Banks’ net-zero lending ambitions run into trouble in oil-rich Canada

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(Bloomberg) — Canadian banks have only just embarked on a path to zeroing the carbon emissions of the companies they lend to, and they are already running into conflicts between what climate activists want and what ESG investors and what Canada‘s oil-dependent economy demands of them.

Fossil fuel lending represents only a tiny fraction of the lending activity of many banks outside of Canada who have also committed to achieving net zero emissions in lending by 2050. They can replace this activity with other sources of profit over time.

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For Canadian banks, it will not be so easy. Last year, the country’s five largest banks were among the world’s top 10 fossil fuel lenders, and four of them were among the top 20 arrangers of the sector’s bond issues.

These banks now find themselves in a position similar to that of many governments – under pressure to help decarbonize the economy while also facing domestic growth-supporting obligations, even if that means doing business with big polluters. .

The banks’ ambivalence on climate has manifested itself in their latest ESG reports. Only one of the Big Five, Bank of Montreal, has committed to reducing absolute emissions from the most carbon-intensive parts of its lending portfolio by 2030.

Three others – the Toronto-Dominion Bank, the Bank of Nova Scotia and the Canadian Imperial Bank of Commerce – have set more flexible, so-called “intensity-based” targets, which aim to reduce emissions per unit of output while allowing total emissions to grow. Royal Bank of Canada has yet to release its 2030 targets and says they will be announced this fall.

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When it comes to reducing their funded issuance, Canadian banks are “definitely catching up, and that’s been true for some time,” said Matt Price, director of corporate engagement for the financial sector at Investors for Paris Compliance, which works to hold companies publicly accountable for their net zero promises. “One of the main reasons we are catching up is that our banks are very exposed to oil and gas.”

Even with the stranglehold that fossil fuels have on Canada — the energy sector accounts for about 10% of its economy — banks have compelling reasons to deliver on their net-zero promises.

A growing number of institutional investors are removing fossil fuels from their investment portfolios as part of the broader social responsibility movement. Bank loan portfolios are also coming under increasing scrutiny from climate activists who see fossil fuel loans as promoting global warming. This is especially true in Canada, where oil sands extraction requires some of the most carbon-intensive production processes in the world.

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Canadians are also very concerned about the climate. About 71% of them agree that climate change is real and mainly caused by human activities, and half say it is a “very serious threat”, according to a poll last year.

Strong interim targets for absolute emissions are important because the scientific consensus is that fast and drastic action is needed to prevent catastrophic climate change. Global carbon dioxide emissions must fall by about 45% below 2010 levels by 2030 to limit global warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit), according to the Intergovernmental Panel on climate change.

So far, Bank of Montreal is the “clear leader” when it comes to ESG, Price said. The lender is targeting a 24% reduction by 2030 in the scope 3 emissions of its oil and gas borrowers, which come from the combustion of the fuels the companies sell. The bank also plans a 33% reduction in the intensity of scope 1 and 2 emissions from these borrowers, which are those generated by their operations and those of their suppliers.

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The banks stress that they will achieve their goals not by cutting customers off from fossil fuels, but by helping fund the carbon reduction efforts of those companies. Not only would cutting them mean sacrificing much of their lending business; it would also arouse the scorn of millions of personal banking customers in the oil-producing prairie provinces.

Royal Bank, the nation’s largest lender by market value, has so far focused on releasing an initial measure of Scope 1 and 2 funded issuance across its entire loan portfolio,” hard work,” said Lindsay Patrick, head of strategic and ESG initiatives at RBC Capital Markets. Scope 3 emissions data from high-emitting parties in its loan portfolio will be released as more and better data becomes available, it said.

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“We wanted to use a consistent methodology, leveraging relatively similar benchmark data, to get a really good view of the entire portfolio,” Patrick said. “We really see this as a broader economic transition to net zero, not just in certain asset classes.”

As for the bank’s interim targets, Chief Executive Dave McKay strongly suggested targeting absolute emissions, which he said “are the only ones that really matter over time.”

“It’s more complex to set absolute reduction targets, and we’re just taking a little longer,” McKay said in response to questions from reporters after the bank’s annual meeting on Friday. “And in a journey of 10 and 30 years, does two months make a big difference?”

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Scope 3 emissions from the fossil fuel industry are the most important metric because they capture the burning of fuels produced by oil companies, which account for most of the emissions, Price said. Many global banks, including HSBC Holdings Plc and Barclays Plc, have already started making these figures public.

Similarly, many global banks have set absolute emissions targets. Citigroup Inc. has committed to a 29% absolute reduction in funded emissions for the energy sector by 2030, while Barclays plans to reduce total emissions from its energy portfolio by 15% by 2025.

Oil sands regimes

The ability of Canadian banks to meet their targets will depend on the oil sands industry’s own efforts to become cleaner, which relies heavily on expensive technology to capture carbon before it is released into the atmosphere. Canada’s federal government recently stated that it is aiming for a 42% reduction in emissions from the oil and gas sector by the end of the decade.

The oil sands’ plans to be net zero by 2050 are “very achievable,” with help from policies like the clean fuel standard and higher carbon prices, said Jackie Forrest, executive director of the ARC Energy Research Institute in Calgary. But short-term goals of cutting emissions by around a third by 2030 could be harder to achieve, she said.

“Building a huge CO2 pipeline and all the infrastructure to store the carbon and capture it – it’s a long project,” Forrest said. “It’s a bit more uncertain what can be done by 2030.”

©2022 Bloomberg LP



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