Canadian banks face ‘green laundering’ allegations as oil and gas firms secure sustainable funding

TORONTO, May 12 (Reuters) – For banks in Canada, one of the world’s biggest oil producers, it’s not easy being green.

Over the past two years, Canadian banks have increased the amount of sustainability-linked financing (SLF) they provide to their oil and gas clients. SLF refers to financing whose cost changes when certain environmental, social and governance (ESG) requirements are met at the corporate level, but does not require that the funds themselves be used for environmentally sound purposes. climate.

This has led to accusations of ‘greenwashing’, with some environmental groups and investors claiming that banks are using the SLF simply to pretend to reduce their carbon footprint rather than taking meaningful steps in that direction.

If the use of financing instruments that do not require a reduction in overall carbon emissions continues to grow, this could delay banks’ readiness for Canada’s transition to a low-carbon economy, leading to greater risk high and increased capital requirements to compensate for them.

The central bank and financial regulator have previously warned that a lack of preparation by banks could expose them and investors to “sudden and significant losses”. Read more

“It’s a dangerous path to take,” said Angus Wong, campaign strategist for the nonprofit environmental group SumOfUs, which represents thousands of Canadian bank investors. “It’s just loans and bonds and adding a word like ‘sustainability’ and adding that to the sustainable finance numbers…it really smacks of greenwashing.”

The issue is particularly relevant in Canada, where the SLF accounts for a greater proportion of all sustainable finance than globally, as it provides a green option for the country’s extractive industries that typically cannot use more specific ones like the so-called green bonds.

Sustainable finance is mainly composed of two types of products: the SLF and the tools for using the products like green bonds, which must be used for environmentally friendly activities.

But the former’s flexibility means financing terms can even allow for increased emissions, which many critics say allows big emitters to put a false veneer of sustainability on the status quo.

Many banks – including Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO) and Bank of Montreal (BMO.TO) – have said 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 energy alternatives such as wind and solar are developed. Read more

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.

With increased focus on the transition to net-zero emissions, global use of sustainability-related instruments (SLIs) more than quadrupled in 2021, according to data from Refinitiv. In the nascent Canadian market, their use has increased nearly 20 times since 2020.

Sustainability-linked bonds (SLBs) account for 11.2% of all sustainability bonds in Canada since the start of 2021, compared to 9.8% globally, according to Refinitiv data. Energy companies issued a third.

Nearly $31 billion in sustainability-related lending (SLL) from Canadian companies accounted for 90% of all sustainable lending over the same period, compared to 85% globally. Traditional energy companies accounted for 10% of those in Canada, up from none in 2020.

Although Canadian banks do not currently face fees for funding large issuers, authorities said climate disclosures would be required starting in 2024 and hinted at future capital needs.

“GOLD RUSH MENTALITY”

Canada is the world’s fourth largest oil producer and sixth largest producer of natural gas, with the industry accounting for about 5% of gross domestic product.

Canadian banks, among the largest financiers of fossil fuels in the world, are on the line between their net zero commitments and their promises to continue supporting oil and gas customers.

Banks have an incentive to increase sustainable finance numbers because the government’s C$9.1 billion emissions reduction plan and the growing popularity of green finance have created a “gold rush” mentality, a said Matt Price, director of corporate engagement for Investors for Paris Compliance (IPC). Read more

Recent SLB broadcasts by pipeline operator Enbridge Inc (ENB.TO) and oil producer Tamarack Valley Energy Ltd (TVE.TO) have shone a spotlight on the issue.

Their SLBs had two oft-criticized features: the focus on emission reductions per unit of output, called intensity targets, rather than total emissions, and the lack of reduction targets for the largest source. emissions, those indirect from the company’s value chain. , called Scope 3 emissions.

Tamarack’s issuance, along with a former SLL facility, funded acquisitions that would increase its oil production.

The use of intensity targets rather than absolute targets is due to continued growth in end-use demand in certain sectors like energy, said Lindsay Patrick, head of ESG at RBC Capital Markets.

Scope 3 emissions are omitted from many companies’ reduction targets due to a lack of data precision, differences in methodology and limited control of end-use demand, she said.

As regulatory attention grows, “we’ll all become much more comfortable with the language of greenhouse gas emissions,” leading to better alignment between what focused investors want on ESG and what companies are providing, said Patrick.

Other major Canadian banks declined to comment or did not respond to requests for comment.

If an oil company only commits to reducing the emissions intensity of its operations, which would exclude Scope 3 emissions, “we wouldn’t see that as a credible sustainability-related instrument,” Kevin said. Ranney, senior vice president of enterprise solutions at Sustainalytics. .

“A credible SLB must include at least one (requirement) that indicates the business model transition of the company,” he said.

Intensity-based targets are a “valid and accepted” way to reduce emissions, allowing the company to focus first on improving the efficiency of its assets, a spokesperson said. ‘Enbridge, adding that its 2050 target is focused on absolute emissions.

There are no current guidelines on what constitutes Scope 3 emissions for the midstream sector, he said.

Tamarack did not respond to a request for comment.

Certainly, most bank investors are not opposed to providing sustainable financing to traditional energy companies. A shareholder proposal presented by IPC at the Royal Bank shareholders’ meeting in April calling for an end to the practice received only 9% of votes in favor.

“Canada has an oil and gas industry that needs significant injections of capital to reduce emissions,” said Jamie Bonham, director of corporate engagement at NEI Investments.

Still, “I don’t think all of this should be… included in the same (sustainable funding) bucket,” he said. “The current blurring of the lines…is what leads to the greenwashing allegations.”

($1 = 1.3019 Canadian dollars)

Reporting by Nichola Saminather in Toronto Additional reporting by Nia Williams in Calgary and Simon Jessop in London Editing by Denny Thomas and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.