The Logic’s Catherine McIntyre is in Glasgow this week to report on COP26. Watch for her dispatch, “Live from Glasgow,” every day in The Logic’s Daily Briefing.

GLASGOW — As world leaders arrive in Scotland for two weeks of climate negotiations, the role financial markets can play in curbing the climate crisis will be front and centre.

The UN has convened the COP26 conference on climate change, which opened here Sunday, to find a way to shrink net global emissions to zero by 2050 in a bid to keep temperatures from rising more than 1.5 C, considered to be the threshold past which neither the environment nor the economy are likely to recover. A Bank of America report this month pegged the cost of reaching that goal at US$150 trillion over 30 years.

It’s a gigantic amount, said Laura Zizzo, CEO and co-founder of Toronto-based Manifest Climate, a tech platform that helps clients identify and manage how climate change is impacting their business. And as the UN has stated, getting there will require “a framework to ensure every financial decision takes climate change into account.”

That means the institutions that control capital—banks, pension funds, hedge funds and insurers—will play a determining role.

“I think people in general now understand the severity of the climate crisis and governments and businesses are actually being pressured to spend money in the right way,” said Zizzo. “The conversation is much more about, how do we get money flowing in the right direction for the emissions reductions we need? How do we finance the net-zero economy coming forward?”

To that end, charting a course for how money flows to low-carbon assets—without harming workers and countries that still rely on fossil fuels—will be a priority of both official talks and dealmaking on the sidelines here over the next two weeks. While sustainable finance will inform almost all aspects of the conference, the UN has dedicated an entire day of the official program to the theme. On Wednesday, the world leaders in attendance are expected to tackle issues including curbs on fossil fuel subsidies, mandatory climate-risk disclosures, how to price carbon and tax it at national borders, and defining what counts as a green asset.

Several sustainable-finance proponents who spoke to The Logic said they’re bracing for movement on mandatory climate-risk disclosure—that is, requiring companies to measure and report their physical and financial risks from climate change. This information is meant to help give investors and governments a better sense of whether their activities square with their own climate commitments. Some regions—including the EU, the U.K., China, New Zealand and Switzerland—mandate this type of disclosure, and the G20 has advocated for similar standards. But there has been no broader coordination on a common approach. “We have a global problem that needs global solutions,” said Zizzo. “We need the international community to set clear rules and understanding about what we’re talking about so we have comparability of information.”

Canadian regulators have lagged their peers on climate-risk disclosure, leaving the private sector to fend for itself. Many of the largest institutional investors in the country have urged the companies in which they’ve invested to follow guidelines from the Task Force on Climate-Related Financial Disclosure (TCFD), a framework former Bank of Canada and Bank of England governor Mark Carney helped create at an earlier COP. While swarms of companies have recently started disclosing some climate risk, the voluntary approach has left gaping holes and inconsistencies in information.

Canada has been playing catch-up in the run-up to COP26. Days before the conference, the Canadian Securities Administrators—the umbrella organization overseeing provincial securities—proposed requiring any entity that issues securities in the country to disclose their direct and indirect CO2 emissions, as well as risks and opportunities they face related to climate change and how they are managing them. And several Canadian cities—including Toronto and Vancouver—have been angling to become the global head office for the International Sustainability Standards Board, a new branch of the International Financial Reporting Standards Foundation that could help set global rules around climate disclosures and that is set to launch during COP26. 

Many experts in the field see settling the world’s differences on climate disclosure as table stakes at this conference. They expect thornier backroom debates over how to actually finance the global energy transition. Creating a “green taxonomy” is a prerequisite to that, said Zizzo, describing a system to classify which operations and products are worthy of the “sustainable” label. While Europe has taken a lead in this endeavor, Zizzo predicted Canadian negotiators will be pushing for a system that factors in the interests of its energy sector. “Europe generally doesn’t have the same challenges with oil and gas production as other jurisdictions,” she said.

Other challenges to a green taxonomy agreement: whether nuclear energy and carbon capture and storage technologies should count as green assets. “This can sound like arcane talk, but it actually matters when any financial institution, any owner or deployer of capital, is looking to invest in an area,” said John Stackhouse, RBC senior vice-president at the office of the CEO. “If you know a [carbon-capture and -storage] project is a legitimate and welcome part of the transition, then it becomes a more attractive investment because it’s accepted in the global lexicon as contributing to net zero.”

However the taxonomy talks shake out, Canada is likely to face pressure around its investments in oil and gas. Oil Change International published a report last week showing Canada leads the G20 in public spending for the fossil-fuel industry, providing nearly US$12 billion a year on average between 2018 and 2020. Prime Minister Justin Trudeau’s recently re-elected Liberals campaigned on a promise to eliminate fossil-fuel financing by 2023 and Export Development Canada, the federal agency that spends the most on fossil fuels, has said it will cut support by 40 per cent below 2018 levels for the six most carbon-intensive sectors.

Vinay Shandal, managing director and partner at Boston Consulting Group in Toronto, said that while some subsidies may help traditional energy companies transition to renewables or different lines of business, he believes there needs to be broad cuts to fossil-fuel funding, which he says undermines carbon pricing. “When you look at the direction in which the world needs to go, at a more macro level, we have to shift the weight from subsidies to carbon pricing.”

Indeed, a global price on carbon is a key goal on which Shandal hopes to see leaders make progress at the conference. “What’s crazy is [that] at the right price – which isn’t that much, about 80 per cent of emissions can be taken out with existing technologies,” he said, referring to a BCG report showing emission of eight supply chains representing half of all greenhouse gas emissions could be nearly eliminated for about $120 per tonne. “Decarbonizing supply chains and manufacturing isn’t science fiction. We just don’t have the economic incentives.”

In a press conference days before COP26, Canada’s newly appointed Environment Minister Steven Guilbeault touted the country’s carbon-pricing system—which charges $30 per tonne of greenhouse gases produced, with the price set to gradually increase to $170 a tonne by 2030—as the second-most stringent in the world. Having others adopt a similar approach would not only help reduce global emissions, it could also ensure international trade doesn’t compromise individual countries’ net-zero goals, said Cynthia Leach, a senior director at RBC’s research team and former director at Finance Canada. Border carbon adjustments—an import tax on heavy emitters—could also serve that interest. The EU is planning to implement a tax on high-carbon importers starting in 2026. The move could trigger a domino effect forcing other regions to follow suit.

For its part, Canada has begun studying whether to introduce its own carbon tax at the border. “If a domestic producer is subjected to a high-price tax, their goods can be uncompetitive or Canada can be uncompetitive,” said Leach. “It can encourage countries that aren’t as aggressive in their climate ambitions to start pricing or increase their pricing of emissions. As opposed to another country collecting the tax through a [carbon border adjustment], they could level the carbon price domestically and collect that revenue to decarbonize.”

As with other climate finance tools—like carbon pricing and even disclosure—there’s a risk border taxes could disadvantage poor nations already battered by the physical and economic impacts of global warming. “It relates to the idea of sharing the cost of decarbonization,” said Leach. “It’s part of the story of global cooperation,” she said—the ultimate goal that has brought the world to Glasgow.