Canada needs to attract $140 billion in annual investment to reach net zero

Canada needs to invest in innovative and sustainable industries like clean tech and energy to reach net zero

This blog was previously published in the Toronto Star.

One of the many pressures weighing on the federal government’s upcoming budget is that the country needs a significant influx of investment capital to transform and grow our economy, capturing the innovative and sustainable industries like clean tech and energy that will define our future.

But attracting private capital is not like telling a dog to sit or stay. Scruffy or Fido may happily come when call, but pension plans, venture capital and other potential investors are more like cats. And if you’ve ever tried telling a cat what to do, you know how that turns out.

That said, even cats can be enticed to the door under the right circumstances.

To meet the pressing need for private investment in Canada’s economic future, we are going to have to do a lot better at creating those circumstances — starting with the upcoming budget.

The government estimates we need up to $140 billion in annual investment to reach net zero.

The money to reach that goal is out there: close to $4.3 trillion in assets were dedicated to sustainability-linked funds at the end of 2022, according to the OECD. Bloomberg estimates that more than $1.2 trillion in sustainability-linked bonds were issued in 2023. Boston Consulting Group estimates that capital invested in climate tech in 2022 globally was $405 billion.

But that capital won’t be invested in growing Canadian firms, building innovative Canadian IP or improving productivity in Canada unless we can offer more clarity and consistency in our policy environment. Unfortunately, the only thing that’s been clear and consistent over the past 20 years is our failure to do so.

Three specific policies could unlock private capital at a pace and scale necessary to shore up Canada’s competitiveness in the global energy transition.

First, establishing the long-awaited green and transition taxonomy that our financial industry helped develop will provide the clarity on investable products and projects that institutional capital sorely needs for its own due diligence. We’ve been waiting on Finance Canada to give the taxonomy the (ahem) green light for way too long.

Second, policy uncertainty at the federal level will put a chill on Canadian investment if we can’t provide improved confidence on the industrial carbon price. That price is a key driver of longer-term financial analysis and valuation, which is why politicians on all sides need to be clear on their commitment to it before investors can make final decisions on projects or firms that will be affected. The federal government should work diligently to establish a system for carbon contracts for difference — financial instruments that insulate investment from policy fluctuations created by government decisions over the short-term.

Third, if we want substantial export-oriented companies to establish operations in Canada and employ Canadians, we need to develop the kind of clean electricity grid contemplated under the federal Clean Electricity Regulations. Global firms are paying close attention to their carbon footprints. They can’t afford to lock in long-term, energy-dependent operations in jurisdictions that can’t offer lower-carbon energy infrastructure. Canada can get to that kind of grid through a combination of innovation, regulation, tax credits and — most importantly — co-operation.

While we squabble about process and some provinces establish barriers to new energy projects, other jurisdictions are setting the rules without us. Our export-driven economy is dependent on access to markets like Europe that are establishing carbon-related border adjustments (tariffs). Shareholder dollars are shifting to companies that can better control their emissions profile. Other countries are deepening the tax incentives and regulatory support for lower-carbon energy producers and distributors.

When it comes to attracting investment to our new economy, Canada’s pension plans, banks, startups and unions are all working to grow our clean energy and innovation portfolios. If we can combine that initiative and capacity with clarity, consistency and co-operation from federal and provincial governments, we should have plenty of cats scratching at our door to get in.

Kevin Thomas is chief executive officer of SHARE, the Shareholder Association for Research and Education. Rick Smith is the President of the Canadian Climate Institute.