(Chair) in the chair.

[English]

Hello to everyone who is joining us in the room and online. Welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy.

My name is Pamela Wallin, and I serve as the chair of this committee. I would like to introduce the other members of the committee: deputy chair Senator Loffreda, Senator Gignac, Senator Marshall, Senator Martin, Senator Massicotte, Senator Petten, Senator Ringuette and Senator Yussuff. Thank you all for being here.

Today we continue our examination of Bill S-243, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts.

We have the pleasure of welcoming back Peter Routledge, the Superintendent of Financial Institutions, and he is accompanied virtually today by Stéphane Tardif, the Managing Director, Climate Risk Hub. Welcome to you both. Thank you for joining us this evening and for coming back so soon. It seems like you were just here. We will go to you, Mr. Routledge, and have your opening remarks. The floor is yours.

[Translation]

Hello, Madam Chair, ladies and gentlemen of the committee.

We are gathered today on the traditional unceded territory of the Algonquin Anishinaabe people who live here and who have been looking after it for millennia. With me this afternoon is my colleague Stéphane Tardif, Managing Director, Climate Risk Hub, Office of the Superintendent of Financial Institutions.

[English]

The Intergovernmental Panel on Climate Change, or IPCC, reported earlier this year with high confidence that it expects average warming to reach 1.5 degrees Celsius in the near term, with every increment intensifying multiple and concurrent physical hazards. To slow and stop global warming, economies will have to transition away from greenhouse gas-emitting energy sources, a task that itself presents significant transition risks to economies, including and especially Canada’s. Thus, responding to the threats posed by climate change remains one of the great challenges for this generation of Canadian policy makers.

Before I explain what we have achieved at the Office of the Superintendent of Financial Institutions, or OSFI, on climate risk management since I began my service as superintendent, I would like to discuss OSFI’s mandate and its relation to the risks caused by climate change.

OSFI has an explicit mandate to contribute to public confidence in the Canadian financial system. This includes ensuring that the financial institutions we regulate are managing the risks that could impact their safety and soundness. Among these are the physical and transition risks associated with climate change. While OSFI does not have an explicit mandate to advance climate change objectives, our current mandate provides us with ample scope to take action to ensure the financial institutions we regulate are managing how climate change impacts their safety and soundness. Climate change impacts financial institutions’ safety and soundness because it will alter the cash flows generated by some financial assets and businesses. Stronger and more frequent natural disasters are changing the economic fundamentals in some insurance segments. As the world shifts away from greenhouse gas-emitting energy sources, the Canadian financial system will have to finance businesses’ transition to a low carbon economy. Thus OSFI’s existing mandate compels my organization to react with urgency to the risks posed by climate change. If we fail to do so, then we fail to fulfill our existing mandate.

Over the last year, OSFI has made significant progress in helping regulated financial institutions advance their competence in managing the physical and transition risks associated with climate change. We have made our expectations clear through Guideline B-15 on Climate Risk Management, created a platform for dialogue through the Climate Risk Forum and initiated a Climate Risk Returns and Standardized Climate Scenario Exercise. We have pursued regulation of the federal financial system for better climate risk management via innovation within our existing regulatory practices and tool set.

We believe now is the time to deepen our application of sound risk management practices to the risks of climate change, and this entails sound, bottom-up risk analysis that will, in turn, inform future regulatory decisions around risk weighting and, therefore, capital allocation, scenario testing and disclosures.

Thank you. Stéphane and I are happy to answer your questions.

Thank you very much.

I know that you are a person that really likes the data and wants to be able to track what the financial institutions are doing. Just in terms of where you think the banks are at, I’m looking at numbers from the 2022 Environmental, Social and Governance, or ESG, performance reports. The banks — I won’t put the numbers beside each one — but $84 billion, $96 billion and $107 billion, and their projections are to be in the range of $500 billion by 2025. These are significant increases in terms of funding the transition. Are you pleased with those numbers?

As superintendent, it’s not my job to be pleased with loan portfolio composition; it’s my job to make sure that they’re diligent about the way they’re making those loans and capitalizing them appropriately. That said, the hallmark of sound banking is a diversified loan portfolio, and to the extent those numbers you state reflect loan portfolios diversifying into a variety of economic activities, that’s good news. I’d rather have a bank with a thousand small trees than three big ones.

Thank you.

Thank you, Mr. Routledge, for being here.

Could you kindly share your nuanced perspective on this proposed legislation, Bill S-243? Does it hold the potential to supersede your jurisdiction, and do you harbour confidence in its pragmatic implementation, should it garner approval?

Let me start by saying it’s a bill before Parliament, and if Parliament passes the bill with instructions to the superintendent, I’m duty-bound to implement it faithfully. Whatever Parliament tells us to do, we’ll do so faithfully. That’s the faithful execution part of my job.

The fearless advice part of my job is that we at OSFI, in conjunction with our peers internationally, have built over the last several decades, in response to several financial crises, an architecture of risk measurement and capital allocation against those risks that is broad, comprehensive and detailed. I think good advice for me to give to parliamentarians is for them to let the bank geeks, who think about capital allocation and risk weighting, do their work and allocate capital on the basis of risk considered across a variety of sectors. Specific directions on the weighting of specific assets, while we could make it workable — and we would make it workable if Parliament so instructed us — there might be a better way to get at managing the risks that those preferred risk weightings are meant to address.

Just to get back to it, like you said, the current mandate of OSFI is to have public confidence in the Canadian financial system. You did say to let the bank geeks determine the cost of capital, et cetera, and I agree with you on that aspect. Don’t you feel it overrides, a little bit, your authority in putting such a bill forward and not letting you determine how to manage these risks? Maybe just add a word as to how you feel the Canadian banks are currently managing these risks, but I don’t want that question to take away from my first question.

Yes. I think, to an extent, exogenous idiosyncratic directions on how to risk weight specific assets that aren’t part of a broader and comprehensive risk framework, I think that will lead to more costs and more unintended consequences. The extent to whether it challenges the superintendent’s authority, I would honestly say the superintendent’s authority flows from instructions given to the superintendent from statute, and so I don’t see the changing of statute generally as something that impinges upon the superintendent’s authority.

Thank you.

Every time you come here, we walk around the edges of this. It’s not your job to tell the banks what to invest in or in what proportion; you’re there to oversee their viability. We’ll just keep that all in mind.

[Translation]

Welcome, Mr. Routledge. It is always a pleasure to see you. This bill, sponsored by our colleague Senator Rosa Galvez, who is unfortunately not with us today since she is attending COP28, is full of good intentions. There is no doubt about that. I think we all agree and commend her on her fine work. There is a link between finance and climate change.

I would like to hear your general reaction. Before we get into the specifics, do you think it is the right approach? Are our financial institutions concerned about greater transparency? Should the approach be legislative or regulatory? To achieve the same objective then, should your work involve regulations instead of legislation?

[English]

My fearless advice is that capital rules, capital guidelines and capital allocation should flow from a technocratic, non-legislative framework that is comprehensive across all risks in a financial system. I think it’s entirely appropriate for parliamentarians to challenge OSFI and the superintendent on whether we’re doing that responsibly, but my experience with risk is that managing it, particularly in the world of financial institutions, is to be done with great care, and with great care comes great empiricism that is agnostic to asset and not agnostic to relative risk.

To carry the answer further, there are legitimate concerns that our credit modelling does not capture the risks of climate change fully because climate change has not fully arrived. It has arrived in a very significant measure, I admit, but in terms of having its effects in the historic data on credit and market risk, et cetera, it hasn’t fully arrived. That’s why we’re doing the hard work on measuring Scope 1, 2 and 3 emissions so that we can begin to adjust how we think about risk for a forward-looking analysis on climate change. That, to me, is the bank geek’s way to deal with climate risk.

[Translation]

I have a second question.

Looking at the bill, it seems to be very detailed in proposing a risk weight of 1,250% for any loan or bond related to fossil fuels.

If I understand you correctly, it is not the role of legislators or parliamentarians to go into that much detail. Nonetheless, would approving such a detailed bill have unexpected consequences? What would the impact be on financing, access to capital for the Canadian economy?

I am worried because it might mean that Alberta or a sector of the economy would have difficulty securing financing from financial institutions. Correct me if I am wrong. Can you clarify this?

[English]

Productive, profitable risks will find financing. If, by virtue of regulation, one sector, and in this case banks, pulls back from profitable risk taking, there will be other investors to fill the breach, so the notion that shifting capital risk weightings exogenously without considering the broad array of risks will materially alter investment in a protected asset class would be a difficult argument to sustain, in my view.

So I understand, a profitable company will have no problem raising money from whatever it is, Wall Street rather than Bay Street, but for Canadian banks, they will lose significant market share, let us say, in that sector?

In that sector. Although, to clarify, oil and gas assets are really only 5% of total assets, so I don’t want to overstate the impact, but yes, in that sector, that could be a very plausible outcome.

Just to be clear, there is not a distinction between investing in the oil and gas sector whether it’s for transition or for expansion?

Yes.