Canada’s Crown corporations have been gradually shifting to clean investments, but there are ways to make better bets with public funds.
There is a straightforward financial tradeoff at the core of the energy transition. Since every dollar invested in fossil fuels brings the risk of higher emissions, it follows that every dollar redirected toward low-carbon projects reduces the risk.
In other words, decarbonization demands the reallocation of huge sums of capital. In Canada alone, the federal government estimates that achieving net zero by 2050 will mean mobilizing at least another $100 billion in public and private spending—every year.
At 440 Megatonnes, we’ve looked at one dimension of this financial transition already by examining how federal departments use tax measures and program spending to reduce emissions. These are the types of spending that the federal government had in mind with its new guidelines to eliminate inefficient fossil fuel subsidies. The guidelines take a major step toward aligning Canada’s spending with its climate goals.
But there is another important category of spending that is worth examining. These are the billions of public dollars invested every year through public finance mechanisms, which include the loans, guarantees, insurance and other capital provided by Crown corporations for projects within and outside Canada. In its announcement on fossil fuel subsidies, the federal government promised to issue a plan for phasing out public financing for fossil fuels by 2024. This Insight illustrates just how significant that phase out would be—and what kinds of guidance Crown corporations will need to get it right.
Public financing for energy has largely favoured fossil fuels
Canada has two major providers of federal public finance. The first is Export Development Canada (EDC), the country’s export credit agency and by far the largest purveyor of public finance; and the second is the Business Development Bank of Canada (BDC), which provides credit to small- and medium-sized enterprises.
This Insight focuses on these two organizations, though in the coming years, other federal Crown corporations may provide public finance to accelerate the energy transition. EDC and BDC support a variety of projects across the economy, and their investments in energy include everything from smart thermostats to wind farms to wood pellets. But as Figure 1 shows, the bulk of their financing for energy has historically gone to fossil fuels industries.
It’s worth acknowledging that Crown corporations don’t always call the shots. Much of the funding for the Trans Mountain pipeline, which contributes to the visible fossil fuel spikes in 2018 and 2020, is issued from an account reserved for transactions that are too risky for EDC but that government ministers have deemed to be in the “national interest.”
But as late as 2021, Canadian public finance was out of step with global trends that have long since shifted in favour of clean energy. In that year, as the world invested about $1.5 dollars in low-carbon energy for every dollar invested in fossil fuels, Canada’s public finance institutions did the opposite, directing about $3.2 dollars to fossil fuel industries for every dollar that went to low-carbon energy.
To align Canada’s public finance with the country’s climate goals, financiers must consistently do two things: redirect public financing from fossil fuels to low-carbon energy, and simultaneously ensure that any remaining public support for fossil fuel- or transition-exposed projects is consistent with climate goals.
The beginning of the end of public financing of fossil fuels
There are signs that Canada’s approach to public finance is shifting.
First, Crown corporations are dedicating increasing sums to clean technologies and emissions reduction. BDC has a dedicated fund of $1 billion set aside for clean tech companies, while EDC financed clean technology deals that were worth a total of $8.8 billion in 2022—well on the way to its goal of financing $10 billion in deals by 2025.
Second, federal entities are setting explicit goals to shift capital away from fossil fuels. The most important is the federal commitment, mentioned above, to make rules for phasing out public financing of fossil fuels in 2024. Those rules will complement guidelines that the federal government issued in 2022 to prohibit public financing for unabated fossil fuel projects overseas. For its part, EDC has already implemented those guidelines and has set a modest target to shrink its portfolio related to upstream oil and gas production by 15 per cent by 2030 relative to 2020.
These commitments point in the right direction. But green investments still represent a small share of public finance for energy. And public finance institutions lack tools to assess whether their remaining investments in transition-exposed industries are genuinely aligned with climate goals.
To some extent, both of these challenges are symptoms of uneven standards and information scarcity. Even when a public institution like EDC or BDC discloses its own exposure to climate risks and documents its financed emissions, the companies that seek certain lines of financing may not be scrutinized for the credibility of their climate plans or the consistency of their projects with net zero emissions. Nor are public institutions equipped with direction about how to reconcile short-term benefits like job retention with the long-term risks of economic transition.
More information enables better investments
One way to equip financiers with better information is to standardize the way that we evaluate investments against climate goals. The recently proposed climate investment taxonomy is exactly this kind of tool, outlining best practices for companies that want to be eligible for sustainable finance and establishing benchmarks against which financial institutions can measure their investments. EDC is well positioned to adopt this taxonomy in full because it already has a framework for classifying investments as “green” or “transitional”.
Assets financed by these green bonds must measure and disclose some of their exposures to transition risks, so the natural next step is for regulators to broaden these requirements. Standardized climate disclosure rules would help level the playing field and equip markets with information to make more sustainable bets. A further step would be to develop a more detailed framework to evaluate whether investments will be resilient to the economic changes that accompany the energy transition.
Finally, institutions can commit to investing an even greater share of their portfolio in demonstrably clean projects. The more capital that is allocated to reducing emissions, the more quickly we will reach our goals. More detailed guidance and more ambitious targets will help Canada’s public financiers move money faster and shift it toward projects that promise greater long-term benefits for investors and the climate.