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Leveraging Institutional Capital for Climate-friendly Investments

George Benson, Aliya Dossa, Chiyi Tam

Report to Global Aairs Canada, August, 2016 !1


EXECUTIVE SUMMARY This report aims to provide Global Affairs Canada with policy recommendations to facilitate the mobilization of institutional investors’ capital for climate-friendly investments. Through conducting a literature review on previous research in this area, we identify successful existing efforts while highlighting opportunities and gaps for expansion, within a Canadian context. We borrow from the literature in defining climate-friendly investments as “investments aligned with the transition to a low-carbon economy and society that reaches the policy target of limiting global warming to 2°C”.(1) At a high level, the vision behind this research is to strengthen Canada’s role in advancing climate friendly activity within and outside of Canada’s borders. As this is a broad objective, we have made the decision to focus our policy recommendations into three main sub-categories: firstly, the mobilization of institutional investors for climate friendly investments generally; secondly, the leveraging of existing investment networks within the Canadian economy to benefit both nationally- and internationally-based clean technology small- and medium-sized enterprises (SMEs); and, finally, an exploration into how leadership exhibited by Global Affairs Canada could spark regulatory changes in other jurisdictions around the world. To facilitate these foci, we have conducted several interviews with both Global Affairs Canada and figures active and knowledgeable in the institutional investors field to understand how public-private collaboration can best be approached. We summarize these results to highlight strategic channels within the Canadian ecosystem of institutional investors, which, in turn, we hope can inform how partnership building takes place in other jurisdictions, as well.

We also evaluated existing structures for investment into Canadian clean technology SMEs. By highlighting existing strengths and unexplored potential routes for growth, the growth of these clean technology firms can be stimulated and, in turn, contribute to the underlying goal of advancing a climate-friendly Canada going forward. Our recommendations operate on two key principles: (1) that many early-adopters of climate finance already exist and have knowledge that can be shared with their peers, and (2) that meaningful climate finance will necessitate financial regulatory changes; changes that businesses can and should help shape. Based on this, we recommend a six-part process that includes: 1. Inter-ministerial agreement and collaboration at the federal level 2. Consultations and momentum-building with Canadian domestic institutional investors 3. Targeted partnership building with the key global actors involved in the mobilization and regulation of institutional investors 4. Supported short-term actions involving knowledge-sharing that help build technical capacity amongst institutional investors 5. Targeted information-gathering and capacity building amongst institutional investors, startups, and SMEs to encourage greater mutual engagement 6. Planning and information gathering for long-term changes to the global financial regulatory system. GAC’s leadership in this process, we feel, could be transformative, and help carry Canada further into the spotlight as a global climate leader.

Acknowledgements: The authors would like to thank all of the people who were consulted during the creation of this report, the Social Sciences and Humanities Research Council (SSHRC) for their logistical assistance during this project, and Global Affairs Canada for the opportunity to present this research. !2


The Authors George Patrick Richard Benson is a Master’s Student at the UBC School of Community and Regional Planning (SCARP), former Vancouver Economic Commission intern, and urban climate planning consultant. Aliya Dossa is a graduate of UBC’s Vancouver School of Economics, and co-founder of MycoRemedy Inc., a biotechnology company that restores polluted environmental sites 100-percent naturally using fungi-based remediation techniques. Chiyi Tam is a graduate of UBC’s Faculty of Land and Food Systems, a founder of the UmbraCity umbrellasharing, and an urbanist who works in international development and sustainability.

Photographs: Cover image, NASA Earth Observatory [2000]; Background photos, in order, are attributed to the following owners, Anthony Malkovich [2014] Mark Garten [2014], NASA Earth Observatory [2015], and Mike Dariano [2015].

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Table of Contents 1. Introduction

5

2. Background, Research and Findings

8

A. Definitions

8

B. The State of Climate Finance

10

C. Institutional Investors and Climate Finance

13

D. Interviews and Feedback

15

3. Policy Recommendations E. Phase 1 - Internal Consultation & Mission Clarification F.

Phase 2 - Domestic Stakeholders Convening

16 18 19

G. Phase 3 - International Partnership Building

20

H. Phase 4 - Supporting Short-term Voluntary Actions

21

I.

Phase 5 — Supporting Startups and SMEs through Climate-Finance

24

J.

Phase 6 — Creating Long-term Regulatory Changes

25

4. Policy Implications and Conclusion

26

5. Appendices

30

K. List of Abbreviations L. List of Canadian Institutional Investors

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Introduction Global climate change is the most pressing challenge of our time. The suite of actors necessary to overcome this challenge include all levels of government globally, as well as non-state actors such as corporations and individuals. These actors will be required to invest, on average, 1% of global GDP per year to reduce GHG emissions to sustainable levels, and according to some estimates as much as 5.5% of global GDP per year. (2) (3) This is money that goes beyond what many states are able to spend and so other sources will need to be found. This project proposes to study how Global Affairs Canada (GAC) can mobilize institutional investors, as non-state actors, to help invest in (and, indeed, profit from) interventions that benefit the climate. This project outlines a potential convening process for institutional investors, as well as the various facets of climate finance and the global regulatory system that must be recognized and engaged with in order to achieve meaningful direction of monies towards interventions that achieve significant GHG reductions.

FIGURE 1. PROJECTED RISES GLOBAL AVERAGE TEMPERATURE (EPA, 2014)

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The motivation for this report has been driven by a desire to seek answers to the following questions: 1. What role can Global Affairs Canada play in bridging the gap between large pools of institutional investment capital and the need for climate-friendly investments, so as to mitigate and adapt to the impacts of a changing climate, both nationally and internationally? 2. How can Canadian clean technology firms, especially small- and medium-sized enterprises, directly or indirectly benefit from the mobilisation of institutional investors? 3. What kinds of global regulatory changes would need to occur for climate finance to become mainstreamed — and what would it take to achieve those changes? This remainder of this report proceeds as follows. In Section 1, we provide a background of climate finance, including key definitions, a brief history, our research, and our findings. In Section 2, we present our corresponding policy recommendations. Section 3 explores the policy implications of these recommendations and offers concluding thoughts, followed by supporting appendices in Section 4.

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SECTION 1 — BACKGROUND, RESEARCH, & FINDINGS

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Definitions Institutional Investor An institutional investor is, at its core, any body that manages groups of financial investments on behalf of others. Broadly speaking, an institutional investor is an entity that trades in securities at high enough volumes that it qualifies for treatment such as special rates and lower commissions. Notably, there are significant differences between the various types of institutional investors, such as, for example, pensions funds and insurance companies. Chief among these varying characteristics are the differing levels of liability constraints and equity allocations faced by each institutional investor category, as demonstrated in Table 1 below. The implications of their diversity for climate finance are noteworthy. Institutional investors with lower risk tolerances, like insurance companies, have historically been some of the most advanced actors in climate finance. This is important to keep in mind when targeting and convening specific institutional investors. As we are focusing on institutional investors as a collective group, the nuances of these differences are beyond the scope of this report, but it is important to consider these differences in any engagement process.

Sovereign Wealth

Private Wealth

Endowment DC Pensions Less Mature DB Pensions

Mature DB Pensions

0%

Typical Equity Allocation

100%

FIGURE 2. INSTITUTIONAL INVESTORS (DAN MIKULSIS, 2014)

Low

<â&#x20AC;&#x201D; Level of Liability Constraint â&#x20AC;&#x201D;>

Insurance High

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Climate Finance Climate finance refers to the broad intersection of flows of capital and either the: (a) need for, or (b) actual investments made in various projects, systems, and technologies, among other things, that reduce greenhouse gas emissions, or protect against climate disruptions. Whereas climate finance was originally understood as part of the Conference of Parties (COP) of the United Nations Framework Convention on Climate Change’s (UNFCCC)’s Clean Development Mechanism (CDM), it now operates far more broadly among public and private actors. (4) Many actors have since come to refer to the general investment of monies in mitigative or adaptive measures, from both public and private actors, as ‘climate finance’ activities. While some of the policy literature refers to this as “private climate finance,” for our purposes in this report, we shall simply refer to both public and private capital mobilization as climate finance.

FIGURE 3. RELEVANT VARIABLES FOR DEFINING CLIMATE FINANCE (CPI, 2015)

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The State of Climate Finance The World Economic Forum and the Climate Policy Initiative estimate that the world will need roughly USD 5.7 trillion invested annually in green infrastructure to protect the climate, meaning USD 5 trillion will need to be shifted from ‘business as usual’ projects, and an additional USD 700 billion per year raised still. (5) Looking at these numbers, it is clear that private climate finance, which makes up the bulk of that USD 5 trillion ‘business as usual’ money, has a massive role to play in mitigating the impacts of climate change. As the Global Landscape of Climate Finance 2015 offered last year: “after levelling off in 2012, and declining in 2013, the amount of climate finance invested around the world in 2014 increased by 18%, from USD 331 billion to an estimated USD 391 billion.” Public monies, specifically, are growing, “with contributions by governments and intermediaries reaching at least USD 148 billion (range of USD 144–152 billion) in 2014, an 8% increase from 2013 levels, and a 10% rise from 2012.”(6) They note that governments are becoming increasingly interested in guiding and directing this money and seeking policy frameworks that allow it to be focused effectively. Private investment is also growing despite two years of decline. In particular, private investment in renewable energy was up by 26% in 2014. Overall, private money remained the largest source (62%) of global climate finance that the Landscape was able to capture for 2015, though it also noted that, while there was increasing governmental attention in the space, there were still significant technical and strategic knowledge gaps for many major institutions.(8) It is these knowledge gaps we are seeking to bridge through our policy recommendations in this report.

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FIGURE 4. GLOBAL STATE OF CLIMATE FINANCE IN 2015 (CPI, 2016)

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Climate Finance, SMEs, and Startups Startups and small and medium enterprises (SMEs) have a major role to play in the realization of global climate change goals, particularly as they bring innovative, sometimes paradigm-shifting, products to market. The World Bank estimates that there will be $1.6 trillion of growth amongst SMEs and clean tech startups over the next decade.(9) For GAC there is a clear imperative here, both in terms of supporting development abroad, and emerging Canadian startups and SMEs that may grow internationally. As illustrated in Figure 4,venture capital (VC) firms play an intermediary role between institutional investors and the startups/SMEs in which they invest. Therefore, for any future investment behaviour-change to occur, incentives must be aligned both between the institutional investors and the VCs, as well as between the VCs and the SMEs. It is unclear how much work has been done globally coordinate these three actors, meaning that GAC may be able to take a leadership role in helping develop incentive-based mechanisms to encourage capital-flow from institutional investors into the hands of SMEs who focus on clean technology ventures and other low carbon and environmental goods and services. Such incentives should be positioned so that they trickle down so as to encourage increased activity in cleantechnology development from the ground up. These incentive structures could include things like rewarding those institutional investors who channel their capital through climate-friendly and climate-focused venture capital firms, thus incenting more venture capital firms to be climate-focused and, subsequently, incentivizing SMEs to do the same. Other such incentive structures could take the form of anything from a GAC-organized multiplier on the returns to institutional investors yielded from clean technology-based SMEs, special terms in term sheets to SMEs from VCs supported by clean technology-focused institutional investors, or anything in between.

FIGURE 4. RELATIONSHIP BETWEEN INSTITUTIONAL INVESTORS AND SME/ STARTUPS (AUTHORS, 2016)

Investments

Venture Capital Firms

Startups & High Growth-Potential SMEâ&#x20AC;&#x2122;s

Returns

Institutional Investors

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Institutional Investors and Climate Finance Institutional investors, globally, accounted for over $80 trillion in holdings in 2011. (10) Collectively they represent the largest pool of investment money on earth. When we think about the investments needed to protect the climate, there is a clear convergence here. Particularly in terms of power-generation and mobility, there are necessary investments that will be multi-generational in use and will provide a steady rate of return.(8) While nation-state led climate finance activities have been slow moving, building particularly after the 2010 agreement on the Green Climate Fund, private finance around climate change has expanded precipitously since then.The UNEP Finance Initiative (UNEPFI) has been a leading institution in coordinating these efforts, building on its past successes with the Principles for Responsible Investment (PRI) and its various statements on sustainable financial practices. For institutional investors specifically, UNEPFI catalogues six broad areas (11) of action that have become increasingly prominent: 1. Low carbon and high energy efficiency finance and investing — including: A. Pension fund allocation to low carbon and high energy efficiency B. Supporting renewable energy projects C. Partnerships in developing countries D. Growing green bond market E. Reducing real estate emissions and energy use 2. Emissions reducing finance and investing — looking for new techniques to reduce the carbon emissions from loan books and investment portfolios. 3. Adaptation finance and investing — banks and insurance companies, in particular, are looking for ways to better support adaptation projects, especially in developing countries. 4. Measurement and transparency — financial institutions in general are working to better measure and report on their risk profiles, their performance, and their exposure to various climatic stressors. 5. Engagement with companies — greater numbers of financial institutions are using proxy voting and other means to influence the actions and direction of companies they are invested in. 6. Engagement with policy-makers — financial institutions across the field are now making a dedicated effort to work closely with policy-makers to ensure there is a shared understanding of the threat and the particular opportunities that institutional investors can act on, and where they will need assistance. There is still significant uncertainty regarding the ways in which policy-makers and institutional investors will collaborate on climate finance policy. While GAC and its international counterparts are increasing their capacities, and working more and more with organizations like UNEP FI, there are still considerable gaps in knowledge and methodology surrounding the coordination protocols required. At the same time, regional institutional investor bodies, such as the Institutional Investors Group on Climate Change (IGCC) and the Investors’ Network on Climate Risk (INCR), are also playing a larger role. In 2014, for example, they called on governments to work more closely with them and to develop clear mechanisms for supporting their mobilization of capital. Despite these efforts to date, there is still ample room to clarify the central source of authoritative information in the climate finance policy-making realm, and to mobilize thoughtfully around it. !13


â&#x20AC;&#x153;What we are seeing is that for climate-friendly options to be attractive to investors today, they must be competitive on financial risk-return, i.e., without adjusting for climate-related risks.â&#x20AC;? Shifting Private Finance towards ClimateFriendly Investments (2015)

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Interviews and Project Feedback In interviews that we conducted over the course of our research for this report, we spoke to private financial consultants, government officials, and civil society actors operating in the climate finance space. Some of their common observations included: • Growing amount of activity in the climate finance here in Canada, driven by both consumer demands and realization that impact investing can turn real profits; • Still capacity building needed throughout the field, with things like trustee education, technical analyses of green financial products, and so on; • Leveraging international partnerships will be a significant part of impacting major Canadian financial institutions, like pension funds, which are invested significantly overseas; • Any and all convening processes must have clear goals and outcomes expressed if private partners are going to participate. Those interviewed were overwhelmingly positive on the idea that GAC and the Government of Canada as a whole would take action to mobilize private capital in climate finance. They noted that while policy priorities over the past decade had not been conducive to creating voluntary activity amongst investors, regulatory changes, both in Canada and abroad, would be necessary long-term goals.

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SECTION 2 â&#x20AC;&#x201D; RECOMMENDATIONS

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Recommendations Our recommendation is a multi-phase convening process, initiated by GAC and performed in partnership with both Environment and Climate Change Canada and the Ministry of Finance. The long term vision is for Canada to be an international leader for realising a climate-aligned international financial system. In pursuit of this GAC should focus on initiating volunteer actions on the part of major institutional investors, through actions like technical capacity-building. We heard clearly in our interviews and noted in our research that without national and international financial regulatory changes, it is very likely that only early adopters and other non-typical actors will continue advancing necessary climate finance goals.

It is important that all of these actions be measurable. Regarding voluntary actions, success in this process would be measured through particular threshold markers for engagement in the form of voluntary actions taken, technical capacity markers met, and gains in market share for climate finance-based activities (e.g. number of green bonds oďŹ&#x20AC;ered in a year). The particulars of these metrics are secondary. Of primary importance is that metrics are taken and that they incent climate-friendly activity among targeted actors.

We utilize the remainder of this section to describe our policy recommendations in chronological phases.

The actions described in Phases 1-3 are designed to build consensus for the execution of actions subsequently contained in Phases 4-6.

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Phase 1 — Internal Consultations & Directionbuilding GAC is not the only Canadian agency working on climate change. To be an effective actor in the international realm, it must be aligned with the other relevant domestic actors first, particularly the Ministries of Environment and Climate Change and Finance. This phase will include: 1. Meetings called between Deputy Ministers of all GAC Ministries, Environment and Climate Change, and Finance to create strategic alignment on all future climate finance activities by these ministries. 2. The creation of an ‘Interministerial Working Group on Climate Finance’ (IMWG) to oversee an engagement process with the outcome the strengthening of: 1. Voluntary action amongst Canadian and international institutional investors that include: carbon disclosure for their portfolios (e.g., through the Carbon Disclosure Project), integration of Environment and Social Governance (ESG) framework into their governance structures, and the offering of demonstration and pilot financial products in climate finance space; 2. Technical knowledge amongst Canadian and international institutional investors, including: new financial products that support climate finance initiatives, risk management frameworks more suitably adapted to a changing climate, and the creation of benefits and regulations needed to embed ESG in firms’ governance structures; 3. Technical knowledge amongst Canadian and international regulators on possible regulatory changes relevant for climate investments; 4. Medium- and long-term governance mechanisms in Canada (possibly within the auspices FederalProvincial Ministerial Working Group on Carbon Pricing) and internationally to ensure the long-term reform of financial systems to include a climate friendly regulatory framework that stresses ESG values and mandates disclosure of climate risk; 5. International support for a climate-aligned financial system; including existing intergovernmental and transnational mechanisms, such as the UNEP Finance Initiative, which have been already working towards this goal. 3. Consultations, following Ministerial agreement, with the heads of major federal institutional investors and financial regulatory institutions to inform them of this process and to secure their participation. Actors to consult include: Bank of Canada Funds Management and Banking Division, Canadian Pension Plan (CPP) Investment Board, the Canada Deposit Insurance Corporation (CDIC), and Export Development Canada; as well as national and provincial regulatory bodies including: the Office of the Superintendent of Financial Institutions (OSFI), the Investment Industry Regulatory Organization of Canada (IIROC), Canadian Securities Administrators (CSA), and the Mutual Fund Dealers Association of Canada (MFDA).

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Phase 2 — Domestic Stakeholders Convening Following agreement from Ministries and regulators, the IMWG could then pursue an initial round of engagement with Canadian institutional investors to understand what their greatest needs are in the area of climate finance. This would include: 1. Targeted individual stakeholder meetings with distinct institutional investor groups to notify them of the interministerial plan to seek voluntary action on climate finance, and to seek their input for long-term changes to the Canadian and international financial regulatory system. Actors consulted would include the following Canadian Institutional Investors: A. The investment branches of the “Big Five”: RBC, CIBC, TD Canada Trust, BMO, Scotia Bank; B. Insurance Companies with +$10B in assets; C. Pension funds with +$10B in assets; D. Endowments and Charities +$200M in assets; and E. Provincial Sovereign Wealth Funds (e.g., Alberta Investment Management Corporation, Investment Saskatchewan, [Quebec’s] Generations Fund, etc.).[For list of all institutions, see Appendix 2] 2. Integrated feedback on priorities and technical gaps from stakeholder meetings into programming decisions for future meetings. 3. Formation of an Industry Advisory Committee from a representative sample of institutional investors of each type (e.g. insurance companies, pension plans, etc.) to keep the IMWG apprised of pertinent developments in the field and feedback from stakeholders, as well as to add input on programming and future directions for the convening process.

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Phase 3 — International Partnership Building Successful action on climate finance will be global in nature. Connections and conversations with Canadian stakeholders will make it easier for GAC and the IMWG to work with outside partners. As Canadian institutions come on board with the IMWG’s plan, parallel conversations with other major international actors, both public and private, will be essential. As the goals of the process state in Phase 1, engagement with these actors will make clear Canada’s dedication to encouraging voluntary changes in institutional investors’ behaviour towards pro-climate actions, building their technical and policy capacities, and creating both national and international financial regulatory changes. This phase will include: 1. Targeted, high-level meetings with leading climate-finance jurisdictions, informing them of Canada’s intention to initiate its domestic regulatory and voluntary process with institutional investors and to look for their support in replicating these goals and this process on an international scale. 2. Addressing the UNFCCC Finance Committee (either directly or through a sitting member of the committee), the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures, and the UNEP Finance Initiative regarding these planned activities, their scope, goals, and build alignment with these institutions’ own actions. 3. Meeting with relevant transnational and non-state actors, including the Institutional Investors Group on Climate Change (IIGCC), the Investor’s Network on Climate Risk (INCR), Asia Investor’s Group on Climate Change (AIGCC), Investor Group on Climate Change (IGCC), and Principles for Responsible Investment (PRI), and inform them of this planned process, its goals, and work to build strategic alignment between it and their work. 4. The formation of a ‘Transnational Steering Committee on Climate Finance’ (TSCCF), with the relevant national parties and liaisons from the UNFCCC Finance Committee, FSB Taskforce, and the UNEP Finance Initiative, and transnational institutional investors’ groups, alongside dedicated staff and logistical funding, to: A. Manage the international engagement process envisioned in Phases 4-6; B. Establish a feed-in framework to identify challenges and solutions, noteworthy successes, and other relevant considerations; C. Establish and monitor metrics relevant to Phase 5; and D. Map out the pathway to Phase 6.

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Phase 4 â&#x20AC;&#x201D; Supporting Short-term Voluntary Actions After helping to establish both domestic and international coordinating mechanisms on climate finance, GAC will have to play a role in supporting existing, or quick-start actions, that build institutional investorsâ&#x20AC;&#x2122; capacity and/or increase national and global governance. In particular, these efforts should take a perspective of drawing in lowengagement, or low-capacity institutional investors to fora where they can draw on the experiences of knowledgeable actors already firmly entrenched in the climate finance space. In particular, we recommend: 1. Sending appropriate IMWG and TSCCF representatives to relevant forums that address climate finance and, where possible, organize (1) information gathering sessions on ideal regulatory changes to support climate finance, and (2) open pledges for climate finance activities (e.g., additional green bond offerings, embedding of ESG, pilot programmes in innovative financing vehicles, etc.). 1. Canadian forums include (but are not limited to): A. Responsible Investment Association of Canadaâ&#x20AC;&#x2122;s annual conference B. Shareholder Association for Research and Education (SHARE) annual conference C. Canada Pension Summit 2. International fora include (but are not limited to): D. UNEP Finance Initiative Global Roundtable Programme (GRP) E. Ceres Investor Summit on Climate Risk F.

International Forum of Sovereign Wealth Funds

G. GLOBE Capital conference H. Green Economy Coalition annual conference I.

Major Economies Forum on Energy and the Climate

J.

P80 Group Foundation Solutions Summit

3. Working with the aforementioned organizations and fora to understand actors who have had long-term low-engagement with these processes and work on targeted measures to encourage them to attend and actively participate in these meetings; in particular stress opportunities to feed into forthcoming regulatory changes. 4. Working with the aforementioned organizations, particularly the UNEP Finance Initiative, to host workshops, webinars, meetings, or informational gatherings on the following topics, wherever topics are not being covered accurately. Possible topics could include:

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A. Issuing Climate Bonds — Bring together the Canadian and international institutional investors, the Climate Bonds Initiative, three of the largest green bonds issuers from 2016, the Bank of America, Merrill Lynch, Credit Agricole CIB, HSBC, and Canada’s first ‘green’ bond issuer, TD Canada Trust. The focus of the workshop would be on the technical specifications for what constitutes climate and green bonds, expected return on investment (ROI) and rate of return (RR), and offer high-level “matchmaking” for spaces in the Canadian market where green bond issuance is likely. B. Building Partnerships with Venture Capital to Support Startups and SMEs — Bring together leading figures in the VC, institutional investor communities, and from exemplary LCEGSS startups and SMEs to discuss opportunities to better coordinate actions, strengthen returns, and expand the role that startups and SMEs can play in advancing innovative technologies. C. Other possible workshop themes could include: I.

Creating and Expanding Green Indexed Funds;

II.

The Role of Public Financial Institutions in Stimulating Pro-Climate Investment;

III. Green Securitization; IV. Financial Benefits of an Internal ESG Framework; V.

Advancing Ecosystem Services, both in and outside REDD+, as a Financial Vehicle.

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â&#x20AC;&#x153;Full consistency between institutional investorsâ&#x20AC;&#x2122; goals and those of sustainable development will not be possible without policy interventions in the real economy that internalize environmental and social costs so that sustainability risks are priced appropriately and fully captured by markets.â&#x20AC;? Financial Reform, Institutional Investors, and Sustainable Development (2015)

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Phase 5 — Supporting Startups and SMEs through Climate Finance Both the IMWG and the TSCCF must recognise the crucial role that startups and Small and Medium-sized Enterprises (SMEs) will play in creating sustainable practices and products ‘on the ground’ throughout the world. The developmental possibilities of this kind of alignment are immense. Providing meaningful support to these actors, both in technical knowledge and capacity, but also in direct access to investors and knowledge of where their capital flows are headed, will hopefully prove transformative. Our recommendations for GAC include: 1. Using the Canadian Trade Commissioner Service (CTCS) as a platform for engaging with Canadian businesses about opportunities presented with developments in the climate finance space. In particular, focus on: A. Report-outs from the workshops in Phase 4, particularly Risk and Profit Profiles for Green Business: an Equity Investment Focus, helping businesses to focus on service offerings and on thematic areas of action that are growing because of climate finance action globally. B. Hosting informational sessions with Canadian businesses in the low carbon, environmental goods and services, and clean technology sectors, about the global flows of capital into climate change products. C. Creating an online ‘notice board’ for major overseas investors, such as Canadian pension plans, to keep these businesses aware of major infrastructure or other projects where climate finance will need to be mobilized. 2. Hosting workshops in collaboration with CTCS and other actors on subjects such as: A. Opportunity Identification for the CTCS — Meeting to provide information to the CTCS with up-to-date information on the state of LCEGSS, with both service and product opportunities seen by investors, as well as businesses in these sectors looking to match ongoing or future projects abroad. B. Advancing Global Climate-Friendly Development through Canadian-based Startup and SMEs - a subset of startups who are ‘getting it right’ to present on best practices and how institutional investors can simultaneously support their progress and participate in the subsequent upside through demanding certain climate-friendly qualities of the Venture Capital (VC) firms in which they invest (see Figure 3 for the relationship between Institutional Investors and startups/SMEs).

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Phase 6 â&#x20AC;&#x201D; Creating Long-term Regulatory Change The end game of this engagement process, and of any meaningful attempt to create climate change action, will be to see changes created in both Canadian and other jurisdictionsâ&#x20AC;&#x2122; financial regulatory systems. Broadly speaking, these changes would centre on mandatory carbon and climate risk disclosure, ingrained ESG principles, amongst other things. To initiate this, we recommend: 1. Collected input from each phase of the process can be sorted through with international partners to identify the most pressing changes to be made to global financial markets 2. Build a timeline for rolling out national-level financial disclosure changes, climate-risk guidelines, and national and international developmental priorities based on previous input.

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SECTION 3 â&#x20AC;&#x201D; IMPLICATIONS AND CONCLUSION

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Implications If our recommendations are undertaken, our expectations for their impacts are as follows: First and foremost, we expect greater clarity amongst federal stakeholders as to their climate finance responsibilities and greater technical capacity to engage on this issue. Second, an increase in both the breadth and depth of conversations about climate change in the financial world. Thirdly if institutional investors build their internal capacity in climate finance, we expect their exposure to overall climate risks to decrease. Finally, we expect Canadian (LC)EGSS businesses to experience greater opportunities in Canada and abroad in climate finance-funded projects. Impacts to Institutional Investors • Greater prevalence of climate-friendly investments • Greater capacity to understand, document, and avoid climate risk • Greater coordination between institutional investors on climate finance globally, as well as with governmental, and non-governmental partners • Better alignment with the desires of their customers, who are increasingly looking for ESG-integrated investors and pro-climate investment opportunities Impacts on Canadian Businesses • Greater opportunities for LCEGSS businesses both in Canada and abroad to work on climate finance projects • Greater impetus for non-LCEGSS businesses to decarbonize and ‘green’ their operations Impacts on Federal Government • Rehabilitation of Canada’s reputation as a global environmental leader • Increased partnerships with other governments, intergovernmental organizations (such as the FSB, among others) • Greater ability of GAC to enact its mandates in trade, development, and foreign relations, particularly as the implementation of the GCF is concerned.

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Conclusion It is clear that there is a mutually-beneficial opportunity for climate-friendly investments to be accelerated through the convening of institutional investors. Both Global Affairs Canada and the Government of Canada as a whole can play a meaningful leadership role in this regard. By following the step by step plan outlined in our policy recommendations namely: Internal Consultations and Mission Clarification, Domestic Stakeholders Convening; International Partnership Building; Supporting Short-Term Voluntary Actions; Supporting Startups and SMEs through Climate-Finance, and Creating Long-term Regulatory Changes GAC can be confident in its position as a leader in mitigating and adapting to a changing climate through climate finance.

â&#x20AC;Š

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Endnotes (1) European Commission Director General on Climate Change. Shifting Private Finance towards ClimateFriendly Investments. (EU, 2013) (2) Stern Review. (2006) Pg., 211 (3) IPCC (2007) Pg., 11; 19 (4) Venugopal, Shally and Shilpa Pate “Why Is Climate Finance So Hard to Define?” World Resources Institute, April 08, 2013 <http://www.wri.org/blog/2013/04/why-climate-finance-so-hard-define> (5) Climate Finance,” World Resources Institute, n.d. Accessed from: <http://www.wri.org/our-work/project/ climate-finance> (6) Climate Policy Initiative. Global Landscape of Climate Finance 2015. (November, 2015). Pg., 1 Accessed from: <http://climatepolicyinitiative.org/wp-content/uploads/2015/11/Global-Landscape-of-ClimateFinance-2015.pdf> (7) () infoDev. Building Competitive Green Industries: the Climate and Clean Technology Opportunity for Developing Countries. (Washington, D.C: World Bank, 2014) (9) Climate Policy Initiative. Global Landscape of Climate Finance 2015. (November, 2015). Pg., 1 (10) Çelik, Serdar and Mats Isaksson. “Institutional Investors and Ownership Engagement,” OECD Journal: Financial Market Trends, Volume 2 (2013). Pg., 97 (11) The IPCC analysed four scenarios in 2014 and estimated that “global cumulative RE investments [needed] (in the power generation sector only) ranging from USD2005 1,360 to 5,100 billion for the decade 2011 to 2020, and from USD2005 1,490 to 7,180 billion for the decade 2021 to 2030. Edenhofer, Ottmar, Ramón Pichs-Madruga, Youba Sokona, Kristin Seyboth, Susanne Kadner, Timm Zwickel, Patrick Eickemeier et al., eds. Renewable energy sources and climate change mitigation: Special report of the intergovernmental panel on climate change. Cambridge University Press, 2011. Pg., 20 (12) UNEP. Financial Institutions Taking Action on Climate Change. (2013) Pg., 4-5

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SECTION 4 â&#x20AC;&#x201D; APPENDICES

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Appendix A — List of Abbreviations CDM ― Clean Development Mechanism COP ― Conference of the Parties ESG ― Environment and Social Governance FSB ― Financial Stability Board GAC ― Global Affairs Canada GHG ― Greenhouse Gas GDP ― Gross Domestic Product IGCC ― Institutional Investors Group on Climate Change IMWG ― Inter-Ministerial Working Group INCR ― Investors’ Network on Climate Risk LCEGSS ― Low Carbon and Environmental Goods and Services Sector PRI ― Principles for Responsible Investment REDD+ ― Reducing Emissions from Deforestation and Forest Degradation ROI ― Return on Investment SME ― Small- and Medium-Sized Enterprises TSCCF ― Transnational Steering Committee on Climate Finance UNEP ― United Nations Environment Programme UNEPFI ― United Nations Environment Programme Finance Initiative UNFCCC ― United Nations Framework Convention on Climate Change VC ― Venture Capital

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Appendix B —Canadian Institutional Investors Canadian Insurance Companies +$10B

Total Assets (Billions of CAD, March 31st, 2016)

Manulife Financial

697

Power Financial

407

Sun Life Financial

246

Fairfax Financial

56

Industrial Alliance Financial

54

Desjardins

46

Intact Financial

21

E-L Financial Corp

19

RBC Insurance

13

TD Insurance

13

The Co-operators Group

13

SSQ Financial

11

ivari

11

Canadian Pension Funds +$10B

Total Assets (Billions of CAD, December, 2015)

CPP Investment Board

278

Ontario Teacher’s Pension Plan

168

Public Service Pension Plan (Federal)

81

Ontario Municipal Employees Retirement System

77

Healthcare of Ontario Pension Plan

63

Quebec Government and Public Employees Retirement Plan

59

BC Municipal Pension Fund

43

Alberta - Local Authorities Pension Plan

34

BC Public Service Pension Plan

27

BC Teacher’s Pension Plan

24

Ontario Pension Board

23 !32


Canadian Pension Funds (Con’t)

Total Assets (Billions of CAD, December, 2015)

Hydro-Quebec

22

Canadian Forces Pension Plan

21

Canada Post Corp

21

BCE Master Trust Fund

20

Quebec Construction Industry

19

OPSEU Pension Trust

18

Canadian National Railway Company

17

Air Canada Pension Investments

17

Ontario Power Generation Corp

13

Canadian Pacific Railway

12

Alberta Teachers Retirement Fund Board

12

General Motors of Canada Ltd

11

Royal Bank of Canada

11

Alberta Public Service Pension Plan

10

Regime du Rentes du Mouvement Desjardins

10

Regime de Retraite du Personnel d’Encadrement

10

Canadian Foundations and Endowments +$200M

Mastercard Foundation

Total Assets (Billions of CAD, December 2015 for Endowments, 2014 for Charities and Foundations) 4

University of Toronto Endowment

2.1

Foundation Lucie et Andre Changon

1.4

University of British Columbia Endowment

1.45

McGill University Endowment

1.43

Queen’s University Endowment

1.1

University of Alberta Endowment

1.1

La Ka Shing (Canada) Foundation

0.9

Vancouver Foundation ($0.815B)

0.815

University of Calgary Endowment

0.79 !33


Canadian Foundations and Endowments +$200M (conâ&#x20AC;&#x2122;t)

Total Assets (Billions of CAD, December 2015 for Endowments, 2014 for Charities and Foundations)

The Hospital for Sick Children Foundation

0.7

University of Western Ontario Endowment

0.685

McMaster University

0.609

Dalhousie University

0.537

The Azreili Foundation

0.5

The Winnipeg Foundation

0.5

J.W. McConnell Family Foundation

0.5

York University

0.439

Victoria University, Toronto

0.411

The Calgary Foundation

0.408

University of Victoria Endowment

0.348

Buckingham Charitable Foundation

0.34

La Fondation Marcelle et Jean Coutu

0.229

W Garfield Weston Foundation

0.223

Joseph Lebovic Charitable Foundation

0.227

Lazaridis Family Foundation

0.221

Larry and Cookie Rossy Family Foundation

0.221

The Edmonton Community Foundation

0.209

Fondation J.A. DeSeve

0.203

!34

Leveraging Institutional Capital for Climate-Friendly Investments  

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