Climate change becoming a priority for most banks

Canada’s banks are finally getting the climate change message, but some are doing better than others when it comes to making a greener future for the country.

The Ethical Funds Company released a report Wednesday that rated the Big Five banks on 25 climate-specific indicators from its Corporate Sustainability Scorecard.

“As a pillar of the Canadian economy, Canada’s major banks have both a financial and social responsibility to take action on climate change,” says Robert Walker, vice-president of sustainability for Ethical Funds. “Our report clearly shows that all five banks have at least begun to rise to the challenge of climate change, but much more still needs to be done.”

The banks were graded on four main areas — policies, board oversight and management capacity, performance, and transparency — with RBC and TD Bank tying for first place.

“Once viewed as a laggard on environmental risk assessment … TD is helping set the bar in Canada on what banks can and should be doing to mitigate climate risk,” says the report.

Ethical Funds says TD’s effort to get governments to implement a carbon tax program is one reason it’s deserving of the top spot. The organization also says the bank is committed to a carbon audit and “an assessment of climate risks faced by their clients.”

TD’s environmental policy also addresses the risks associated with a loss of biodiversity, including the negative impacts on financing, underwriting and advisory services.

Another plus for TD is the bank’s statement that “it will not finance operations that significantly degrade critical natural habitats.”

Tied for first place with TD is Royal Bank of Canada. Its high marks are attributed partly to the bank conducting a high-level carbon risk profile of its lending portfolio in 2005. “This provides the bank with a lead over the others in this crucial first step toward understanding the risks and opportunities for their clients,” The Ethical Funds explains.

The report adds that RBC has “demonstrated a strategic understanding of the link between climate change and the related issues of forest biodiversity” and that it is committed to improving its credit risk assessment policies to include biodiversity-related issues.

Ethical Funds was also pleased to see that the bank has set up a corporate environmental affairs department, which is mandated to monitor the implementation of RBC’s environmental policy and to be the expert resource on environmental affairs.

Third on the list is CIBC, which the organization says is “steadily increasing policy development and disclosure.”

The report points out that for the past two years, CIBC conducted a carbon audit of its lending portfolio and was talking to experts and environmental organizations about climate change. It even hosted a meeting between the banks, the World Wildlife Fund and the Canadian Boreal Initiative in 2006.

Recently, the bank updated its Environmental Credit Risk Management Standards and Procedures, which “are an improvement” but still not as complete as TD’s and RBC’s policies. “One key area of weakness,” says the report, “[is that] CIBC has not made the same kind of commitments to protecting high conservation value forests.”

The last two banks on the list, Scotiabank and the Bank of Montreal, are improving but still have a long way to go to catch up to TD and RBC.

Right now, Scotia doesn’t have a formalized disclosure policy on carbon management and is behind most of the other banks in biodiversity and boreal forest protection. “We understand they are holding off on policy implementation in these areas in light of the accumulating challenges facing the forestry industry,” says Ethical Funds.

Still, the bank is doing a better job than BMO, which hasn’t made an effort to provide evidence that it’s considering climate change risk in its lending portfolio.

“BMO has told us that they do not see the need to undertake a carbon risk audit of their lending portfolio,” says the report. “We take this as an indicator of the bank’s lack of readiness for a carbon-constrained future. We fear that BMO is not preparing itself as energetically as its peers for the business opportunities presented by climate change.”

While the banks’ attitudes toward climate change are improving, Ethical Funds says nearly all the action taken has been related to policy development, building oversight mechanisms and developing staff capacity. “These are all important first steps,” says the report. “But many of the statements made by the banks are aspiration only, and some include a disturbing amount of qualifying language.”

Because of the complicated jargon, the banks have left room for “several loopholes” that could let them off the hook for their commitments.

Of course, Ethical Funds hopes the banks follow through on their promises, especially because banks are “universal investors” and their actions are far reaching. “Due to their size, they commonly invest across all sectors. If climate change threatens our economy as a whole, it will almost certainly undermine the ability of banks to make profits. It is in the interest of each bank — and each bank investor — to see that the risks associated with climate change are minimized.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(03/12/08)

Bryan Borzykowski