Climate Change and Canada: What Investors Should Know for the 2020s

In this mini-series, we're taking a look at four macro-economic trends Canada is facing in the decade ahead, and how the nation can successfully navigate them to thrive. In this edition: climate.

The following is an excerpt from RBC Economics' recently released report, Navigating the 2020s.

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The Challenge

As the world warms, planning for a more sustainable future has shifted from a medium-term goal to a pressing need. For Canada, there's particular urgency: a 2019 federal report noted that the country warmed 1.7°C between 1948 and 2016—twice the global rate.

Canada's investment in pollution abatement and control increased tenfold in the past decade and will demand even more resources in the 2020s. The federal government's 12-year Investing in Canada plan has allocated $27 billion to green infrastructure investment, and $7 billion in projects have already been approved. The private sector is also doing its part—Petro-Canada just completed the final charging station in its coast-to-coast electric vehicle charging network.

Climate change could influence Canadian farmers' crop choices, put strains on existing infrastructure including ports and coastal roads, and determine the location of future residential developments. It's no wonder central banks and investors have turned their attention to assessing the systemic risks climate change could pose.

Domestic energy use is expected to decline

The Canadian Energy Regulator's base case is for energy use per capita to decline almost 9% by 2030, and energy use per unit of economic output by more than 16%.

Canadians will be slow to get off fossil fuels, but a shift from coal to natural gas in electricity generation is expected to reduce the emissions intensity of fossil-fuel consumption. And demand for oil and refined petroleum products is expected to decline due to increased efficiencies in modes of transportation.

Lower costs for clean technologies will also help reduce the emissions intensity of electricity production. Installed capacity of wind and solar is expected to increase by nearly 50% in the next decade and will account for 9% of electricity generation in 2030, the CER says.

Climate change costs will weigh heavily on insurers and the insured

A warmer planet means more intense and frequent extreme weather events, and Canada hasn't been immune. For insurers, this has meant a surge in annual claims. From the first decade of the century to the second, the average number of catastrophic events per year almost doubled, while the average annual reported insured losses quadrupled (from .5 billion/year from 2000-2009 to $2.02 billion/ year from 2010 to 2018) (Data from the Insurance Bureau of Canada).

Canadian households and businesses have paid the cost. Last year, half of Canadian businesses said they were struggling with high insurance costs, up from 43% the year before. Household spending on home insurance premiums has grown at almost twice the clip of overall spending over the past decade, with Canadian households paying an average of $700 for home insurance in 2017, up 35% from 2010. The risk of further increases is high.

The Opportunity

Exporting energy technology

Canada will remain a major producer and supplier of energy to the rest of the world. That role will increase as new oil pipelines are built and LNG export capacity comes on stream. We expect Canadian oil sands producers, already large investors in clean technology, to continue to invest in measures that will further reduce emissions per barrel. Doing so will help Canada keep domestic emissions under control (the oil and gas sector accounts for more than one-quarter of Canada's GHG emissions) and ensure the oil we export is as cleanly produced as our competitors.

Canada's natural gas exports can also play a role in reducing emissions intensity abroad. LNG shipments to emerging economies in Asia, where energy demand is growing much faster than in Canada, can help replace coal in electricity production, just as natural gas is doing here in Canada.

As climate concerns mount, Canada's challenge will be to better sell ourselves as a responsible, cleaner energy producer. We already compare favourably to other oil-producing countries in Environmental, Social and Governance rankings. Canada's oil and gas industry invests $1.4 billion a year in clean technologies, according to the Clean Resource Innovation Network, and 12 Canadian companies were among the top 100 companies in the 2019 Global Cleantech 100, an annual ranking of the companies leading in sustainable technology innovation. Ottawa has set out an ambitious target of turning Canada's leadership in clean technologies into one of Canada's top-five exporting industries by 2025. Its goal: a cleantech sector that would generate $20 billion in exports midway through the decade, compared with $7.8 billion in 2016.

Embracing green financing

Investments required to make a shift to a greener future in Canada will be expensive. The good news: global financial markets have signaled growing appetite to finance the transition through green bonds, whose proceeds are used in projects that will mitigate or reduce climate change. Canada's first green bond, for US$300 million, was issued in early 2014. There are now around US$15 billion in Canadian-issued green bonds outstanding. While green bond issuance remains a small fraction of total global bond issuance, it rose to US$150 billion in 2018 from just US$1 billion a decade ago. Certified green bond issuers have achieved favourable terms due to high demand and scarcity of supply.

While Canada remains a smaller player than China or France, it has seen its green bond market grow steadily, with public sector issuers leading the way. There's plenty of opportunity to take the lead on next-generation clean projects, given Canada's abundance of resources, well-developed financial sector and highly educated population.

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