores themes of interest to leaders, innovators and entrepreneurs.

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