From: Glen Hodgson
To: Canada’s finance ministers and financial industry
Date: July 10, 2019
Re: Sustainable Finance: What Role for Crown Financial Institutions?
An earlier Intelligence Memo outlined the final report from the federal government’s expert panel on sustainable finance. Sustainable finance is about enhanced business opportunities as well as being green – positioning Canada and its investment institutions as active and leading players in the global and regional market for green finance.
The report said the government’s central role is to create the right conditions for sustainable finance via regulation and by building financial and technical capacity. Many government entities already exist to provide or facilitate funding in some fashion for green activities, aiming to ensure Canadian firms and organizations have access to sufficient and appropriate sustainable finance. These entities include the Business Development Bank of Canada (BDC), Export Development Canada (EDC), Sustainable Development Technology Canada (SDTC) as well as numerous government programs supported by budgetary spending.
Recommendation 11.2. states that government-backed cleantech financing should support Canada’s long-term competitive pursuits. It calls for a review of “the risk mandates and investment horizons of the entities involved in administering public cleantech funding within Canada, to ensure they align with and promote national objectives.” This recommendation makes good sense; such a review should consider how to clarify responsibilities and strengthen coordination and handoffs among entities.
Let’s focus on the role that Crown financial institutions like BDC, EDC, Farm Credit Canada (FCC), the Canadian Commercial Corporation (CCC) and the new Canadian Infrastructure Bank (CIB) can play in building capacity for sustainable finance. They can play three broad roles:
First, they can act as lender or insurer of last resort, providing financing or insurance where there is market failure and private market capacity is generally unavailable.
Second, they can work in a complementary fashion with the private sector, sharing risk on transactions and portfolios, and developing overall financial market capacity.
And, they could be an active competitor in specific market segments, providing greater choice for businesses while adding to available market capacity.
Crown financial institutions have the added advantage of creating a financial multiplier effect. After the government invests in the capital base of these financial institutions, private sector financing can be attracted to share the risk and business opportunities and multiply that initial government investment.
The expert report mentions various Crown financials in a number of places and allocates specific tasks to them, but the discussion is largely tactical; there is limited discussion on the broader strategic role they could play in building the Canadian market for sustainable finance. Recall that EDC and BDC have already been given direction and capital by the federal government to expand their green credit activities, providing a foundation for an expanded role to build the Canadian ecosystem for green finance.
Yet the report also proposes developing “a regional green bank network” to facilitate the retrofit market (recommendation 13.4). The federal government and its regional development agencies are encouraged to provide support to these potential banks in the form of grants or other types of credit enhancements.
Canada currently has no network of regional green banks, which exist in other countries and in some US states. Green banking capacity could conceivably be developed in Canada to cover a range of needs from infrastructure, to commercial and residential retrofits, to green credit for consumers and other purposes. The federal government could work with interested provinces and other parties such as credit unions and commercial banks, drawing on the experience elsewhere.
What’s next? At this stage, a system-wide perspective is required on Crown financial institutions and green finance: to define their roles more fully, identify specific opportunities to work with private financial providers, and assess any gaps in coverage (like retrofits) and how best to fill them. That would be a logical next step in building Canada’s capacity for sustainable finance.
Glen Hodgson is a senior fellow at the C.D. Howe Institute.
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