Financial actors with significant stakes in Canada’s fossil fuel industry have been unlikely to use their influence to push for transitioning to a lower-carbon economy, according to a new study.
The recently published work, authored by former and current University of Victoria researchers, states financial markets will play a key role in enabling or constraining the low-carbon transition that’s needed in order to stave off the worst impacts of climate change.
The researchers looked at financial backers of the “big five” fossil fuel companies that together account for 80 per cent of Canada’s bitumen operations.
They concluded that just 14 shareholders hold significant leverage on Canada’s fossil fuel industry, and in the last decade that equity ownership has been increasingly consolidated by foreign entities. Seventy per cent of those influential shareholders are based outside of Canada.
“What this means is Canada in some ways has lost that domestic oversight,” said Truzaar Dordi, the study’s lead author.
The largely foreign investors also may be less engaged in achieving the country’s climate commitments, the study said. That could have global implications as Canada’s fossil fuel operations are expected to emit 36 billion tonnes of emissions under current policies – an amount that would eat up 16 per cent of the world’s remaining carbon budget by 2050.
“If a key stakeholder puts up barriers that certainly plays a significant challenge for, nationally as well as globally, us meeting our climate targets,” Dordi said. “They can be a voice for change and they should be a voice for change.”
Capital markets can enable unsustainable fossil fuel production and consumption at levels that will contribute to climate instability, the study said. Canada is especially vulnerable as the authors point to how the costs associated with oil and gas extraction are much higher compared to operations in other parts of the world.
The study found the five firms are highly sensitive to the influence of their external financiers as they all have debt-to-capital ratios of around 60 per cent, which is about twice as much as the global average.
The authors argue shareholders are unlikely to advance the low-carbon transition as they have to put a lot of money into the largely fixed assets making up the Canadian oil and gas sector, so they’ll want to maximize their returns.
“Part of the problem with that is investors don’t really want to see investments stranded, they don’t want to see stranded assets,” Dordi said.
But that also opens shareholders to risk if low-carbon policies are accelerated in response to the worsening impacts of climate change being seen. The study found interventions that direct capital in a more sustainable direction could restrict the activities contributing to the climate crisis, while also mitigating financial risks.
The authors call on Canada to strengthen its climate change fight and send clear signals to the market by using supply-side policies to align the financial system with the low-carbon transition. The study said that could include limiting fossil fuel exploration or extraction – through production taxes or revoking subsidies – to reduce the risk of carbon lock-in and stranded assets.