Lending & Canada’s Climate Credibility Gap

Abstract: Policy uncertainty in Ottawa is beginning to ripple through Canada’s financial system. As Prime Minister Mark Carney balances climate ambition with energy pragmatism, lenders face a growing challenge: how to price risk in a market where regulation, carbon policy, and disclosure standards remain in flux. The result is a cautious credit environment where capital costs rise for businesses without transition plans, and investment flows increasingly toward more predictable jurisdictions abroad.

In theory, no one should understand the link between climate risk and financial risk better than Mark Carney. The former central banker and UN climate envoy built his reputation warning that unpriced carbon could destabilise the global economy. Now, as Canada’s prime minister, he faces the more daunting task of convincing his own country to act accordingly.

So far, the results have been uneven. Mr Carney’s energy policy has pleased no one: climate advocates call it backsliding; investors call it confusing. He has paused electric-vehicle mandates, softened the carbon price on consumers and mused about new pipelines—all while promising that a climate competitiveness strategy is just around the corner. For a government that talks in the language of transition, the signal to markets has been anything but clear.

The new report from Business Future Pathways makes that uncertainty measurable. While Europe and Japan have coaxed a fifth of their major firms into publishing transition plans, Canada barely scrapes 5%. The authors argue that such plans are not ideological documents but practical risk tools, frameworks for how a company will operate, finance, and adapt in a warming world.

Investors, they note, increasingly expect them.

Lending Impact

For lenders, such questions are not moral but mathematical. Firms that consume more energy than peers or rely on climate-sensitive supply chains are, by definition, riskier bets. Yet many Canadian businesses still treat climate disclosure as optional and policy change as hypothetical.

That hesitation is amplified by Ottawa’s wavering. Mr Carney’s government is reportedly set to double down on the industrial carbon price introduced in 2019, its main tool for emissions reduction, but his openness to revisiting other regulations, such as the oil-and-gas emissions cap, has unsettled climate-minded investors. The quiet from his office has left both oil executives and renewables developers guessing.

Meanwhile, capital is moving elsewhere. America’s Inflation Reduction Act has lured clean-tech investment at unprecedented speed. The European Union’s carbon border mechanism rewards exporters with transparent pricing and penalises laggards.

For lenders, that ambivalence translates directly into pricing uncertainty. Banks and non-bank financiers are being pressed, by regulators, investors and their own risk models, to integrate climate factors into credit assessments. Yet without a stable national framework, it is difficult to calibrate those risks consistently.

Canadian lenders now face a paradox. Global investors reward portfolios aligned with net-zero goals, but domestic borrowers often lack the transition plans or disclosures needed to quantify exposure. The result is credit priced in a fog: higher premiums for sectors without transparency, and a quiet migration of capital toward borrowers operating under European or American standards.

Some institutions have begun experimenting with “green underwriting,” linking loan terms to emissions intensity or energy efficiency. Others are using climate data to adjust collateral values, particularly in real estate and agriculture. But the policy patchwork complicates coordination and slows adoption.

The upshot is that policy ambiguity does not merely frustrate environmentalists, it distorts credit markets. Until Ottawa provides a predictable regulatory signal, Canadian lenders will continue to lend defensively, financing yesterday’s economy while the rest of the world races ahead with tomorrow’s.

Six Key Points

1. Canada trails its peers: Only 5% of firms have credible climate transition plans, the lowest share in the G7.
2. Policy uncertainty is raising costs – Inconsistent federal signals make it difficult for lenders to price climate risk, increasing borrowing costs.
3. Disclosure gaps hurt borrowers – Many Canadian firms lack transition plans or emissions data, leading to higher risk premiums.
4. Capital is flowing abroad – Clearer frameworks in the U.S. and EU are attracting clean-tech investment away from Canada.
5. Innovation is underway but uneven – Banks are testing green-linked lending, but progress is limited without federal guidance.
6. Stability is essential – A predictable climate policy would allow lenders to price risk confidently and help Canada remain competitive in the global race for sustainable finance.

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