Nichola Saminather

TORONTO (Reuters – It’s hard to be green for banks in Canada, the largest oil producer on the planet.

In the past two years, Canadian banks have increased the amount of sustainability-linked financing (SLF) they extend to oil and gas clients. SLF is financing that changes in cost when certain requirements for environmental, governance and governance (ESG), are met by the company. However, the funds do not have to be used to support climate-friendly activities.

It has been criticized as “greenwashing,” and some investors and environmental groups have claimed that banks use SLF to pretend they are reducing their carbon footprint, rather than actually taking meaningful steps.

The use of finance instruments that don’t require reductions in carbon emissions could continue to grow, which would delay Canada’s transition from a high-carbon economy. This will lead to increased risk and higher capital requirements.

Financial regulator and the central bank have both warned investors that failure to prepare banks for these events could result in “sudden, large losses” and increased risk.

“This is a dangerous road to follow,” said Angus Wong of SumOfUs’ campaign strategist. SumOfUs represents thousands Canadian bank investors. These are loans and bonds. Adding one word, sustainability, to the sustainable financing numbers is a form of greenwashing.

The issue is especially pertinent in Canada, where SLF accounts for a bigger proportion of all sustainable financing than globally, as it offers a green option for the country’s extractive industries that typically cannot use more specific tools like so-called green bonds.

The majority of sustainable finance is made up of two types of products, SLF and green bonds. Both must be used to fund environmentally-friendly activities.

The flexibility offered by the latter means that financing terms may allow for increased emissions. Many critics claim this allows heavy emitters to present a false facade of sustainability.

Many banks, including Royal Bank of Canada and Toronto-Dominion Bank, have stated that a smooth transition to a net zero economy can take many years. They also stressed that oil and gas industries need ongoing support in order to keep up with demand for energy alternative such as solar and wind.

Net zero emissions is the aim of reducing greenhouse gas emissions by human activities, or offset them using processes or technologies that capture them.

With increased focus on the transition to net-zero emissions, the use globally of sustainability-linked instruments (SLIs) more than quadrupled in 2021, according to Refinitiv data. Their use in Canada, a relatively new market for SLIs, grew almost 200% between 2020 and now.

Sustainability-linked bonds (SLBs) have made up 11.2% of all sustainable bonds in Canada since the start of 2021, versus 9.8% globally, according to Refinitiv data. One third of these were issued by the energy sector.

Canadian companies’ nearly $31 billion of sustainability-linked loans (SLLs) accounted for 90% of all sustainable loans in the same period, compared with 85% globally. Canada’s traditional energy companies accounted for 10%, compared to none in 2020.

Canadian banks are not being charged for financing high-emitting emitters at the moment, but authorities say that climate disclosures will become mandatory starting in 2024. They also hint at possible capital requirements.

“GOLDRUSH MENTALITY”

Canada is the fourth-largest oil producer in the world and the sixth-largest, accounting for about 5% gross domestic product.

Canadian banks are among the largest Banking on Climate Chaosfinanciers worldwide. They have to balance their commitments of net zero and continuing support for oil and gas clients.

Because of the C$9.1billion government-funded emissions reduction plan, and growing interest in green financing, banks have been encouraged to increase sustainable financing, according Matt Price, Director of Corporate Engagement for Investors for Paris Compliance.

Recently, Enbridge (NYSE) Inc and Tamarack Valley Energy Ltd issued SLBs. This has put the issue in the limelight.

Two of the most controversial features of their SLBs were the focus on emissions per unit production (called intensity targets) and the lack of targets to reduce indirect emissions from the value chain of the company, known as Scope 3 emissions.

Tamarack, along with a prior SLL facility funded acquisitions to increase oil production.

Lindsay Patrick, RBC Capital Markets’ head of ESG, stated that the use of intensity targets rather than absolute goals is because there has been continued growth of end-demand within certain sectors, such as power.

She said that Scope 3 emissions are often omitted in many companies’ efforts to reduce their carbon footprints due to a lack data accuracy and methodology variations, as well as a little control over the end market.

Patrick explained that as regulatory focus increases, we will “all just become more fluent with the language of greenhouse gases emissions,” which will help to align what ESG focused investors desire and what companies have.

Canada’s largest banks did not reply to our requests for comment.

If an oil company commits only to reducing the emissions intensity of its operations, which would exclude Scope 3 emissions, “we would not consider that to be a credible sustainability-linked instrument,” said Kevin Ranney, senior vice president of corporate solutions at Sustainalytics.

He stated that a credible SLB must include at least one requirement to facilitate the company’s transition.

Enbridge spokeswoman said that intensity-based targets were a valid and accepted way of reducing emissions. She added that the 2050 goal is centered on absolute emissions.

He said that there is not currently any guidance regarding Scope 3 emissions in the midstream industry.

Tamarack didn’t respond to our request for comment.

To be certain, the majority of bank investors support sustainable financing traditional energy companies. At Royal Bank’s April shareholders meeting, IPC presented a shareholder proposal calling for the end of this practice. Only 9% voted in favour.

Jamie Bonham (director of corporate engagement at NEI Investments) stated that Canada’s oil and gas sector needs substantial capital injections to lower its carbon emissions.

However, he stated that “It shouldn’t all be… in the same bucket (sustainable financing).” “The current blurring is the reason for greenwashing claims.”

($1 = 1.3019 Canadian dollars)