Will today’s climate accounting announcements lead to tomorrow’s ambitious action plans?

By April 8, 2021News

By Mike Toulch, Senior Engagement and Policy Analyst

In a November blog post, we asked whether TD Bank’s announcement of its new climate plan would “raise the bar” for Canadian banks.

Four months later, all of Canada’s five largest banks have now committed to measuring and disclosing their “financed emissions” in accordance with the Partnership for Climate Accounting Financials (PCAF). TD, CIBC, and Royal Bank have all joined the Rocky Mountain Institute’s Centre for Climate Aligned Finance.

Climate action has been a central focus of each bank’s annual shareholder meeting this month.

These developments are significant. The question now is, will they lead to ambitious and achievable action plans?

On its own, joining these initiatives does not change the fact that the Canadian banking sector has lagged significantly behind many international peers on climate action. Investors and stakeholders have long highlighted the Canadian banking sector’s outsized relationship with the fossil fuel industry.

The banking and financial services sectors are pivotal to accelerating the low-carbon transition, and recent commitments are modest but significant steps.

Why the optimism? Initiatives such as PCAF are crucial to establishing a common measurement framework for financial institutions and policymakers, based on common assumptions and metrics.  That common understanding is crucial to define, measure and achieve “climate-aligned” finance. In other words: none of us would be able to accurately track banks’ progress without a framework like this.

Initiatives such as the Taskforce on Climate-related Financial Disclosures (TCFD) and external stakeholder pressure have brought climate risk to the forefront for the financial sector.

But, expectations have already shifted – and risen: many investors, policymakers, and analysts are focusing on the concept of climate alignment. This shift has coincided with a recognition that climate risks are systemic. Climate risks have the potential to destabilize capital markets and cause serious negative consequences for both financial institutions and the broader economy.

Banks will need to set ambitious short-, medium-, and long-term targets to dramatically reduce emissions from their lending activities. They will need procedures to calculate and standardize emissions measurement across a wide range of financial activities, products and sectors of the economy. A unified and standardized approach – in effect, a common language or sectoral road map – can provide both enhanced transparency for external stakeholders and greater efficiency and quality for the sector.

The Poseidon Principles are a framework for sustainable finance in the shipping sector. These might serve as an example of how sectoral roadmaps are valuable. The Principles are a framework for integrating climate considerations into lending decisions in line with the International Maritime Organization’s target of a 50% reduction in total annual greenhouse gas emissions by 2050 in the shipping industry (compared to a 2008 baseline). This is a clear example of how standards can help make climate-aligned reporting commonplace while supporting broader policy objectives.

The path ahead

Commitments to initiatives such as PCAF and the Rocky Mountain Institute’s Centre for Climate Aligned Finance are important milestones. But what banks and stakeholders actually do with the information that flows from these initiatives will be a far more critical catalyst for change. Meaningful action means setting bold, science-based targets. It means creating activity exclusions and aligning capital expenditures with carbon reduction targets. And that’s just the beginning of what’s needed to ensure that today’s accounting and disclosure commitments catalyze tomorrow’s ambitious emissions reduction successes.

At SHARE, our engagement with Canadian banks will focus on those crucial next steps, while raising the bar for decisive action. We’re not alone – responsible investors, civil society groups, climate activists, academia, and policymakers are aligning in Canada and internationally, to accelerate the transition.