Why are directors at Canada’s biggest banks ignoring climate risk?

This week, representatives from most countries in the world will meet to sign the Paris Agreement. By signing the agreement, national governments commit to reduce greenhouse emissions and transition their economies towards a carbon neutral future. In order to meet the ambitious target of keeping global warming to below 1.5 degrees, carbon dioxide emissions will have to drop to net zero between 2045 and 2050. Total greenhouse gas emissions need to decline to net zero between 2060 and 2080. In recognition of the need to act on these targets, G20 member states – representing the world’s largest economies — have already agreed to phase out the use of fossil fuels.

These policy developments have combined with market forces — falling costs of renewable energy, technological breakthroughs in energy storage, and an impossible business case for high-cost oil producers — to convince investors to embrace a low carbon future. Some of the world’s largest investors are now betting on the low carbon economy taking shape in line with the Paris Agreement targets.

As investors and national economic policy makers respond to the ambitious emissions reductions targets embedded in the Paris Agreement, Canada’s banks should be responding. Their international peers are already acting to reorient investment and debt portfolios to prosper as nineteenth century hydrocarbon based energy systems are wound down.

Last week, Norges Bank, the asset manager for Norway's CAD$1.1 trillion sovereign wealth fund, the world's biggest, announced it had sold shares in 52 coal-dependent companies from its portfolio. This included a number of coal heavy Canadian utility companies. The bank will announce further exits from high-risk fossil fuel producers later this spring.

According to Jim Yong Kim, president of the World Bank Group, “following the Paris climate agreement, we must now take bold action to protect our planet for future generations.” Commercial banks are decarbonising their investment and loan portfolios to protect their bottom lines, as well as the planet, from climate risk. Over the past year, the Royal Bank of Scotland reduced their global investment in oil and gas companies by 70 per cent, scaling back exposure to the sector from CAD$40bn to around $12bn. In France, Ircantec, a public pension fund, has just launched a four-year roadmap setting out its approach to the low-carbon transition that will shift its portfolio away from fossil fuels. As the world changes around them, Canadian banks appear firmly wedded to the fossil fuel status quo.

Possible conflicts of interest may keep Canadian banks blind to climate policy risk

Bank boards of directors are packed with current and former fossil fuel company directors who have the knowledge required to help guide the banks through the low carbon transition. Yet potential conflicts of interest at the board level may be preventing Canada’s big banks from acknowledging the energy transition that is underway and acting to decarbonise their investment and debt portfolios. Loans to heavily indebted oil sands companies are weighing on all five of the banks' balance sheets, but the banks refuse to call time on a declining industry.

Instead, bank directors appear to be ignoring the risk that stranded fossil fuel assets and sustained low oil prices pose to their loan and underwriting businesses. While it is normal to see shared board roles between a country’s largest private companies – our banks and energy companies – the banks’ unwillingness to question fossil fuel company business models raises questions over their assessment of and action on climate risk.

At Scotiabank, board member Michael Grandin is Chairman of the Board at Cenovus Energy.

TD Bank board member Claude Mongeau is also President and Chief Executive Officer at Canadian National Railway (CNR), a major shipper of oil and coal; board member Brian Ferguson is a President at Cenovus Energy, and sits on the Canadian Association of Petroleum Producers’ (CAPP) Oil Sands CEO Council.

BMO board member Lorraine Mitchelmore was the Executive Vice President Heavy Oil at Shell Canada until December 2015 and is an outspoken pipeline advocate. Sophie Brochu is also the President and Chief Executive Officer of Gaz Metro, one of the largest natural gas distributors in Canada. At this year’s Annual General Meeting, BMO’s current CEO Bill Downe remained bullish on an oil recovery, but failed to address the business implications of climate change policy action and the G20 decision to phase out fossil fuels.

RBC board member Victor Young sits on the board of Imperial Oil, which is owned by Exxon Mobil. Exxon is currently being investigated by a number of US State Attorney Generals for misreporting on climate business risks to shareholders. Board member Richard George is on the board of Osum Oil Sands, Anadarko Petroleum, and the heavily indebted Pennwest Petroleum.

CIBC Board member Patrick Daniel also sits on the boards of Enbridge, Capital Power and Cenovus. Board member Jane Peverett has additional board roles at Aegis, Hydro One, and the Postmedia Network. Board member Gordon Giffin sits on the board of Canadian Natural Resources, CNR and Transalta, one of Alberta’s largest utilities.

The extent of shared board roles between the banks and the fossil fuel industry should put Canada’s big banks at the forefront of business planning for the low carbon energy transition and associated risk assessment. Instead, none of the banks have publicly acknowledged the business risks and opportunities linked to climate change policy action.

Rather than rehash fossil fuel company press releases on a bright future for oil, gas, and coal, bank board members should provide honest appraisals of the business prospects facing carbon-exposed companies. As 195 countries implement the Paris Agreement and renewable energy use grows, the risks to high-carbon companies and the banks that finance are real. Their international peers are already acting to assess and manage these risks.

Now is the time for Canadian banks to catch up.