Will a new climate pledge from Canada’s Big Six banks overhaul their fossil fuel financing?

Given the banks’ deep reach across the Canadian economy, new net-zero commitment could drive a fundamental transition

Canada’s big banks – long criticized for being too focused on the fossil fuel sector – are taking a big step toward being drivers of change, not just passengers, in the race to net-zero.  

In a joint news release, the “Big Six” banks – BMO, CIBC, National Bank, RBC, Scotiabank and TD – announced they are adding some much-needed rigour to their strategies on climate change by joining the United Nations’ Net-Zero Banking Alliance (NZBA). They said the commitment demonstrates their intention to “play a significant role in financing the climate transition and support collaborative approaches between the public and private sectors to reach the goal of net-zero by 2050.”

The Canadians join 66 other global banks, insurance companies and financial industry service providers in a net-zero alliance led by former Bank of Canada governor Mark Carney in preparation for the UN’s COP26 climate summit in Glasgow. He is also running similar alliances for insurers and financial services providers. 

To meet the commitments made under the alliance’s framework, the big banks will have to quickly overhaul their business strategies. That will mean reducing their financing of Canada’s fossil fuel industries, except for emission-reduction efforts, and focusing far more on emerging technologies that will drive the transition to a net-zero-carbon economy.

As signatories of the NZBA, the banks commit to aligning their lending and investment plans with the Paris Agreement’s goal of limiting the increase in average global temperatures to 1.5°C. They are also confirming their previously announced targets to achieve net-zero greenhouse gases (GHGs) throughout their operations by 2050, including emissions they finance. And they will adopt a series of shorter-term targets, with progress reviewed annually by the United Nations Environment Programme Finance Initiative.

Given the banks’ deep reach across the Canadian economy, their enhanced climate strategies could drive a fundamental transition in the country.

The NZBA announcement will stand as a watershed moment – if they keep their pledges. Strong leadership from Finance Minister Chrystia Freeland would help ensure they execute.

The banks’ transition strategies would not depend on government policy or allow for foot-dragging based on skepticism about whether the world will achieve the Paris goals. 

Instead, they say they will conduct all their lending and investment business in a manner that is consistent with the 1.5°C target. 

While there are numerous 1.5°C scenarios, the International Energy Agency (IEA) in May published its own roadmap, which posits a 75% decline in global oil production and 60% decline in natural gas between 2020 and 2050. The groundbreaking report stated that “there is no need for investment in new fossil fuel supply in our net zero pathway.”

Under the NZBA commitment, each bank will have to select a decarbonization scenario from credible, well-known sources, and then set 2030 targets for the emissions that result from their lending and investment activity in high-GHG sectors. Those shorter-term targets must themselves be consistent with the 1.5°C target.

Canadian banks are also working with the federal government’s Sustainable Finance Action Council on how to implement mandatory reporting on climate-related financial risk and on the need for data that will support internal decision-making and external assessment of the institutions’ progress. 

From talk to action 

Turning high-minded pledges into successful strategies will require full engagement – from boards of directors and senior managers to account executives and investment bankers.

Reflecting the historical importance of the oil and gas sector to Canada’s economy, the Big Six banks remain among the world’s largest lenders and underwriters for fossil fuel production, pipelines and downstream activity like refineries and chemical plants. 

A report commissioned by Greenpeace Canada and released in August found that since the Paris deal was signed in December 2015, Canada’s five largest banks have provided $800 billion in financing to fossil fuel companies, including oil and gas producers and pipelines. Each institution is in the top 25 publicly traded banks worldwide for loans and investment to the fossil fuel sector.

The Net-Zero Banking Alliance announcement will stand as a watershed moment – if they keep their pledges.

Compared to some European banks in particular, they have been slow to embrace the principles of sustainable financing or embark on a rigorous approach to emissions reductions in their business operations. The banks have endorsed the goals of the Paris Agreement and, individually, have made broad net-zero commitments, but they have been too cautious. 

The big Canadian banks had been noticeably absent from the United Nations’ Glasgow Financial Alliance for Net-Zero, which is meant to showcase private-sector commitments at the COP26 meeting.

Until last week, the Vancity credit union was the only Canadian member of the Net-Zero Banking Alliance, which includes giants like the Bank of America, Citi, Barclays and South Korea’s Shinhan.

Making net-zero the banks’ business

VanCity CEO Christine Bergeron said all the banks will require corporate-wide efforts to make good on their pledges. “Everyone needs to deliver on their commitments, and it’s hard work,” she said in an interview.

In a LinkedIn post, RBC CEO David McKay said the banks will help businesses and individuals “establish and accelerate their climate plans, achieve their goals and adapt to net-zero.” Rather than abandoning the fossil fuel sector, he said, the financial institutions will work with their high-emitting customers to support Canada’s emissions targets.

The IEA’s 1.5°C roadmap provides some idea of how the banks might reorient their businesses. We need a massive increase in capital investment for renewable power; for broad deployment of carbon capture and sequestration, electric vehicle infrastructure and the hydrogen supply chain; and for the commercialization of energy efficiency and other clean technology.

Such a shift does, of course, entail risk and uncertainty. Banks – and indeed all creditors and investors – need to hone their analytical tools for assessing likely rates of return on a sector-by-sector, company-by-company basis. And they will need better data to enable the transition.

An overly cautious approach carries its own risks that have been well-enunciated by groups such as the Task Force on Climate-Related Financial Disclosures (TCFD), which was established in 2015 to help companies disclose climate-related risk in their financial statements. Those risks include the likelihood that long-life, high-GHG assets will become stranded and that some bank customers will see an accelerating erosion of their business models.

Banking executives will face tremendous pushback if they move as quickly as the climate crisis demands. The oil and gas industry is well represented on their boards, and conservative politicians and commentators across the country will decry any threat to the business status quo.

The bankers must be steadfast and aggressively follow through on their NZBA commitments. The future of Canada’s zero-carbon economy is their business now. 

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