Did TD just raise the bar for climate action at Canadian banks?

By Mike Toulch, Senior Engagement and Policy Analyst

In our collective effort to tackle the climate crisis, banks and lending institutions hold tremendous unrealized potential to help transform the Canadian economy.

Up to now, Canadian banks have generally lagged behind their international counterparts on climate-related commitments. However, on November 9, TD Bank took a significant step forward and distinguished itself among its Canadian peers with the release of its 2020 Climate Action Plan.

To start with, TD is the first of the big six Canadian banks to make a public commitment to net-zero emissions by 2050. Going one step further than a simple public commitment, the plan includes measures and targets toward the bank’s goal of net-zero emissions from its operations and financing activities by 2050.

Here’s some of what TD has committed to, and what it means for Canadian investors.

Net Zero 2050 & ‘Financed Emissions’

TD has joined a growing list of European banks and American banks (including Morgan Stanley and JP Morgan Chase) in a commitment to reach net-zero by 2050 and to track ‘financed emissions.’

The concept of “financed emissions” is that lenders should account for the emissions associated with their lending and underwriting activities, not just from their direct operations. For banks, tracking financed emissions is crucial to understanding the overall emissions associated with their core business activities and providing decision-useful information to develop climate-related strategies and track progress.

For investors, the commitment to the disclosure on financed emissions provides both clarity and context to how banks contribute to the low-carbon transition. Many banks have been quick to make sustainable finance commitments “in principle.” But it has been difficult for investors to assess specific strategic changes associated with those commitments without understanding whether the bank’s substantial lending portfolio contributes to the low-carbon transition.

Previously, that effort has been hampered by the lack of a unified methodology for measuring financed emissions. One standard that has garnered significant interest from banks and investors is the framework set out by the Partnership for Carbon-aligned Accounting Financials (PCAF). PCAF is a global initiative to develop transparent carbon accounting practices to assist financial institutions in aligning their portfolios with the Paris Climate Agreement.

TD Bank has now committed to joining the PCAF initiative, joining Vancity Credit Union, Desjardins, and AIMCo in adopting the standard.

PCAF has already received significant support from EU and global institutions and is emerging as a leading standard among North American banks. Adopting an industry-wide methodology to measure financed emissions ensures greater harmonization among North American banks and creates greater transparency and accountability for their stakeholders.

Arctic Circle Exploration and Production Exclusions

In addition to its climate targets, TD joined RBC and BMO in its commitment to exclude financing for drilling projects within the US Arctic National Wildlife Refuge (ANWR). The exclusion is in keeping with local stakeholders’ demands, including the Gwich’in Nation, which has fought to preserve the ANWR from oil and gas development for the past 40 years. Protecting the ANWR is both a commitment to sustainability and wildlife preservation as well as to respecting Indigenous rights.

However, TD’s exclusion went a step further in committing to no new exploration or development financing within the arctic circle as a whole.

An exclusion policy focusing exclusively on the ANWR could have been a mere symbolic gesture in the wake of the recent US presidential election, as the incoming Biden administration is expected to stop any further exploration in the ANWR. TD’s decision to expand the scope of its policy to include fossil fuel development across the entire arctic circle places it in a unique position among its peers.

The larger exclusion is also a potential signal to explorers and producers that financing for new exploration may be further constrained as the climate crisis deepens. While Canadian banks have made recent commitments to exclude specific activities from their portfolios, those policies have been largely related to the mining and use of thermal coal. Canadian banks have been reluctant to exclude activities related to new oil and gas exploration and production, despite the fact that existing global proven and probable oil and gas reserves already exceed the amount that can be extracted and burned without dangerously exceeding a global temperature rise below 1.5 degrees.

What comes next?

When taken in total, TD’s announcements have provided a clear answer to the question of which of the ‘big six’ banks has gone furthest on their climate-related targets and ambitions.

These announcements mark an encouraging step forward for TD and the Canadian banking sector, which has shown increasing interest in climate solutions and sustainable finance in recent years. As individual financial institutions take steps to raise the bar on climate action, the sector as a whole will have to up its game on developing effective governance, new business strategies, comprehensive risk management, and better performance-tracking around climate change and each institution’s role in Canada’s low-carbon transition.

On behalf of its institutional investor network, SHARE has worked with colleagues in Canada and internationally to secure commitments from many of the world’s largest lending institutions to adopt the Principles for Responsible Banking, to conduct climate scenario analyses, to align their lending portfolios and practices with a 1.5-degree warming scenario, and to provide adequate disclosure in line with the Taskforce on Climate-related Financial Disclosure (TCFD).

Engaging banks to use their leverage to accelerate the low carbon transition is a long-standing element of SHARE’s work. As we continue our engagement with Canadian banks to take leadership in the climate transition, we will be pushing them to be ambitious – and competitive – in moving the Canadian economy to be more sustainable, inclusive and productive.

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