A coalition of environmental groups is calling on the federal government to regulate climate commitments made by banks and other financial institutions to avoid greenwashing and accelerate change.
“Finance is the next front in climate accountability,” Alan Andrews, climate director for Ecojustice, told a conference on sustainable finance that Environmental Defence, Ecojustice and Shift hosted along with the UN-backed Principles for Responsible Investing in Toronto on September 13.
In a report released the same day, the three advocacy groups recommend that Ottawa’s banking regulator require financial institutions to adopt a “credible climate plan” that would include interim targets for 2025 and 2030.
Canada’s big banks, pension funds and insurance companies are members of the Glasgow Financial Alliance for Net Zero (GFANZ), under which they have committed to bring their investment and lending practices in line with a net-zero economy by 2050. The banks’ climate plans need to be mandatory, subject to enforcement and fully aligned with climate science including a planned phaseout of high-emitting assets, said Andrews.
The day-long session focused on aligning financial policy with Canada’s climate goals, including federal commitments under the Paris Agreement to reduce GHG emissions by up to 45% below 2005 levels by 2030 and achieving net-zero emissions by 2050.
The audience included representatives of the major banks and officials from Finance Canada as well as Environment and Climate Change Canada with speakers from the European Commission and the U.S. Treasury Department.
The federal government is imposing emissions regulations on the oil and gas sector, power utilities and automakers, but it has not set climate targets for banks, pension funds or insurance companies.
Instead, the Office of the Superintendent of Financial Institutions (OSFI) is proposing guidelines that would require federally regulated financial institutions (FRFIs) to disclose the risks that climate change poses to their businesses and how they will manage the transition to a net-zero world.
The advocacy groups argue that the banks and other institutional investors should be required to not only disclose how climate change will impact them but also align their lending and investment practices with deep emissions reduction plans.
While the OSFI proposal is couched in the language of guidelines and expectations, the federal regulator does have a range of supervisory tools to promote compliance with its guidelines and address issues that are identified, a spokeswoman said in an email.
Still, its focus is firmly on the risks that climate change poses to the banks and Canada’s financial system and not how those institutions are contributing to climate change.
“Our job is to ensure Canada’s FRFIs can operate through a period of economic disruption triggered by a global move away from GHG energy sources,” OSFI superintendent Peter Routledge said in a speech on September 8.
In a submission to OSFI, three environmental groups argue that while its proposal is a significant step forward, it “falls well short of requiring action at the scale and pace commensurate with the challenge.” The letter was submitted on August 29 by Environmental Defence, Ecojustice and an umbrella group called the Climate Action Network Canada.
Finance is the next front in climate accountability.
-Alan Andrews, climate director for Ecojustice
Senator Rosa Galvez is also critical of the regulator’s approach. Galvez introduced legislation earlier this year that would require federally regulated financial institutions to produce and meet net-zero climate plans. The senator, who attended the Toronto conference, said she is hoping her bill will be sent to committee this fall.
In a draft submission to OSFI provided to Corporate Knights, Galvez said the regulator needs to take a tougher line. Canada’s banks are “dangerously over invested in fossil fuels” and are placing “the stability of our entire financial system at risk,” she said in the draft letter.
The banks’ willingness to finance fossil fuel expansion projects will make it increasingly difficult for Canada to meet its climate commitments, she added.
The banks argue that they are moving with due diligence, with lending that will help the oil industry reduce its own emissions.
Oil and gas companies represent less than 5% of outstanding loans by Canadian banks. And the banks insist they remain fully committed to the GFANZ, which was announced ahead of last year’s Glasgow climate summit by former Bank of Canada governor Mark Carney.
“Banks understand that the financial sector is central to securing an orderly transition to a low-carbon economy,” said Aaron Boles, spokesman for the Canadian Bankers Association, in an email.
“That’s why several banks in Canada have begun implementing climate action plans that set specific targets to meet the demands of this global challenge, including committing to climate-related financial disclosures, adapting their risk management frameworks and aligning their lending to low-carbon outcomes.”
Still, Canada’s banks remain among the world’s largest financiers of oil and gas companies, a fact that reflects this country’s role as a major producer and one that relies on commercial companies rather than state-owned firms.
While four of the five top banks have released their GFANZ climate plans, critics complain they fall well short of the actual commitments required for alliance membership. Several speakers at the conference described Canada as a laggard when it comes to aligning the financial sector with the country’s climate goals.
While the Europeans are taking a more regulated approach, the United States expects that the generous public funding for clean energy projects under the recently passed Inflation Reduction Act will provide incentives for banks and other institutions to commit their own money.
The OSFI proposal for mandatory disclosure of risk does provide some incentives for financial institutions to shift their business away from fossil fuels.
Their disclosures will signal to the rest of the world, including their own shareholders, whether they are reducing their financed emissions. The more invested they remain in carbon-intensive assets, the greater the risk they face of holding stranded assets that lose value due to the transition. The regulator has signalled that it may require larger capital cushions for more vulnerable institutions, a move that would erode the profitability of a bank.
Despite those inducements for action, there is plenty of scope for the banks to backslide. We have grown accustomed to seeing ambitious voluntary targets that are never met. With the increasing urgency of climate action, the federal government may have to use its regulatory powers to drive a faster pace of change in the financial sector.