After years as a decarbonization and climate finance expert watching the progress of the financial sector in meeting its climate commitments – more often how they stalled or backslid – it’s clear the sector’s voluntary net-zero pledges have limits. So does the ability of financial regulators to manage climate risk.
Recent publications from two leading academic institutions, the Columbia Center on Sustainable Investment (CCSI) and the London School of Economics (LSE) Global School of Sustainability, capture this well.
Both argue that without broader government economic policy aligning incentives with mitigating climate risk, the financial sector will never overcome short-term profit motives and won’t redirect capital from fossil fuels toward climate solutions at the scale or speed necessary.
This doesn’t mean the sector should abandon the work. It means the federal government should take action to encourage and enable our massive financial institutions – the engines of our economy – to meaningfully shift their capital by aligning public finance and industrial policy.
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A May LSE paper summarizing feedback from more than 70 global asset managers and owners representing US$40–50 trillion in assets found that these institutions increasingly see themselves miscast by the general market-led narrative as the key drivers of decarbonization and the energy transition. They believe government policy is the real lever.
If these institutional investors are to profit from mitigating the climate crisis rather than worsening it, they argue that they require regulation and policy that evens the financial playing field.
The paper concludes that institutional investors’ ability to advocate for government policy changes is the biggest lever they have to drive real-world decarbonization. At minimum, that means pushing for credible sustainable finance rules, such as a sustainable finance taxonomy and corporate climate risk disclosure.
In Canada, institutional investors now have a chance to participate in shaping the country’s sustainable finance taxonomy and sectoral transition pathways in a manner that is science-based and not weakened by vested interests in oil and gas. In terms of corporate climate-risks disclosure, investors can lobby provincial securities regulators to move forward on their stalled climate-risk disclosure regulation.
Ideally, the paper argues, institutional advocacy efforts should push for broader economic policy that aligns incentives with the energy transition, such as emissions caps in the oil and gas sector. Asset owners, with their longer investment horizons, are best-placed to lead this.
In June, in From Planetary Hazard to Financial Stability: Disentangling Climate Risk and Institutional Responsibility, Lisa Sachs, director of the Columbia Center on Sustainable Investment, extended this argument from asset managers and owners to the financial sector and its regulators more broadly.
She argued that driving climate action is simply beyond their limited organizational models and mandates. She highlighted the role of fiscal authorities – the agencies holding the public purse – to tilt the financial attractiveness of energy projects and climate risks.
Both papers are correct that voluntary net-zero commitments have real structural limits, most notably:
- short-term profit motives and investment vehicles whose timelines are mismatched with the worst impacts of climate change; and
- vulnerability to market signals set by broader government economic policy.
Canada offers evidence of these limits, with financial institutions backpedaling on net-zero commitments over the past year, including the country’s largest pension fund (Canada Pension Plan) and two of its largest banks (Scotiabank and RBC).
More importantly, capital isn’t shifting away from fossil fuels toward climate solutions at the pace that even the federal government’s recently weakened climate commitments require.
Despite incremental progress – declining investment in greenfield oil and gas expansion (the first greenfield project greenlit since 2013 took place this June, representing a 0.6-per-cent increase on average 2025 production) and increased investment in major clean-energy projects – Canadian oil and gas production and emissions remain on an upward trajectory.
The financial markets play a critical role as a source of finance for the global energy transition, so with better information and rules, they can better price in climate risk. However, market signals can be muddied by contradictory government policy and investment.
In 2022, the International Panel on Climate Change concluded: “Innovative financing approaches could help reduce the systemic underpricing of climate risk in markets and foster demand for Paris-aligned investment opportunities. Approaches include de-risking investments, robust ‘green’ labelling and disclosure schemes, in addition to a regulatory focus on transparency and reforming international monetary-system financial-sector regulations (medium confidence).
“Political leadership and intervention remain central to addressing uncertainty as a fundamental barrier for a redirection of financial flows. Existing policy misalignments – for example in fossil-fuel subsidies – undermine the credibility of public commitments, reduce perceived transition risks and limit financial-sector action (high confidence).”
During my years as a Canadian climate shareholder advocate, I saw evidence of the sector’s potential for incremental change. Numerous factors contributed. Of course, a key driver is market fundamentals – namely the declining cost of, and increasing demand for, renewables.
In addition, better climate-risk data, media attention and investor pressure have helped increase accountability within financial institutions and put climate risk on board agendas. Credible, independent research, along with climate-risk disclosure regulation have also been critical to this trend.
Still, Canadian financial-sector regulators can do much more. A recent paper from Investors for Paris Compliance documents their failure to police greenwashing or to deploy fuller climate-risk tools, such as mandating credible transition plans.
To reiterate: accountability and marginal reforms won’t be sufficient on their own. There needs to be broader government policy alignment.
Prime Minister Mark Carney – the former governor of both the Bank of Canada and the Bank of England, and a principal architect of the Glasgow Financial Alliance for Net Zero – understands better than most the important, but limited, role of the financial sector in addressing climate change.
That background is an asset and should help identify both the need for improved financial-sector climate-risk regulation and for broader policy to align financial incentives and enable our massive financial institutions to meaningfully shift their capital.
There are two key ways to ensure this: industrial policy and aligning public finance.
Canada’s oil and gas sector, the country’s largest source of emissions, continues to expand. No amount of financial-sector disclosure or net-zero commitments can change that without government industrial policy that prices carbon seriously, restricts new fossil-fuel development and backs clean alternatives with the kind of support the transition requires.
Public financing can de-risk these burgeoning sectors to allow Canada to capitalize on the energy transition.
The federal government’s recent inclusion of oil and gas major projects on its list for fast-track approvals and federal support for expanded oil and gas pipelines sends exactly the wrong kind of signal to the market. Carney effectively acknowledged this in his recent announcement that Canada will not meet its previous climate commitments.
The second is aligning public finance. Export Development Canada and Business Development Canada remain significant financiers of carbon-intensive activity and this further muddies the market signals about the climate transition risk.
Aligning their mandates explicitly with Canada’s climate commitments – not as a secondary consideration but as a core operating principle – has the potential to ensure climate-transition risks are more effectively priced into the market.
These are policy levers that Ottawa can, and should, pull.
