Sustainable finance and Canadian banks

Jonathan Laski
Director, Sustainable Finance, PwC Canada

As Canadian banks look for ways to achieve their climate change commitments, they’re eyeing substantial increases in sustainable finance loans to fund activities aligned with the transition to net-zero greenhouse gas emissions. But even as they allocate funding to companies and technologies needed in a net-zero future, it’s becoming clear that the journey towards achieving ambitious climate change goals is a challenging one with many complex issues at play.

In this article, we explore how Canadian banks can overcome the complexities and turn their sustainable finance efforts into actions that build trust and, ultimately, position the organization to harness the growth opportunities and mitigate the risks of the net-zero transition.

Sustainable finance and the non-linear path to net zero

Sustainable finance represents a key tool for Canadian banks to make progress towards their own net-zero targets and contribute to achieving national and international climate change goals. While meeting their targets requires them to significantly increase loans allocated to businesses and innovations needed to reach net-zero emissions, that’s not the full story. Banks must also address two other important areas: first, they need to consider how their sustainable finance programs compare to the amount of financing provided to businesses and activities that can’t align with a net-zero future; and second, they have to engage with emissions-intensive companies that, provided they have the right leadership, incentives, funding and other supports, can decarbonize.

Canadian banks are coming under rising pressure to address all three of these areas at once, and this is where claims of greenwashing arise. Some stakeholders, for example, suggest banks focus too much on their efforts to fund the greenest activities, like renewable energy and green buildings, at the expense of transparency about ongoing lending to organizations not able to align with a net-zero future or that have yet to decarbonize. The result is reduced trust amid heightened scrutiny of banks’ sustainability disclosures.

These challenges reflect the fact that achieving net-zero financed emissions is about more than increasing loans to and investment in the most sustainable companies and projects. For banks, this means fundamentally rethinking how they do business as part of the sustainability-centred transformation needed to help minimize the rise of global temperatures.

Making your bank’s sustainable finance actions count

Given the complexities involved and the ongoing evolution of disclosure requirements, what can Canadian banks do? Below, we highlight three actions that can help Canadian banks make the most of the sustainable finance opportunity and improve their disclosures:

While Canada’s banks have teams of talented sustainability professionals, they can’t attend every client meeting to make sure those issuing loan decisions consider and incorporate issues like decarbonization into lending terms. Those frontline account managers have differing levels of understanding of sustainability issues and the various levers, such as opportunities to offer better loan terms to recipients taking concrete actions on decarbonization, at hand. They may also fear clients will go to another bank or a private lender for financing if they push hard for sustainability-related information and terms in the loan agreement.

Addressing this could involve changes to how a bank trains and incentivizes frontline account teams. Banks should start by encouraging staff to have conversations about sustainable finance with their customers, backed by tracking of metrics and, eventually, performance incentives, to encourage them to prioritize sustainability matters in lending discussions. This is an area where technology can also help: we envision a future where a bank sets up its customer relationship management system to remind frontline staff to raise climate-related issues with their clients early on and prompt them again if and when the transaction moves ahead to a lending agreement.

While Canada’s largest banks have made significant progress in measuring their scope 1 (direct) and 2 (purchased energy) emissions, improving the precision of their scope 3 reporting (especially their financed emissions) has been much more difficult. According to our recent analysis of environmental, social and governance (ESG) reporting practices in Canada, 45% of Canadian financial institutions analyzed disclose scope 1 and 2 and some scope 3 emissions, while 39% obtain assurance over their emissions data.

Accurate data is critical since this is the basis for setting targets for reductions and tracking progress across industries and companies with substantial emissions. Canada’s banks have made strides in measuring the emissions of some of the industries they finance, but they can go further in increasing stakeholder trust in their sustainability performance by having their financed emissions data assured. They can also look at technology-enabled solutions that produce more precise measurements of emissions across the companies and industries they serve.

Closely related to the data quality issue is the need to improve transparency of a bank’s sustainable finance performance. Stakeholders want to see the full picture of a bank’s track record, including when it comes to its financed emissions, rather than just getting information on the greenest activities and businesses it’s supporting.

One approach that has been gaining traction elsewhere in the world is the use of a green asset ratio. It shows how a bank’s level of financing for sustainable activities and companies compares to the amount of loans and investments in more emissions-intensive businesses. While this ratio has been equalizing closer to 1:1 in recent years, analysis suggests achieving the goals of the Paris Agreement will require it to reach 4:1 before 2030.¹

We can expect the results of pilot projects related to green asset ratios used elsewhere soon, making this an important issue for Canadian banks and regulators to watch as they look for ways to increase the transparency of, and build trust in, their sustainable finance programs.

Accelerate your bank’s strategy-led, sustainability-centred transformation

While regulations such as the Office of the Superintendent of Financial Institutions’ B-15 guideline on climate risk managementOpens in a new window will spur substantial action by Canadian financial institutions on climate change, simply fulfilling regulatory requirements won’t result in a bank meeting its net-zero commitments. To actually become a net-zero financial institution by 2050, banks will need to quickly move from first iterations of transition plans required by B-15 to more substantive sector-by-sector approaches to achieve deep reductions in financed emissions. Ultimately, they need to develop broader transformation plans that outline the cross-functional overhaul of how they do business and measure success beyond the stock price.

As studies, such as our latest CEO Survey, have shown, business leaders have already identified climate change as one of the key global megatrends driving business reinvention today. For this reason, the response by Canadian banks needs to be a comprehensive one starting with clear messages from top leadership around the vision and strategy for climate-driven transformation and the priority their employees should put on it.

The scale of the changes involved also requires a deep commitment by, at least, the following six teams and leaders within a bank:

sustainability leaders, whose role includes coordinating an enterprise-wide strategy for sustainable finance;
finance leaders, who play a key role in producing quality sustainability-related data;
the legal function, whose role includes evaluating legal risks related to sustainable finance;
the risk function, which can help update the bank’s risk appetite to incorporate climate criteria;
technology leaders, who can help integrate new data and technology and improve analytics capabilities; and
human resources, which can support upskilling, change management and alignment of incentives related to sustainable finance.

Equipping your bank for the future

It’s all about embracing a strategy-led and sustainability-focused transformation of how a bank does business. We believe sustainable finance is an important tool for Canadian banks to accelerate this transformation and help their teams understand the complexity of climate-related disclosures. Now is the time to sharpen the approach to sustainable finance and equip your bank for the future.