Bank chiefs walk tightrope on energy evolution

This article was written by Mark McQueen and was published in the Toronto Star on June 12, 2024.

As they prep for Thursday’s Parliament’s Environment and Sustainable Development Committee hearing, Canada’s big bank CEOs are walking a tightrope.

Having been summoned by a Liberal/NDP-dominated committee to allay concerns about the impact of Canada’s financial system on the environment, one’s instinct will be to regale MPs with five minutes of virtuous stories about how your institution is trying to save the turtles.

Banks certainly have a good story to tell, but given high energy prices, the CEOs may want to avoid painting themselves into the environmentalist’s corner. During an earlier hearing, some MPs tried to determine if our banks had reduced the availability of capital to oil and gas (O&G) companies, which — if true — could eventually lead to higher domestic O&G prices. Good question.

For more than a decade, bank executives have taken useful steps to shrink their institution’s carbon footprint: new energy efficient headquarters, “green energy” purchases from Bullfrog Power, even cutting electricity use through a reduction in the number of computer monitors at their offices. More recently, they’ve wisely put their sizable balance sheets to work in support of renewable projects, such as wind power and solar farms.

Twenty years ago, a Canadian wind farm developer might have just one door to knock on (Manulife) if it wanted to raise long term debt. Today, “sustainable finance” seems destined to generate more business for Canadian banks than the entire O&G industry.

In the current political and media climate, one can sympathize with bank boards for appointing a “chief sustainability officer” and generating 60-page reports about creating “a more sustainable world.” If Starbucks is going to exit plastic straws, it’s natural that the omnipresent banking sector has wanted to “step up.”

What gets less attention is that global banking regulators have spent the last decade jawboning the financial sector about “Breaking the tragedy on the horizon — climate change and financial stability,” as outlined in a 2015 speech by then-Bank of England governor Mark Carney. The same fellow who may well be a leadership candidate for the carbon-hating Liberal party.

As a regulator, Carney ominously warned financial institutions to plan for “the likely future cost of doing business” with “companies that produce and use fossil fuels.” Canada’s own bank regulator, Peter Routledge, the Superintendent of Financial Institutions, followed suit last month during his appearance before the same house environment committee when he outlined the agency’s expectations for “sound climate risk management.”

Banks face a multi-faceted dilemma: are they taking on undue risk if they don’t favour the environment over the fossil fuel industry?

Canada’s O&G sector accounted for $71.4 billion (greater than three per cent) of GDP at last count, employing hundreds of thousands. Provincial governments will rake in more than $20 billion of royalties in 2024 — cash that pays for countless schools and hospitals.

Given the sector’s economic impact, bank CEOs may be asked to explain the eye-popping $23-billion drop (48 per cent) in the Big 6’s drawn O&G loans between 2020-23. MPs may also wonder why drawn O&G loans have fallen, on average, from five per cent to a modest 1.9 per cent as a share of the banking sector’s total lending to business/governments over the same short period.

Bank executives will assure MPs that this is merely a function of the heady cycle, as a profitable O&G sector pays down its debts. That may be true, but lender JP Morgan’s O&G credit exposure dropped just 12 per cent during this time frame.

As Alberta Premier Danielle Smith continues to push for autonomy from the Canada Pension Plan, she’s also advocating for every oilpatch entrepreneur who worries that they won’t be able to rely on their traditional sources of debt capital a decade from now.

If I were testifying, I’d be wary of accentuating my institution’s role in the so-called “transition to a low carbon future” — OPEC isn’t going anywhere. Should he win the next election, Conservative Leader Pierre Poilievre has already made clear that he’ll be focused on the Canadian economy and not “glossy ESG brochures”; executives ignore that message at their peril tomorrow.

Banks face a multi-faceted dilemma: are they taking on undue risk if they don’t favour the environment over the fossil fuel industry?