During the UN climate conference in Glasgow, Canadians were given the impression that the finance industry is rushing to the earth’s rescue. Former Bank of Canada governor Mark Carney announced that firms representing US$130 trillion in assets (including Canada’s major banks) had joined his Net-Zero Banking Alliance, pledging to meet the goals of the Paris Agreement and reach net-zero in financed emissions by 2050.
But what does it really mean to join this voluntary initiative, and how will investors and the public know whether Canada’s banks are serious about tackling climate change? Drawing on experience around the world, Investors for Paris Compliance just published a net-zero best practices guide for Canadian banks. This will help clarify what’s expected of banks and help investors and the public hold banks accountable to their commitments.
There’s a lot of catching up to do for Canada’s banks, which have plenty of carbon on their balance sheets. The big five – RBC, TD, Scotiabank, BMO and CIBC – all rank in the top 25 lenders in the world to the fossil fuel industry. They have collectively lent well over half a trillion dollars to fossil fuel activities since the Paris Agreement, with their underwriting and investing facilitating even more carbon in our atmosphere.
In joining the Net-Zero Banking Alliance, Canada’s banks committed to align their lending and investing – but so far not underwriting – with net-zero by 2050, consistent with limiting average warming to 1.5°C by 2100. Importantly, they will also set interim targets to cut their financed emissions by 2030. Carney is pushing for these targets to be up to a 50% reduction in financed emissions.
This is a key point. 2050 is a long way off and unlikely to motivate changes in business practices today. But if banks accept their responsibility to halve their financed emissions by 2030, that changes their choices right now. One way to assess their seriousness will be to see how quickly they adopt 2030 targets, and whether those targets are in line with climate science. They will also need to involve absolute reductions, not just reductions in emission intensity.
Another way to assess their seriousness will be in how Canada’s banks deal with their fossil fuel clients. This fall, the International Energy Agency found “there is no need for investment in new fossil fuel supply” because “no new oil and gas fields are required beyond those already approved for development.” We already have enough developed fossil fuel reserves to blow not only the carbon budget for 1.5°C of warming, but 2°C as well.
This finding is being ignored by bank clients in Canada’s oil and gas industry who are planning to expand production by 30% by 2030. They too have begun to portray themselves as on track to reach net-zero through carbon capture and storage, but even if they convince governments to shell out the $50 billion in subsidies they’re requesting for this purpose, it would not decarbonize the end product where more than 70% of the emissions lie. The only true way that energy clients will fit into banks’ net-zero balance sheets will be for them to transition out of fossil fuels and into renewables.
How banks manage these client relationships will determine success. In the U.S., Citigroup CEO Jane Fraser said she expects to shed clients who are not making the transition. In Canada, our banks so far are saying publicly they will “work with” their clients rather than drop them. That’s a setback for accountability, signalling to the laggards they have no reason to worry. This will boomerang responsibility back onto the banks when their high-carbon clients cause them to miss their targets. Competitors of the big banks, such as Vancouver City Savings Credit (Vancity) and Laurentian Bank Financial Group, have taken a cleaner approach by just getting out of financing fossil fuels entirely.
How will we know if the banks are on track? The good news is that Canada’s major banks have now joined the Partnership for Carbon Accounting Financials, a global initiative to standardize reporting on emissions associated with loans and investments – but again doesn’t apply to underwriting. In 2022, we can expect baseline assessments from Canada’s banks, with annual reporting thereafter to assess progress.
This alone won’t be enough disclosure to give investors and the public a clear picture. Credit Suisse, for example, goes further and publishes how many of its commercial clients are in categories between “unaware” and “green,” with a commitment to phase out the former. Or, since the banks have pledged hundreds of billions of dollars in “sustainable finance,” but with lax definitions and the potential for greenwashing, we need robust reporting on where that money goes and quantification of associated emissions reductions.
Overall, 2021 was the year of net-zero pledges. 2022 will be the year when we begin to see if they are real. Investors, customers and civil society will be watching closely.
Matt Price is the director of corporate engagement for Investors for Paris Compliance, a shareholder advocacy organization active with publicly traded companies in Canada.