Canada’s big banks respond to net-zero pressure

Some of Canada’s biggest banks are taking action to back up their net-zero promises as investors step up their scrutiny on emissions targets.

While heavy polluters have traditionally taken the most flak for their greenhouse-gas emissions, the financial institutions funding their projects have found it increasingly difficult to fly under the radar.

In March, a report from the Rainforest Action Network found that Royal Bank of Canada, Bank of Nova Scotia, CIBC, Toronto-Dominion and Bank of Montreal increased their financing of fossil fuels by a combined $61 billion in 2021. From 2016 to 2021, those banks lent $911 billion to the fossil-fuel industry. In August 2021, a Greenpeace report performed a similar analysis.

However, banks are setting emissions reduction targets. This past October, Bank of Montreal, Bank of Nova Scotia, CIBC, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank signed on to the UN-convened Net-Zero Banking Alliance (NZBA). All six were already members of the Partnership for Carbon Accounting Financials, a group that aims to standardize emissions disclosure internationally.

Membership in both organizations has forced the banks to grapple publicly with their financed emissions — those attributable to companies they lend to or invest in.

Previously, most net-zero talk from banks focused on Scope 1 and Scope 2 emissions, which includes greenhouse-gas releases linked to the bank’s own operations.

But the real barrier to net-zero alignment was always going to be in the realm of Scope 3 emissions, which are related to upstream and downstream activities, including financing.

Signatories to the NZBA have 18 months to set interim decarbonization targets for 2030, with a focus on clients in carbon-intensive sectors. Banks must publish emissions data annually, with further targets then due every five years until the ultimate goal of net zero by 2050.

Of the banks that have reported, RBC estimated its balance-sheet wide carbon footprint at 45 million tonnes for 2021, but put off its interim targets until the spring of 2023.

CIBC went a step further, aiming for a 35% cut in Scope 1 and 2 emissions of its oil and gas borrowers from a 2020 baseline by 2030, plus a 27% reduction in their Scope 3 emissions.

BMO also focused on the oil and gas sector, targeting a 33% cut in the Scope 1 and 2 emissions by 2030 from a 2019 baseline, plus a 24% reduction in their Scope 3 emissions. The bank also wants the carbon intensity of its power generation lending portfolio to decline by 45%.

Over the same period, TD identified its energy sector clients for a 29% emissions reduction and aims to bring the emissions of its borrowers in power generation down by 58%.

For its part, Scotiabank believes it can cut its power and utilities emissions by 55% to 60% by 2030. The Scope 1 and 2 emissions for its oil and gas clients are set to reduce by 30%, with the target for their Scope 3 emissions set at between 15% and 25%.

Although Scotiabank also provided emissions estimates for its residential mortgage portfolio and agriculture, Meigan Terry, Scotia’s chief social impact, sustainability and communications officer, said the poor quality of data prevented the bank from setting meaningful targets in these areas for now.

All reporting banks have complained about poor data quality, caused in part by the lack of required emissions reporting from clients. When sector-wide emissions data is used to inform estimates, the margin of error goes up and there is also a risk of double-counting because of the interplay between clients across sectors.

The Canadian Securities Administrators is considering proposals to compel reporting issuers to declare their Scope 1 emissions, or a weaker version that would give them the option of explaining why they are not disclosing their Scope 1, 2 or 3 emissions. In the U.S., the Securities and Exchange Commission recently proposed rule changes that would make the reporting of all 3 scopes mandatory for its registrants.

Mandatory reporting and improved data could be a double-edged sword for banks that fail to live up to their net-zero commitments, said Conor Chell, an environmental and regulatory compliance lawyer with MLT Atkins in Calgary.

“Once that happens, we’re gong to see activists, shareholders and potentially regulators looking at companies that are not performing as well as their industry peers. From there, we could see litigation against some of the big players in each of those sectors,” Chell said.

The recent ouster of three Exxon Mobil directors in a proxy fight over their climate credentials and legal action taken personally against board members of energy giant Shell in the U.K. by investors questioning the veracity of their net-zero plan offer a peek at the type of litigation we could see in Canadian courts, Chell added.

In the meantime, Frederick Isleib, director of ESG research and integration with Manulife Investment Management, said investors should concentrate on actively engaging with banks to “understand their approach and make an assessment on their degree of commitment.”

To assist investors, the company has developed a framework that scores banks on a four-point scale according to their progress towards achieving net-zero, based on indicators such as climate stress-testing of the bank’s loan portfolio, board oversight of its decarbonization strategy, and the sophistication of capital protection schemes when extending financing to carbon-intensive industries.

“[Investors] should be identifying those banks wiling to lead on decarbonization by investing and extending capital to new technologies, solutions and alternative energies,” Isleib added.

Toronto-based NEI Investments put the Big Five on its 2022 focus list for engagement over their net-zero alignment.

“We’re excited about the Net-Zero Banking Alliance, but it’s too early to assess progress at this point, because they’re just starting to set targets,” said June Zimmer, NEI’s vice-president of ESG advisory. “We’ll continue to watch whether they are moving quickly enough and push for transparency in terms of how they plan to engage their own clients.”

BMO’s chief sustainability officer, Michael Torrance, said the bank intends to be its clients’ lead partner in the transition to net zero. However, he said the entire financial sector will need to play a role in satisfying demand for oil and gas in the near future to avoid a “disorderly transition” that could have disastrous consequences for the economy, especially as countries move to secure their energy supply in the wake of the Russia/Ukraine war.

“We need to meet the needs of today, and we have to take steps to ensure that future generations can meet their own needs and are not adversely affected by decisions we’re making now,” Torrance said.

At Scotiabank, climate and transition risks are considered as part of the credit-adjudication process, Terry said. Divestment is a last resort, she added, noting that the bank would rather keep clients accountable via its engagement process.

“We firmly stand by any client we have that has a credible transition plan. We are here to help enable them and support them,” Terry said.

Nonetheless, Mike Toulch, an engagement research specialist with the Vancouver-based Shareholder Association for Research and Education, remains unconvinced that Canadian banks are getting the balance right.

“Banks have a profound and catalytic role to play to ensure that society’s transition is both smooth and swift, and while it seems that banks are aware of the problem and recognize a need to act, the pace of change remains far, far too slow across the sector given the urgency of the situation,” Toulch said.