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Opinion: Canadian financial institutions are fuelling the climate change crisis

Canadian financial institutions — banks, pension funds and private equity firms — fund the fossil fuel industry and are therefore helping fuel the climate crisis. Why won’t Ottawa hold them to account?
The federal government has so far been unable to effectively regulate financial institutions’ investments in the fossil fuels industry in accordance with its climate commitments.

Once again, Canada will almost certainly fail to meet its target to reduce greenhouse gas emissions by 40 to 45 per cent by 2030 in accordance with the most recent Intergovernmental Panel on Climate Change (IPCC) recommendations.

This is despite the government’s optimistic spin on the release of its latest emissions inventory report. Jerry DeMarco, the environment commissioner in the Auditor General’s office, has criticized the government’s record as a litany of broken promises:

“We have been repeatedly ringing the alarm bells. Now, these bells are almost deafening.”

Canada is the only G7 nation with 2022 carbon emissions levels that are above its 1990 levels. It has among the highest greenhouse gas emissions per capita in the world, and its fossil fuel industry is also among the world’s largest.

And its financial institutions — banks, pension funds and private equity firms — fund the industry and are therefore helping fuel the climate crisis.

As a result, financial institutions’ assets are at risk. So too are the economy, people’s lives and ultimately the survival of the planet due to catastrophic fires, floods and droughts.

The federal government has so far been unable to effectively regulate financial institutions’ investments in the fossil fuels industry in accordance with its climate commitments.

Regulatory agency

DeMarco recently examined reports by the federal bank regulator, the Office of the Superintendent of Financial Institutions (OSFI) that oversees climate risks and sets risk guidance priorities for financial institutions.

The environment commissioner noted that while OSFI has belatedly designated climate change as a top priority, full implementation is years away. OSFI’s plan to improve banks’ resilience to climate change also fails to specifically encourage their transition to net-zero carbon emissions.

Sen. Rosa Galvez recently argued that OSFI should ensure financial institutions have capital adequacy requirements to protect against the eventuality of climate-related stranded assets.

Financial institutions need to adopt the standard of putting aside one dollar for every dollar of their fossil fuels assets so that if they can’t sell them due to shrinking demand, they’ll have enough money to compensate depositors, workers and shareholders and avoid declaring bankruptcy.

In April 2023, the Bank of Canada released its first annual climate risk disclosure report to provide guidance on the climate change risks facing the Canadian economy and financial system.

Like OSFI, the Bank of Canada report is a start but has a long way to go to make up for lost ground. And ironically, any positive effects could be offset by the bank’s high interest rate monetary policy. Critics of these central bank policies credibly argue that they hinder the transition away from fossil fuels.

Economic experts argue that high interest rates discourage investments in renewables, keep economies locked into fossil-fuel dependence and slow down decarbonization.

Current reality

The latest fossil fuels report by the non-governmental organization Banking on Climate Chaos found that the world’s 60 largest banks invested more than US$5.5 trillion into the fossil fuel industry since the 2015 Paris agreement was signed.

The Big Five Canadian banks all made the list of Top 20 funders globally after investing more than $1 trillion in fossil fuel companies since 2016.

The Royal Bank of Canada ranked as the world’s largest financier of fossil fuels in 2022, providing fossil fuel companies with US$42.1 billion with a total investment of US$253 billion since 2016 — the fourth highest on the globe.

An article in the journal Nature Climate Change estimated that global stranded investor assets — namely, the present value of future lost profits in exploration, production and related services in the fossil fuel sector — exceeds US$1 trillion. The Canadian loss risk is more than US$100 billion, disproportionately in employee savings locked up in Canadian pension funds.

Canada’s largest banks have committed to voluntarily align their investments and lending with the United Nations target of net zero emissions by 2050 as part of the Net-Zero Banking Alliance. They have also committed to cut emissions financing in half by 2030.

However, these banks haven’t made any commitments to jettison their fossil fuel clients. That makes their net-zero pledges highly suspect, bordering on greenwashing.

Conflicts of interest

None of their publicly available plans measure up, according to Matt Price, co-founder of Investors for Paris Compliance, a shareholder advocacy organization.

Although the International Energy Agency has stated that there’s no need for additional fossil fuel infrastructure, Canadian banks continue to fund expansion activities. Multiple proposals put forward by shareholder activists at 2023 bank meetings to give them a say on climate plans have been rejected.

A study by the organization Shift: Action for Pension Wealth and Planet Health has concluded that Canadian pension funds have generally failed to align their investment strategies with the Paris Agreement goals and neglected to develop a credible pathway to transition out of fossil fuels.

Pension funds are also rife with conflicts of interest. The report found that seven of Canada’s 10 largest public pension funds have at least one director who also sits on the board of a fossil fuel company.

Overall, 80 different directors, trustees, executives and senior staff currently hold or previously held 124 different roles with 76 different fossil fuel companies.

Private equity firms, which manage funds beneath the radar for wealthy individuals and institutional investors, have invested an estimated US$1 trillion in the energy sector since 2010 — the vast majority in fossil fuels.

Where to go from here

Introduced more than a year ago, Galvez’s Climate Aligned Finance Act — which seeks to hold financial institutions accountable for investments that increase climate risk — has passed second reading but is still waiting to go to committee and hear from witnesses.

Calling it the gold standard in legislation, 58 academics, myself included, have written a letter urging senators to move the bill forward by referring it to committee for testimony.

The close ties between the federal government and corporations largely explain Ottawa’s failure to effectively regulate banks and pension fund investments.

The corporate government power relationship — known as regulatory capture — largely explains the government’s failure to effectively regulate banks and pension fund investments.

Regulations benefit the industry at the expense of the public interest. In this case, the fossil fuel industry and financial institution enablers are able to shape the regulations governing their operations, block or delay new regulations and remove or dilute existing regulations deemed a threat to their interests.

Countervailing measures must be urgently implemented to combat regulatory capture and ensure the public interest takes precedence over profit.

The Conversation

Bruce Campbell is affiliated with the Canadian Centre for Policy Alternatives, Group of 78, Rideau Institute for International Affairs, Polaris institute