Responsible Banking – Part 2: Aligning finance with the goals of the Paris Climate Agreement

By Laura Gosset, Senior Shareholder Engagement and Policy Analyst

“Climate change continues to pose risks to both the economy and the financial system.” – Bank of Canada, Financial System Review 2019

There is a growing consensus that banks have a crucial role to play in shaping Canada’s climate transition and ensuring a sustainable and prosperous future. Climate change is threatening financial stability and banks are facing exposure to systemic climate-related risks that cannot be ignored. Canada’s climate is warming at twice the rate of the global average, and Canada’s commitment to reduce greenhouse gases 30 per cent by 2030 and 80 per cent by 2050 will require a considerable amount of private sector investment to ensure these outcomes.

“If Canada is to meet its long-term objectives, sustainable finance must become, simply, finance. In other words, climate change opportunity and risk management need to become business-as-usual in financial services, and embedded in everyday business decisions, products and services.” – Government of Canada, Final Report of the Expert Panel on Sustainable Finance: Mobilizing Finance for Sustainable Growth

Urgently, banks must fully integrate climate change considerations into their business strategies, lending policies and practices to enable Canada to reduce its greenhouse gases in a way that limits the harmful impacts of climate change. Over the past several years, SHARE has been engaging with Canadian banks, asking them to do just this – and we are seeing some positive momentum begin to take shape.

Since declaring their support for the disclosure framework outlined by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) in 2017 and 2018, the six major Canadian banks have begun to implement the TCFD’s recommendations on climate governance, strategy, risk management, and metrics and targets. Climate change has featured more prominently in the public disclosures of Canadian banks, signifying an increased focus on addressing climate-related risks and opportunities. Canadian banks recognize the importance of communicating to investors on their climate governance and strategy and this is reflected in enhanced disclosure. For example, Scotiabank included a description of the board’s oversight and management’s role in evaluating climate-related risks and opportunities in its 2018 Annual Report. Five Canadian banks have disclosed that they are in the early stages of analyzing and conducting climate scenario analysis in line with the TCFD recommendations.

Perhaps the most notable development has been the three Canadian banks that have established and disclosed targets to increase exposure to low-carbon and climate-resilient sectors. TD Bank Group announced a financing target of $100 billion in low-carbon lending, financing, asset management, and other initiatives by 2030, followed by RBC’s commitment to provide $100 billion in sustainable finance by 2025 and CIBC’s recent commitment to $150 billion in environmental and sustainable finance by 2027.

We are encouraged by these commitments and the assurance they provide to investors and other stakeholders about the direction of capital flows, but it is clear that Canadian banks are still in the early stages of integrating climate considerations across their businesses.  As Canada’s government-appointed Expert Panel on Sustainable Finance noted in late 2018, “sustainable finance is growing in Canada, but at a pace and scale outstripped by many of our peers.”. What we need now is an accelerated response from banks to limit the mounting costs of inaction on climate change.

Last month, the global banking community took a stride forward with the launch of new UNEP-FI Principles for Responsible Banking. These principles include a significant commitment for signatories to align their business strategies with the Paris Climate Agreement. So far, a third of all global banks have signed on to support these principles; noticeably absent are the major Canadian banks. Only one, National Bank, has signed on.

Given the need for a swift transition towards a low-carbon economy, we hope to see other Canadian banks clarify their commitments to align their business strategies, policies and practices with the goals set out in the Paris Agreement. SHARE will continue to engage Canadian banks and track their progress down this path.

Government of Canada. (2018). Interim Report of the Expert Panel on Sustainable Finance. Gatineau, QC: Government of Canada, p. 6.

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