In a remarkable turn of events, Canada’s bank CEOs have been summoned to Ottawa to appear before the House of Commons Environment Committee on June 13. They tried to decline and send industry association representatives instead, but the Committee put its foot down.
This is the first time that the CEOs have faced formal government scrutiny on the issue of their banks’ role in fueling the climate crisis, or inversely in financing the energy transition. And, parliamentarians are well within their rights to do so given the privilege extended to banks by the Canadian public, that of profiting handsomely from their role helping to create the money supply.
MPs will need to be well prepared since the CEOs will talk a good game about their net zero commitments, which sound good on paper. But, as our annual report cards have shown, Canada’s banks are dragging their feet on decarbonizing their financing – falling well behind their European peers.
Here are the main arguments we expect the CEOs to make, and why they fall short:
We need to keep financing fossil fuel companies to help them transition
The main controversy with Canadian banks is their globally significant financing of fossil fuels, adding over US$100 billion last year alone. When challenged about this, we hear variations on the theme of supporting an “orderly” (code for “slow”) transition, and that the banks need to keep financing these companies to help them get there.
While this sounds reasonable, the problem is that there’s no evidence it’s true. In fact, the evidence points in the other direction. It’s not that there’s a debate between an “orderly” or “rapid” transition – there’s actually no transition taking place.
Look at any major Canadian oil and gas company, including the pipeline companies, and you’ll see expansion of fossil fuels rather than an effort to transition into clean energy. They try to point at carbon capture and storage (CCS) as the silver bullet that will get them to net zero, but again, there’s no evidence this is true. The oil and gas industry will only do CCS if taxpayers pay for it, and even if it works well at scale (doubtful), it will only address a fraction of emissions. The math simply doesn’t work.
The banks have started to roll out “client engagement” frameworks to evaluate high-carbon clients and their transition, with RBC and BMO stating that they’ll consider dropping clients who don’t progress. But, these frameworks have thus far been either weak or opaque, making it highly unlikely that the banks will seriously confront the misalignment of their major oil and gas clients.
European banks are not perfect by any means, but many have begun throttling down their fossil fuel financing, starting with coal and oil and gas expansion projects, with some committing to an overall drop in oil and gas financing and facilitation activity. This is what actual transition looks like. One Canadian bright spot: BMO is the only Canadian bank that has set an absolute target for scope 3 oil and gas financed emissions and is reducing its upstream oil and gas financing, although it remains very active financing midstream companies that are engaging in expansion.
We put hundreds of billions into sustainable finance
Each of the banks has set a target in the hundreds of billions of dollars for what they variously call “sustainable” or “decarbonization” or “climate-related” financing. Again, this appears laudable at first blush, before the basic question is asked: what does this mean, exactly?
Unfortunately, it doesn’t mean that this financing actually reduces emissions. And in some cases it may actually increase emissions. Sustainable finance as currently practiced by the banks actually means something more like “ESG-related business segment.” This captures loans, bond underwriting, and advisory services related to activities that can be deemed socially or environmentally beneficial or at least neutral.
But, on climate, there are no quantitative standards for this financing, and the banks don’t disclose the emissions impacts of projects undertaken in this segment, meaning there is no necessary relationship with net zero. Worse, some projects are labeled “sustainable finance” because they set targets for reducing emissions intensity even as absolute emissions grow.
For all these reasons we filed a securities complaint early this year regarding the sustainable finance activity of the banks, alleging misleading disclosure. Since then, some of the banks have started to issue disclaimers regarding this work, but it is still held up as part of their net zero response.
Better than vague sustainable finance pledges are more specific ones, such as RBC’s target of $15 billion into renewables by 2030. While better in type, the magnitude needs a dramatic adjustment, since it pales in comparison to RBC’s annual fossil fuel financing (US$28 billion last year alone), meaning that the ratio of clean vs dirty energy is nowhere near the 4:1 ratio by 2030 called for by BloombergNEF.
In theory, a sustainable finance taxonomy that is tied to bank reporting could help bring some discipline to this field, as it has done in the EU. But, if fossil fuels are included in a Canadian taxonomy, as many (including Chrystia Freeland) seem to want, then the opposite will occur – a state-sanctioned attempt at greenwashing, with resulting controversy and market uncertainty.
We can’t do it alone – we need supportive public policy
Canadian banks are also fond of pointing out that there are many factors outside of their control, like public climate policy, that affect whether they will meet their own net zero targets. The CEOs may show up in Ottawa and say, in part, “It’s not us; it’s you.”
This is true to an extent, but can also be used to dodge responsibility. What would make it much more true would be if we saw the banks actually lobbying for good public climate policy. Where are the banks, for example, on asking for stronger building codes so that they can decarbonize their mortgage portfolios? Where are they on supporting an emissions cap for the oil and gas sector so that their oil and gas clients aren’t growing their emissions, thereby growing the banks’ financed emissions?
Unfortunately, the banks have a history of doing the opposite. Canadian bank CEOs have supported expanding fossil fuel infrastructure again and again, and both RBC and Scotiabank recently published reports calling for increased Canadian oil and gas production. If anything, the banks’ record on public policy is one of undermining their own net zero policies – and those of Canadians writ large – rather than lobbying for things that would help them meet their own net zero targets.
In sum, when the bank CEOs appear before the Environment Committee, expect to hear a combination of “we’re on track” and “others need to do more.” The reality, though, is that the banks will keep pouring fuel on the climate fire via their financing for as long as they are allowed to. They are correct in that we need better public policy, and a key part of that is regulating the banks themselves, particularly changing the incentive structure that lets them profit from climate chaos. Ultimately, once the CEOs have returned to Toronto, that’s what the Committee needs to recommend.
