Canada’s recovery plan could miss a huge opportunity to boost climate finance, experts say

In the early morning hours of Sept. 22, the day before Canada launched its COVID-19 recovery plan, Ford Motor Company officials and union representatives reached an ambitious climate deal of their own at a negotiating table. 

The company’s plant in Oakville, roughly 45 minutes west of Toronto, was expected to soon be on the chopping block: another victim of manufacturing’s slow erosion in what was once Canada’s heartland for automotive production. Instead, Ford promised to spend nearly $2 billion to produce five new electric vehicle (EV) models at the plant along with an engine contract for a factory in Windsor, Ont. Both the provincial and federal governments would chip in just $500 million to retool both factories. 

This sort of commitment is unheard of for a major automaker in Canada. “Up until today, of the $300 billion announced globally in EV investments as the auto industry transforms from combustible engines to battery-electric vehicles, not one nickel had been allocated to Canada,” said Unifor national president Jerry Dias in a statement that morning. “But with today’s announcement, that changes.”

The following week, the federal government announced $10 billion in additional green infrastructure spending. Canadian environmental organizations are, by and large, pleased with these developments. However, several organizations told Future of Good that the federal government should do more — and not just by opening its chequebook. Peer countries such as Germany and South Korea are doubling down on aggressive decarbonization campaigns during the pandemic. Even if Canada cannot outspend them, it can help reduce investment risk for impact investors who see opportunity in Canada’s climate finance sector, yet are reluctant to buy in during a time of great uncertainty. 

Several organizations told Future of Good that the federal government should do more — and not just by opening its chequebook.

Brian Smith, CEO of Rhiza Capital Impact Investing, says it still isn’t clear how exactly Canada’s green recovery money will be spent. If it simply goes towards paying existing contractors to build green infrastructure, he says, there won’t be a lot of opportunities for impact investors to gain a foothold. However, he says there could be a substantial benefit to Canada’s recovery plan if investment funds or similar financial tools are involved. “The public sector can play a catalytic role in driving private-sector investment capital,” he says. 

One way this could happen, Smith says, is if some of the federal money was allowed to move through investment funds and shore up risk for private investors. It could act as a loss reserve if an investment goes bad, for example. And because the federal government is able to lend and borrow at low rates, such an arrangement would offer a degree of flexibility for private investors that isn’t typical on the open market. “In taking a deeper risk position than the private sector, that is going to crowd in more investors,” he says. 

While COVID-19 continues to dominate news cycles around the world, climate change remains humanity’s chief existential crisis. “The world came into this pandemic facing the risks and consequences of climate change,” the Trudeau government’s Throne Speech, which passed in the House of Commons Tuesday evening, announced. “The lesson that COVID-19 has taught us is that we need to match challenges with decisiveness and determination on all of these fronts — health and the economy and the environment.” The Liberal government laid out, in broad strokes, a plan to create thousands of jobs for green retrofits of inefficient buildings and encourage green investment. It also promised to attract cleantech companies, especially those producing EVs. 

By Oct. 1, the public got a glimpse at some of the details. The federal government will spend $2.5 billion on renewable power generation, storage, and transmission across the country. Another $2 billion will go to “large-scale building retrofits” while an additional $1.5 billion is earmarked for zero-emission buses and EV charging infrastructure. The total spend — roughly $10 billion — represents a huge investment for Canada, although it still pales in comparison to the European Union’s $1.3 trillion green recovery plan. U.S. presidential contender Joe Biden’s platform calls for a staggering $1.7 trillion federal investment over 10 years, with additional state and private sector investment expected to bring this up to $5 trillion. 

One way the federal government could encourage green impact investment, Smith says, is by allowing banks to create financial products their clients can invest in, and thereby contribute to green infrastructure spending. Major banks such as RBC, TD, and Scotiabank have committed billions of dollars to climate finance funds, but Smith says the banks themselves, like the government, aren’t clear on how these funds are deployed. If regulators allowed banks to create transparent green investment funds and the federal government offered to contribute money or reduce their risk, Smith says the resulting investment could be huge. “Now we’re talking about scale that may start to address the significance of climate change,” he says. 

If regulators allowed banks to create transparent green investment funds and the federal government offered to contribute money or reduce their risk, Smith says the resulting investment could be huge.

Impact investing is increasingly playing a role in Canada, especially when it comes to green companies or products. According to a 2018 report by the Global Sustainable Investment Alliance, Canada’s impact investing scene is relatively small compared to other sources of responsible finance, such as investing according to environmental and social governance (ESG) strategies, but grew by 60 percent in just two years — from $9.2 billion in 2016 to $14.8 billion in 2018. However, ESG remains the most popular method of what the report calls “responsible investing.” Around $1.9 trillion in Canadian-managed assets fall under this category due to the growing business case for ESGs. 

Some of this is due to a growing awareness by institutional investors, both in Canada and abroad, of the financial risks involved in funding highly-polluting industries. Late last year, Sweden’s central bank dumped all of its green bonds in Canada because of its reliance on high-carbon industries such as oil and gas. Last June, Zurich Insurance Group, a Swiss insurance giant, announced it would stop investing in any companies that derived more than 30 percent of their revenue from oil sands operations. 

Getting social finance programs such as VERGE Capital into funding green projects, however, can be tricky. James Chan, VERGE’s manager, says their green impact investing has not grown in recent years. One of the biggest challenges is “deal flow,” or simply finding suitable projects to invest in. Chan’s organization uses loan financing which he says works particularly well when it comes to funding massive projects, such as a solar farm or a green retrofit of a large commercial building. But banks often aren’t willing to finance particularly small projects, he says, while massive projects may just be too big for an organization to handle. 

Chan estimates only about 15 percent of VERGE Capital’s portfolio is focused on green initiatives. “We haven’t actually done too many because there isn’t enough of that critical mass out there,” he says. “We can play an intensely catalyzing role, but a large part of it could be catalyzed by government support at scale.” That support doesn’t have to just be government cash: Chan says it could be anything from a subsidy to drivers looking to buy EVs to the removal of government regulations around an EV purchase.

Governments have plenty of policy tools at their disposal to convince people to buy greener or reduce their carbon emissions. 

Still, investing $10 billion into green infrastructure, with potentially more to come, is already a game-changer. The federal government is also promising to spend money on retraining Canadian workers to meet this new economic future. Isabelle Turcotte, federal director of the Calgary-based Pembina Institute, says investors won’t lack for options under the federal government’s green recovery plan. “There’s a lot of opportunities for impact investors,” she says, “and that’s truly what this is about — attracting additional sources of investment into this big societal project of building an economy that’s going to be more resilient.” 

One example is in the Far North. Many residents are off-grid and use diesel generators to power their homes. The federal government promised to eliminate the use of diesel in these communities by 2030, Turcotte says, but the sheer scale of diesel use and the challenges faced by these remote communities may require more than just government spending. “There’s no doubt that we’re going to need to get those impact investors interested in making these investments,” she says. Turcotte adds that Indigenous communities will need to be at the forefront of these decisions, and could also be investors themselves. 

Not all of this green transition is on the federal government, either. Quebec is debuting dozens of locally produced electric school buses this fall. According to The Lion Electric Co., the bus’s manufacturer, it will be the only jurisdiction in North America to do so. Meanwhile, Alberta’s provincial government’s recently-unveiled natural gas strategy includes a plan to establish itself as a leading supplier of natural gas-generated “blue” hydrogen. CBC reports the strategy could mean the province opens its first hydrogen refineries in five to six years, although it depends on the as-of-yet unproven commercial successes of large-scale carbon capture technology. 

At the moment, Canada’s investments into green economic growth sound bold. When contrasted with the Liberal government’s past support for the oil and gas sector, it might seem almost revolutionary. In 2018, the federal government bought the Trans Mountain pipeline from Kinder Morgan for $4.5 billion to ensure the completion of its controversial expansion project. Last year, the Liberal government invested $275 million into LNG Canada, a liquified natural gas export terminal in Kitimat, B.C. And when the pandemic struck this spring, Canada’s oil and gas industry was hit with the double-whammy of plummeting oil demand and a price war with OPEC. The federal government offered $1.7 billion in relief to clean up the industry’s abandoned wells — debts that, according to Canadian law, companies themselves are required to pay. 

The Throne Speech doesn’t match the ambitions of Canada’s competitors.

Whether the federal government’s current proposal lives up to Canada’s climate change challenges remains to be seen. Tim Gray, executive director of Environmental Defence, says the Throne Speech doesn’t match the ambitions of Canada’s competitors. The European Union, he says, recently launched a $1.3 billion clean restart of their economy. In July, South Korea announced a $127 billion green economic transition plan, on top of a previous commitment to phasing out dozens of coal-fired power plants. South of the border, Gray says, the platform of U.S. presidential contender Joe Biden is still miles ahead of Canada’s ambitions. 

As Chan and Smith pointed out, having the federal government reduce investment risk for impact investors could make a world of difference for Canada’s green recovery. The details still aren’t clear, but Gray believes the Liberal government can do far better. Diverting Canada’s fossil fuel subsidies into cleantech and clean energy initiatives, scaling up investments in regional and urban transit, and promoting electric vehicles would be a start, he says. The Ford Motor Company announcement is promising, but it remains incredibly difficult to actually buy a domestically-produced EV in Canada — and the first models won’t be rolling off of the Oakville factory’s production lines for at least five years. 

On the whole, Gray says Canada’s ability to make a clean transition will all depend on whether it stays true to the idea of a green transition for Canadians. “It really depends on whether or not the federal government can focus on the good of the Canadian people, or continues to do what it has done in the past, which is cave to the pressure of the incumbent oil industry.”

Tell us this made you smarter | Contact us | Report error