Shaping the Future of Sustainable Finance

With the launch of the Institute for Sustainable Finance, Smith is helping Canada take on climate change.

The year 2019 was a wake-up call on climate change for Canada: The Bank of Canada identified climate change as a key vulnerability in the country’s financial system. At the same time, the Canadian Expert Panel on Sustainable Finance reported that Canada lags behind other global financial systems on taking decisive action.

Seizing on this critical opportunity, Smith School of Business led the launch of a new organization to help Canada transition to a sustainable economy. The Institute for Sustainable Finance (ISF) opened in November 2019. It is the first collaborative hub in the country that brings together academia, the private sector and government to increase the country’s sustainable finance capacity.

Major global investors and financial institutions have accepted the reality of climate change and its impact on investments and global economies, says Sean Cleary, BMO Professor of Finance at Smith, and the executive director of the ISF. “For the financial sector, this is a pivotal moment to realign structures to ensure global capital flows toward solutions that will protect Canada’s economy and our prosperity for the long run,” he explains.

At its core, sustainable finance simply means aligning financial systems to promote long-term environmental sustainability and economic prosperity. It puts the environment into everyday business and investment decisions, explains Ryan Riordan, Distinguished Professor of Finance at Smith.

Riordan, the ISF’s director of research, has done studies that involve climate change and finance. For example, research he conducted on the effects of 2012’s Hurricane Sandy on asset prices found that even in the absence of physical losses, the unpredictability of climate change can lead to financial losses.

Previously, says Riordan, the finance world largely ignored sustainability, as if the environment were a costless and riskless input. “Now, we’re finally realizing the environment needs to be thoroughly taken into account in investing, lending and any other kind of financial decision. Otherwise, we’re missing a huge source of risk, a huge source of costs and, potentially, a huge source of returns,” he explains.

That’s where the ISF comes in, to help fill the gap of relevant data, expertise and business-oriented solutions on sustainable finance. “Businesses don’t have the information they need, nor do they have the internal capacity required to make a lot of these decisions around climate change,” says Cleary. “We can provide the information and education for the people who control the capital.”

But why is sustainable finance so important? Without a sound sustainable finance strategy, Canada risks losing potential sources of capital, explains Riordan. “Large investors like pension funds look 30 years down the road. And with climate change, it could become too easy for some of them to skip over us and put their money somewhere else.”

On the other hand, dealing with climate change can create huge economic opportunities. According to the Smart Prosperity Institute, “Canadian demand for low-carbon technologies will double through 2030” and “the size of the clean-technology investment opportunity will reach a cumulative $184 billion from 2020 to 2030.”

Watch Smith professor Ryan Riordan explain the ins and outs of sustainable finance and why investors are now paying attention to the environment.

To capitalize on these opportunities and attract global financing, Canada will need to embrace sustainable finance. More importantly, it will need to create a made-in-Canada sustainable finance system that’s appropriate for our economy, says Cleary. By investing in education, professional training, research and partnerships, the ISF is helping to create critical conditions for Canadian leadership on sustainable finance—at home and abroad.

The ISF is also harnessing expertise in sustainability and finance from across Canada with the establishment of the Canadian Sustainable Finance Network. CSFN is an independent formal research and educational network. With 65 members from 22 universities (including Queen’s University, the University of Calgary, Dalhousie University, Concordia University, the University of Victoria and the University of Manitoba), CSFN works collaboratively to create the most credible and robust body of sustainable finance knowledge in the country.

The long-term goal of sustainable finance initiatives and the work of the ISF is to transform the real economy, with the resulting benefits to people and society in a low-carbon world. When that happens, says Cleary, “sustainable finance will become just a factor considered every day in finance for allocating capital, managing risk and making investment decisions.”