Canada faces a triple economic challenge, and with it, a triple economic opportunity that can lay the foundation for growth through the 2030s.
The three points of this new growth triangle—economic reconciliation, productivity and climate action—are mutually dependent. In other words, you can’t have one without the others.
This was clear at COP28 in December, where there was an emphasis on growth, capital formation and economic inclusion to reach our climate goals. And it can be Canada’s strategic advantage if we make some important adjustments.
Let’s start with climate action, and a blunt reality: Net Zero is going to require a scale of investment that we have not seen in our lifetimes.
RBC’s Climate Action Institute recently published a report on the state of the transition in Canada, called Climate Action 2024, with the core message: We’re making progress but not nearly enough. In terms of financing a transition to Net Zero, we will need to invest $60 billion a year on climate action. Right now, we’re investing $22 billion.
Some good news: that’s up from $15 billion in just three years. Some bad news: it needs to more than double, almost immediately. Which is why we called our report “Double or Trouble.” (Moreover, for every year we fall short, we will get closer to the need to triple the investment required.)
The amount of capital seems daunting, but it’s only about 1% of GDP. And properly invested, it can add to economic growth and prevent us from sliding back into the pre-pandemic funk of secular stagnation.
As every business builder knows, capital is not something that gets printed by governments or banks, at least not for long. It’s what thriving enterprises and sectors attract, generate and retain. All of which requires productivity.
Unfortunately, about 80% of Canada’s climate action over the past decade has been funded by the federal government. Canada is simply not attracting or retaining investment capital, at a time when we need to attract tens of billions of dollars more a year to finance both economic reconciliation and the transition to a net-zero economy. In fact, between 2015 and 2022, business investment declined 16%, largely because of a wholesale retreat of investment in the oil and gas, mining and forestry sectors. And overall, investment has been at best flat, held up largely by government investments in things like hospitals and highways, and our collective investment in real estate.
Not only are we not capitalizing and recapitalizing our key growth sectors, we’re not attracting enough international capital. Canadian investment abroad is now outpacing foreign direct investment in Canada by a factor of two to one ($102 billion to $62 billion).
We’ll need to revise our collective playbook to finance an energy transition, through capital-intensive projects ranging from carbon capture to methane abatement to wind- and solar-powered electricity, hydrogen, and battery storage. One catalyst is economic reconciliation, especially through Indigenous consent and ownership that cannot only prevent years of court battles but provide the sort of stewardship that long-term, climate- and nature-minded investors are looking for.
As we stated in our 2023 report, “92 to Zero,” there will be no Net Zero without the kind of economic reconciliation spelled out in the Truth and Reconciliation Commission’s Recommendation No. 92.
With that spirit, however, the potential for resource development is profound. Our research shows Indigenous lands in Canada account for:
- 56% of advanced critical mineral projects;
- 35% of the top solar sites;
- 44% of the best wind sites for energy production.
Properly and sustainably developed, that resource wealth could generate roughly $225 billion in investment.
We won’t get on these converging paths—to Net Zero, to reconciliation, and to more sustainable economic growth—without a new approach to partnerships with Indigenous communities. A new legal era of free, prior and informed consent will require it. So, too, will common-sense capitalism that sees local ownership and stewardship as essential to healthy, long-term returns. Equity within projects builds a foundation of predictable development, better environmental outcomes, and a community centered approach to social impact. In other words, it de-risks projects and adds to the economic return for all stakeholders, including project proponents.
Beyond opportunities to unlock capital for the transition, we can collectively advance economic reconciliation through investments focused on core infrastructure, in turn fuelling greater economic productivity.
RBC Economics supported the Assembly of First Nations in a major research project, entitled Closing the Infrastructure Gap, that estimates infrastructure needs of First Nations, including housing and basic needs like water, to be approximately $350 billion. The needs of Inuit and Metis communities add to that significantly.
Properly deployed, such infrastructure could increase GDP growth, according to the AFN-RBC research effort, by 0.5% a year.
There’s a lot of money at stake, but the needs and outcomes are about more than money. We need to also focus on consent, security and people.
Consent is what gives investors, operators and supply chains the confidence to take risks.
Security gives them a sense that those risks will be priced and managed fairly.
People make it happen, and keep it happening.
Let’s look first at consent. A couple of years ago, Phil Fontaine, who is a special adviser to RBC, and I launched an initiative of ”listening circles,” to hear from communities across the country and better understand what they mean by consent. There is no crisp definition, and there may never be one. But it’s becoming clear to us that consent takes time, talk and equity.
That will be hard in the face of climate deadlines, like 2030, but the decarbonization projects needed for Net Zero (critical minerals and carbon pipelines, among them) won’t happen without meaningful and enduring buy-in from communities. One of the best ways to demonstrate that is equity participation. Hydro One’s 50/50 initiative, enabling Indigenous communities to own half the transmission lines through their territory, shows how such partnerships can work.
Financial security is a different challenge. Indigenous communities can’t access the capital needed to buy into projects without some form of backstop or guarantee. Most don’t have a balance sheet—they’re not allowed to under the Indian Act—to borrow against, and not enough surplus revenue from their own businesses or federal government transfers to support such loans. However, through loan guarantees, such as the one developed by the Alberta government, we’re seeing that Indigenous communities are willing and able to borrow and buy into the ownership structure of major projects.
We see this as a central reason to establish a national Indigenous loan guarantee, as laid out in the 2023 Fall Economic Statement. It could help facilitate the mobilization of $10 billion for Indigenous communities, which in turn could leverage 10 times that amount in partner and private capital. A sovereign guarantee would also cut borrowing costs by 100-150 basis points in many cases, saving Indigenous communities, collectively, more than $100 million a year.
That takes us to the third big need, which is people and skills. Indigenous communities need and want to be more than financial partners in this new economy. They want to be participants, as owners, managers, workers and suppliers. It’s even more pressing in the face of Canada’s looming demographic decline. But to make it happen, and effective, we need to invest much more in our schooling system, from K-PhD, to prepare Indigenous youth for the jobs and roles of a new economy.
The timing for this new approach could hardly be better:
- settlements with the federal government are now coming at a pace and scale that can be transformative for communities and nations;
- fiscal incentives from the federal and many provincial governments, including investment tax incentives, are kicking in;
- interest rates are coming down, leading many long-term investors to look for new opportunities.
As opportunity knocks, we will need to be careful not to bolt the door with undue restrictions on capital. When it comes to an Indigenous loan guarantee, for instance, any sector restrictions such as oil and gas, or pipelines, would be seen as neo-colonial. In such cases, there are other modern tools, such as emissions standards and environmental principles, that many communities would welcome, and indeed would want to lead.
The federal government needs to be careful not to continue to allow new tools such as a guarantee to further slow down project approval and development. Under direction from the Supreme Court of Canada, Ottawa is considering modifications to its environmental impact assessment act, known as C-69, to allow for more provincial flexibility and responsibility. It would be wise to ensure Indigenous projects can live by the same spirit.
Indeed, the federal government may want to see all of this as a singular opportunity to declare to the world — and to Canadians — that when it comes to climate-smart, Indigenous-owned resource development, Canada is open for business. We could by the end of this year have a harmonization of tax breaks and subsidies for Net Zero projects, a national loan guarantee for Indigenous ownership, and simplified regulatory frameworks, which could establish for Canada a new triangle of growth.
A failure to do so could leave us running in circles.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.