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TORONTO (Reuters) – Going green won’t be easy for banks in Canada, one of the world’s largest oil producers.
Over the past two years, Canadian banks have increased the amount of sustainability-related financing (SLF) they offer to oil and gas customers. SLF refers to financing where costs change when certain Environmental, Social and Governance (ESG) requirements are met at the company level but do not require the funds themselves to be used for climate-friendly purposes.
This has led to accusations of “greenwashing”, with some environmental groups and investors claiming that banks are using SLF only to pretend to lower their carbon footprint, rather than taking meaningful steps in that direction.
The increased use of financing instruments that do not need to reduce overall carbon emissions could delay banks’ preparations for Canada’s transition to a low-carbon economy, leading to higher risks and increased capital requirements to offset those risks.
Central banks and financial regulators have warned that a lack of preparation by banks could expose them and investors to “suddenly large losses”.
“It’s a dangerous downhill road,” said Angus Wong, a campaign strategist for SumOfUs, a nonprofit environmental group that represents thousands of Canadian bank investors. “Those are just loans and bonds, add the word ‘sustainability’ and add that to the sustainable financing numbers … it’s really a bit of a greenwash.”
This issue is particularly important in Canada, where SLF accounts for a higher proportion of all sustainable financing than globally, as it provides a green option for the country’s extractive industries, which often do not have access to more specific instruments such as so-called green bonds.
Sustainable financing is mainly composed of two products: SLF, and the use of funds such as green bonds that must be used for environmental protection activities.
But the flexibility of the former means that financing terms can even allow for increased emissions, which many critics argue allows emitters to mask the false semblance of sustainability while business-as-usual.
A number of banks – including RBC, Toronto-Dominion Bank and Bank of Montreal – have said that an orderly transition to a net-zero economy could take years and that the oil and gas industry needs continued support to meet continued demand as development alternative energy sources such as wind and solar.
Net zero emissions refers to the goal of not emitting greenhouse gases through human activities or offsetting them through processes or technologies that capture them before they are released into the atmosphere.
According to Refinitiv, the use of sustainability-related instruments (SLIs) worldwide will more than quadruple by 2021, as concerns grow about the transition to net-zero emissions. In emerging markets in Canada, their usage has grown nearly 20 times over 2020.
Sustainability-linked bonds (SLBs) have accounted for 11.2% of all sustainable bonds in Canada since the start of 2021, compared with 9.8% globally, according to Refinitiv data. Energy companies issued a third of them.
Sustainability-related loans (SLL) of nearly $31 billion by Canadian companies accounted for 90% of all sustainable loans during the same period, compared to 85% globally. Traditional energy companies account for 10% of that in Canada, compared to none in 2020.
While Canadian banks are not currently facing charges of funding high-emitting countries, authorities said climate disclosures would be required from 2024 and hinted at future capital requirements.
“Gold Rush Mentality”
Canada is the world’s fourth largest oil producer and sixth largest oil producer, and the industry accounts for about 5% of GDP.
The Bank of Canada, one of the world’s largest financial institutions for fossil fuel climate chaos, has drawn a fine line between a net-zero emissions commitment and a commitment to continue supporting oil and gas customers.
Matt Price, director of corporate engagement at the Institute of Compliant Investors (IPC) in Paris, said the banks were incentivized to increase the amount of sustainable financing due to the government’s $9.1 billion emissions reduction plan and the growing availability of green financing. .
The issue was brought into focus by recent SLB issuances by pipeline operator Enbridge (NYSE:) Inc and oil producer Tamarack Valley Energy Ltd.
Their SLB has two oft-criticized features: a focus on emission reductions per unit of production, called intensity targets, rather than total emissions, and no emission reduction targets for the largest sources of emissions (indirect targets from the company’s value chain) , known as Scope 3 emissions.
The issuance of Tamarack, along with the previous SLL facility, has funded acquisitions that will increase its oil production.
Lindsay (NYSE:) Patrick, head of ESG at RBC Capital Markets, said the use of an intensity target rather than an absolute target is due to continued growth in end-use demand in certain sectors such as power.
Due to lack of data accuracy, methodological differences and little control over final demand, many companies’ emissions reduction targets ignore Scope 3 emissions, she said.
With the increased regulatory focus, Patrick said, “we will all become more fluent in the language of greenhouse gas emissions,” which will lead to better alignment of what ESG-focused investors want and what companies offer.
Other major Canadian banks either declined to comment or did not respond to requests for comment.
If an oil company only committed to reducing the emissions intensity of its operations, which would preclude Scope 3 emissions, “we wouldn’t consider it a reliable sustainability-related tool,” said Kevin Ranney, senior vice president of enterprise solutions at Sustainalytics.
“A credible SLB needs to include at least one (requirement) that points to a shift in the company’s business model,” he said.
Intensity-based targets are an “effective and recognized” way to reduce emissions, allowing the company to focus first on improving asset efficiency, an Enbridge spokesman said, adding that its 2050 target focuses on absolute emissions.
There is currently no guidance on what constitutes Scope 3 emissions in the midstream sector, he said.
Tamarack did not respond to a request for comment.
To be sure, most bank investors are not opposed to providing sustainable financing to traditional energy companies. IPC’s shareholder proposal to end the practice at Royal Bank’s April shareholders meeting received just 9 percent of the vote in favour.
Jamie Bonham, director of corporate engagement at NEI Investments, said: “Canada’s oil and gas industry needs a significant infusion of capital to reduce emissions.”
Still, “I don’t think it should all be…in one (sustainable financing) bucket,” he said. “The current blurring of lines … is the narrative that led to the green purge.”
($1 = CAD 1.3019)