Canada’s big banks have been incorporating climate considerations into the core of their operations but are starting to get nervous about the legal and reputational risks stemming from commitments made to global climate-related coalitions they voluntarily joined. Much of the issue centres on financing high-emitting sectors, with global alliances taking a much harsher stance than the domestic regulator.
The Globe and Mail reported on Sept. 29 that Canada’s big banks are concerned they could face legal action resulting from antitrust concerns if mandated by global coalitions to cut ties with some high-emitting sectors like oil and gas. The banks also have concerns about how these global coalitions are governed.
The Glasgow Financial Alliance for Net Zero (GFANZ), the self-described “world’s largest coalition of financial institutions committed to transitioning the global economy to net-zero greenhouse gas (GHG) emissions,” is led by a trio that includes former Bank of Canada governor Mark Carney, who took up the post of U.N. Special Envoy for Climate Action and Finance in 2020.
The banking component of GFANZ is the Net-Zero Banking Alliance (NZBA), of which eight Canadian financial institutions are members, including the six largest banks.
The Basel Committee on Banking Supervision is the world’s primary standard-setter for regulating banks, but Fitch Ratings said in June that its principles for managing and supervising climate-related financial risks “will lead to increased reputational and conduct risks for banks as regulators step up their scrutiny of banks’ climate risk and sustainability pledges.”
No Surprise
“It doesn’t surprise me if banks are starting to get worried,” Ross McKitrick, an economics professor at the University of Guelph specializing in environment, energy, and climate policy, told The Epoch Times.
“The fact that they are only now realizing the problems of this agenda just confirms how little competence banks have on issues of climate change and climate policy. They overstate the risks of the former and ignore the risks of the latter.”
Carney has said that the bulk of the cost of transitioning to green energy has to come from the private sector.
GFANZ includes fewer members from top-emitting countries like China, Russia, and India—a cause of consternation for some of the bigger U.S. banks that are thinking of exiting the alliance, the Financial Times reports.
The NZBA commitment and guidelines require banks to set 2030 and 2050 net-zero targets consistent with limiting the global temperature increase to 1.5 degrees Celsius.
“This includes all key sectors involved in extracting and supplying fossil fuels (coal mining, oil & gas) as well as most key sectors involved in demanding and consuming fossil fuels (power generation, transport, real estate, cement, steel, etc.),” states NZBA’s latest FAQ.
To comply with NZBA, banks have to publicly disclose their targets and report annually on progress. They have to set up a high-level transition plan to achieve stated targets within an approximate timeline and calculate and disclose the emissions profile of their lending portfolios every year.
Global Dictates
McKitrick takes issue with global organizations dictating broad restrictions on a country’s firms.
“It is up to democratically elected governments to set regulations on the activities of firms in our economy,” he said. “We can’t have unelected bankers usurping that role, especially when they have shown they lack the competence and accountability to take on such responsibilities.”
GFANZ said on Sept. 14 that there is “no rationale for financing new coal projects,” yet China is ramping up its coal production due to energy supply worries.
“Members should establish and apply financing policies to phase out and align carbon-intensive sectors and activities, such as thermal coal, oil and gas, and deforestation, not only through asset divestment but also through transition finance that reduces real world emissions,” wrote Carney, GFANZ co-chair Michael Bloomberg, and vice-chair Mary Schapiro.
In May 2021, the International Energy Agency published its pathway to net zero by 2050.
“No new oil and natural gas fields are needed in the net zero pathway, and supplies become increasingly concentrated in a small number of low-cost producers,” it said.
But it’s the Office of the Superintendent of Financial Regulations (OSFI) draft guideline B-15 that sets out expectations around climate risk management practices for Canada’s big banks. It could set additional capital requirements for the banks.
OSFI’s senior media relations advisor Carole Saindon told The Epoch Times that the federal agency does not regulate the banks’ “voluntary climate commitments,” referring to those with GFANZ and NZBA.
“OSFI’s mandate allows financial institutions to compete and take reasonable risks based on the financial institution’s own risk appetite,” she said.
A final version of B-15 is expected by early 2023, but the current draft doesn’t single out fossil fuels.
Risk and Reward
As oil prices spiked after the Russian invasion of Ukraine, the focus on energy security has come to the fore—thus the immediacy of fossil fuels has gained in prominence relative to the reduction of emissions.
But the banks are getting the message about continuing to finance the oil and gas sector, which is becoming increasingly untenable within the global alliances.
There’s already been a noticeable pullback from the energy sector by the big banks, and oil and gas has been becoming a smaller share of their lending portfolios.
However, in a dire year for stocks, energy is the only sector in the S&P 500 and Toronto Stock Exchange to have posted double-digit returns year-to-date.
“Banks should evaluate loans to the oil and gas sector based on the usual financial criteria of risk and reward. But they absolutely should not be allowed simply to shut off funding to a major economic sector for reasons of activism and politics,” McKitrick said.
While oil and gas is not the only high-emitting sector, it makes up a very small portion of gross loans for Canada’s big banks—roughly between 1 and 3 percent as of July 2021.
“There was really a bit of a perception that this was a relatively risky sector,” Mark Narron, senior director, North American Banks, at Fitch Ratings, told The Epoch Times.
He adds that the Canadian banks have exhibited robust governance frameworks around climate risk management and are in “relatively good shape.”
“We don’t see voluntary commitments for climate risk management regulations so far as having a negative impact on their earnings potential growth and their business mix.”
But Narron also said the legal risks and antitrust concerns are “not top of mind” in his analysis of the banks.
