Canada needs binding legislation to align climate with finance

This story was originally published by Green Central Banking. It has been edited to conform with Corporate Knights style.

Read the original story here. 

Last month in Santa Marta, Colombia, the world’s first international conference dedicated to transitioning away from fossil fuels convened 57 countries representing more than half of global GDP, 30% of the world’s population, and 20% of global fossil fuel production.

Together, participants sent a powerful signal to markets, investors, industries and governments: the future belongs to clean energy, resilient economies and fossil-free development.

The conference took place against a background of increasing geopolitical, economic and security concerns, all of which are accelerating the energy transition.

Recent instability linked to tensions in the Strait of Hormuz once again exposed the fragility of fossil fuel dependence. The temporary closure of the strait triggered what the International Energy Agency has described as the worst energy crisis in modern history.

Countries that have invested in renewables are proving to be far more resilient. China is leading the transition, Pakistan has seen rapid rooftop solar expansion, India is accelerating solar deployment, while Indonesia has developed a massive solar strategy, and enormous new investment in renewables is being made across the globe, including in Latin America and Europe. All of this demonstrates that energy security increasingly means renewable energy sovereignty.

The global transition is underway, gaining momentum, and becoming irreversible. Indeed, global investments in the energy transition reached a record US$2.3tn in 2025, while renewable capacity expansion continues to accelerate worldwide.

Financial institutions are sounding the alarm

Salient discussions at Santa Marta revolved around the strong warnings coming from central banks, insurers, economists and financial regulators who are increasingly viewing fossil fuel dependence as a major destabilising risk. In fact, the European Central Bank now views fossil fuel dependence as a macroeconomic stability risk, which makes the transition away from fossil fuels a matter of monetary policy.

The recent report from asset managers Impax stresses that financial markets are dangerously underpricing physical climate risks, as investors, insurers and lenders increasingly recognise that many assets exposed to floods, fires, hurricanes, droughts and heatwaves are likely significantly mispriced, overvalued and vulnerable to sudden repricing.

And the era of perpetual fossil fuel expansion is ending. While this doesn’t mean oil and gas will disappear overnight, it does mean that betting national economic futures on long-term fossil fuel growth is increasingly becoming a high-risk strategy.

Countries that continue doubling down on oil and gas dependency will become exposed to a variety of risks: stranded assets, declining export markets, rising insurance costs, fiscal instability, trade disadvantages and growing geopolitical vulnerability.

Countries investing early in the transition – including electrification, clean manufacturing, renewable deployment, storage, critical minerals, energy efficiency and resilient infrastructure – are positioning themselves for industries of the future.

A momentous conclusion coming out of discussions in Santa Marta was the growing recognition that voluntary climate promises are no longer sufficient. Implementation requires binding legislation and aligning budgets with climate commitments.

Moreover, many studies show that the uptake for voluntary standards based on risks and opportunities has been limited in scope and depth, and has not resulted in meaningful change.

Legislation can provide clear and consistent rules which can level the playing field and ensure an orderly transition. This in turn could foster the predictability needed by the private sector to attract domestic and foreign investment. In a time of high economic uncertainty and rapidly evolving geopolitical shifts the ability to diversify economies and attract investment becomes more important than ever.

The Climate-Aligned Finance Act: a Canadian example

The Climate-Aligned Finance Act (CAFA), which is currently being considered by Canadian lawmakers, is a legislative tool designed to modernise the country’s financial governance. It intends to provide the structure and legal clarity needed for Canada’s financial system to operate consistently with our climate commitments. The act provides clear expectations and ensures that financial decisions support long-term prosperity, creating stability for investors.

At its core the act is about accountability and transparency. The legislation would protect Canada’s economy and could support competitiveness in the global clean energy economy. It offers a constructive, science-based framework that would help Canada attract public and private finance for renewable energy, and to build resilience and establish energy sovereignty.

The act would operationalise climate alignment through five concrete regulatory mechanisms. These include: strengthening fiduciary and governance duties; tying capital adequacy requirements to climate risk; mandating auditable transition plans for federally regulated financial institutions (FRFI); mandating a national action plan to phase out high-carbon financial instruments and promote genuinely sustainable ones; and mandating timely public review of progress on these actions, to ensure iterative learning and enhanced accountability.

Notably, CAFA establishes climate alignment as a duty for directors and executives of FRFIs and state-owned Crown corporations and requires the appointment of at least one individual with climate expertise to certain boards of directors. To address the growing risk of stranded assets, the act encourages the financial regulator to ensure that financial institutions hold sufficient capital against high-carbon exposures. Furthermore, entities to which the act applies would be required to publish science-based, credible plans, targets, and reports on meeting climate commitments to ensure progress, not just promises.

We need credible and consistent policy to provide clarity and guidance to the financial sector for the biggest economic transformation we have seen since the industrial revolution. The act comprehensively provides investors with the certainty and security they need to invest in Canadian capital markets, helping to ensure investment-readiness well into the future, while maintaining the competitiveness of our economy in a global market which increasingly values sustainable investment opportunities.

In January, the House of Commons’ Standing Committee on Environment and Sustainable Development released its report on the impacts of Canada’s financial system on the environment and climate change which reflected the committee’s in-depth study conducted in 2024 during the previous parliament. The first recommendation was “[t]hat Canada’s financial system be reformed to align with climate commitments … the Climate-Aligned Finance Act … which would itself provide a robust, science-based regulatory framework for conducting transition plans and annual progress reports and address greenwashing concerns around climate action”.

Legislation like CAFA is needed now more than ever because economic competitiveness, innovation and energy independence are dependent on capital flows being directed towards renewable and clean energy projects, as well as community-led initiatives to build resilience. Furthermore, the act’s integrated approach to addressing the greatest existential crisis of our time seeks to tackle the root cause of the multiple cascading crises we face – biodiversity loss, affordability, climate change and health.

Advancing global sustainable finance governance

The governance logic underpinning CAFA is transferable across jurisdictions and governments might be inspired by the process used to develop CAFA. The act was created in collaboration with dozens of national and international experts and was refined based on feedback received during Senate committee study through further consultation with climate scientists, legal scholars and financial experts.

The act is grounded in climate science, financial expertise and the best international regulatory and voluntary practices. In short, the process adopted modeled the best practices of open parliaments which favour a holistic understanding of the interdependence of complex problems such as climate change and finance, and the development of evidence-based policies.

Climate‑related financial risks are increasing. The Climate-Aligned Finance Act demonstrates that effective alignment of finance with climate objectives requires enforceable governance. For central bankers and financial regulators worldwide, the imperative is no longer whether to act, but how quickly credible, accountable frameworks can be put in place to future-proof their economies.

Rosa Galvez is a civil-environmental engineer and an independent senator for the province of Quebec.

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