Financing 1.5°C: How Canadian Banks Are Approaching Climate Alignment

If Canada’s influential “Big Six” banks are any indicator, climate ambition among the Canadian financial sector is rapidly evolving—following similar trends in the United States and, before that, in Europe. Between TD Bank Group, Royal Bank of Canada, Scotiabank, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada, Canada’s “Big Six” control over C$6.6 trillion (US$5.3 trillion) in total assets as of January 2021—more than triple Canada’s 2019 GDP.

In just the past six months, half of its members—TD, RBC, and BMO—announced 2050 net-zero commitments. With CIBC, TD, and RBC joining the Center for Climate Aligned-Finance as Strategic Partners in the first quarter of 2021, we decided to take a closer look at the growing climate ambition in Canada’s financial sector.

Action really began to heat up in late 2020, with a number of dominoes falling in November alone. In addition to TD’s net-zero commitment, Canadian Prime Minister Justin Trudeau introduced the Canadian Net-Zero Emissions Accountability Act to address the country’s 2050 net-zero goal. That same month, the Bank of Canada and Office of the Superintendent of Financial Institutions announced a pilot project to use climate change scenarios to understand financial system risks related to a low-carbon transition. And five of the “Big Six” collectively funded the Institute for Sustainable Finance with a mission of aligning mainstream financial markets with Canada’s transition to a lower-carbon economy. Then, in December 2020, Canada’s BMO Asset Management become one of 30 signatories to launch the Net Zero Asset Managers Initiative.

Meanwhile, Canada’s government plans to create a transition-focused taxonomy—more tailored to Canada’s natural resource-heavy economy than the European taxonomy, for instance. And in the meantime, investor groups in Canada are preparing to launch a national shareholder engagement program—similar to Climate Action 100+—targeting the country’s heaviest emitters.

Banks were not the only Canadian financial institutions to set climate targets. In January 2021, one of Canada’s biggest institutional investors, the Ontario Teachers’ Pension Plan, committed to net-zero emissions by 2050, and Canada’s biggest credit union, Vancity, committed to net zero by 2040. In February, asset manager British Columbia Investment Management (C$171.3 billion, or US$136.7 billion, in assets under management) notably set itself an interim target when it committed to reducing the carbon exposure in its global public equities portfolio by 30 percent by 2025. Even more recently, RBC and BMO outlined their 2050 net-zero commitments. Amid this flurry of activity across Canada’s financial sector, the scale of banks’ ambitions—and the task before them—has become far clearer than 12 months ago.

Putting Canadian Creditors’ Commitments in Context

The momentum toward net zero among Canadian banks correlates to developments in the United States and Europe. Banks’ net-zero announcements, for instance, share several common features despite their different geographic footprints. Like their US banking counterparts, the net-zero commitments from TD, RBC, and BMO  include operating and financing activities and focus on data analytics and methodologies at the core of their approach to sectoral decarbonization.

Although CIBC has not yet made a net-zero commitment, it was among the first Canadian banks to link executive pay to ESG criteria—a climate solution that US financial sector executives recently also recommended. Like Bank of America, Morgan Stanley, and Barclays, TD, CIBC, RBC, BMO, and Scotiabank also joined the Partnership for Carbon Accounting Financials (PCAF)—a methodology for measuring and reporting financed emissions.

Similar to how JPMorgan Chase established a dedicated Center for Carbon Transition to support its clients, TD Bank created its Sustainable Finance and Corporate Transitions Group, and BMO launched its Climate Institute. BMO’s Climate Institute will focus analytics around decarbonization and transition pathways in sectors like mining, energy, agriculture, real estate, and transportation.

Like some US banks, TD, RBC, and BMO said they will set interim emissions targets and gave themselves timelines for providing further details. They did not identify the sectors they would target, though TD and BMO said they would begin reporting progress this year. RBC, meanwhile, will start measuring and disclosing financed emissions for key sectors starting in its 2022 Task Force on Climate-Related Financial Disclosures (TCFD) Report. RBC said in its recently released 2020 TCFD report that investments in people, tools, data, and analytics are required to establish an enterprise climate-risk appetite, set interim reduction targets, and conduct climate-related stress testing.

RBC followed most major US banks (Wells Fargo, Goldman Sachs, JPMC, BofA, Citi, and Morgan Stanley) by announcing in October 2020 a prohibition on new project-specific financial services directly related to the exploration, development, or production of oil and gas in the Arctic Circle. By December 2020, Canada’s five biggest banks had said they would refuse to directly fund oil and gas drilling in Alaska’s Arctic National Wildlife Refuge.

Overcoming Alignment Challenges in Canada’s Energy Sector

Canada’s unique wealth of natural resources poses a key challenge for decarbonizing its real economy. Natural resource sectors—including energy, minerals, and metals—constitute almost 20 percent of Canada’s GDP, but their carbon emissions are among the hardest to abate. To understand the scale of Canada’s challenge, consider that Canada’s economy is almost three times more reliant than the US economy on energy-related industries. In 2019, Canada’s energy sector alone directly employed over 282,000 people and indirectly supported over 550,500 jobs, accounting for over 10 percent of nominal GDP.

How Canada’s “Big Six” balance their climate commitments with their commitments to their natural resource sector clients will be critical to implementing Canada’s climate ambitions. The Arctic oil and gas drilling exclusions show that although climate alignment poses unique challenges for a Canadian financial sector majorly invested in high-emitting industries, Canadian banks can move quickly in unison once there is enough momentum.

Canadian banks—more so perhaps than banks in other geographies—will need a multipronged approach to overcome these transitions within their portfolios and, in doing so, to influence their clients’ climate actions to bring them into alignment. It starts with leveraging the strength of banks’ deep relationships with their energy sector clients to approach the climate alignment journey together.

Banks, in concert with energy companies, can scale up opportunities and products for transition financing. For instance, alternative renewable fuels pose “significant revenue opportunities” for the oil and gas and petrochemical sectors, according to a December 2020 report commissioned for the Global Financial Markets Association. The Institute for Sustainable Finance estimates that a C$128 billion (US$102 billion) investment is required in the next decade to meet Canada’s goal of 30 percent emissions reductions by 2030. Canada’s oil and gas sector alone will require C$26.3 billion (US$21 billion).

Conclusion

The nature of Canada’s distinctly natural resource-heavy economy demonstrates why the Canadian financial sector’s path from today’s reality to its future climate goals will not be an easy one. Although banks cannot transition the global economy alone, they must proactively participate in the solution. Recent developments suggest that this change in approach is happening. We welcome this increase in climate ambition and will be eagerly following the Canadian financial sector’s next moves.