The role of banks in addressing climate change

There has been a flurry in the media this spring about climate risks for banks and their role in reaching net zero by 2050 in order to align with the Paris Agreement[i]. So what does it mean, to commit to reaching net zero?

Firstly, it should be understood that greenhouse gas (GHG) emissions are categorised into three groups or “Scopes”:

• Scope 1: direct emissions from sources owned or controlled by the company.
• Scope 2: indirect emissions from generation of purchased electricity, steam, heating and cooling consumed by the company.
• Scope 3: all other indirect emissions that occur outside a company’s own operations.

In the case of banks, Scope 3 emissions are primarily those arising from projects for which they provide financing. They are also referred to as “financed emissions” and comprise a large proportion of a bank’s carbon footprint.  To reach net zero, all three Scopes must be reduced to zero, the hardest to achieve being Scope 3. Critical steps along the way for reducing all emissions are:

• Measurement.
• Disclosure of quantitative figures.
• Implementation of concrete reduction steps.

A standard framework for measuring and disclosing financed emissions has been developed by the Partnership for Carbon Accounting Financials (PCAF). Other initiatives are also well under way, supporting financial institutions in the push towards a decarbonized future, e.g. the Center for Climate Aligned Finance.

Canada is something of a laggard in climate action, as a result of its oil-based economy, and Canadian banks are among the world’s biggest financers of fossil fuels. However, there have been a number of encouraging signs recently:

• Some of the five big banks (RBC, TD, BMO) have announced commitments to reaching net zero by 2050, as well as signing onto PCAF and other initiatives.
• Other banks (CIBC, Scotiabank), while not making a formal commitment on net zero, are mobilizing funds towards this end and also participating in PCAF and other initiatives.
• Desjardins has a target of reaching net zero by 2040, while the Caisse d’économie solidaire Desjardins was the first bank in North America to measure and disclose its carbon footprint using the PCAF methodology.
• Brookfield Asset Management plans to raise a $7.5 billion fund devoted to shifting to net zero. 

Where is EIG in all this?

EIG holds two banks in its portfolio, Scotiabank and Desjardins, the latter via the Caisse d’économie solidaire Desjardins. Following a member survey that identified climate and environmental issues as a top priority, we have been actively pursuing shareholder engagement with these two banks.

Scotiabank

We started by sending a letter in January 2021 noting our satisfaction with recent environmental commitments (refusing to fund oil and gas exploration in the Arctic and mobilisation of capital to mitigate the impacts of climate change) and asking Scotiabank to:

• Commit to measuring and annually disclosing its full carbon footprint using the Partnership for Carbon Accounting Financials (PCAF) methodology; and
• Commit to reaching net zero in financed emissions by 2050, in alignment with the Paris Agreement.

Scotiabank responded quickly, inviting EIG to discuss by phone. EIG reiterated these requests in a subsequent conversation with two senior executives at the bank, who informed us that more commitments on climate would be made public in its forthcoming Environment, Social and Governance Report but that they were unwilling to be more specific at that point. They noted that the bank wanted to make a definite commitment only when it had a clear plan to follow, and mentioned that transitions required reliable substitutes for the 80% of Canadians who currently rely on natural gas to heat their homes.

In March Scotiabank released its 2020 Environment Social and Governance report in which they reported on scope 1, 2 and 3 emissions, showing that these are decreasing (great!). They committed to a target of reducing carbon emissions from 2016 levels by 25% by 2025 (a weak target in our view). 

Around the same time, the Proxy Circular with shareholder proposals was made available. To our surprise, a proposal by SumOfUs relating to greenhouse gas (GHG) emissions had been withdrawn. We voted on the other three shareholder proposals and followed up with a letter to the same two senior executives as before, in which we:

• explained the reasons for our votes;
• asked to be informed of details of the withdrawn proposal, reiterating our demand for annual disclosure of all carbon emissions, including Scope 3, and encouraging a stronger interim target of 50% reduction in emissions by 2030.

The bank provided a written response in which they:

• welcomed our feedback and expressed openness to discussing further;
• gave details of the commitments made to SumOfUs that resulted in the withdrawal of their proposal, including: plans for quantitative, time-based analysis of the GHG intensity of their complete loan and investment portfolio; research into pathways to net zero; reporting on progress of GHG emission reduction plans, targets and timelines.

Desjardins

Engaging with Desjardins is somewhat more complicated because of its nature as a coop and its organizational structure. Members belong to a specific Caisse (in EIG’s case, the Caisse d’économie solidaire Desjardins), while all Caisses come under the umbrella of Desjardins Group. Each Caisse has a certain independence in terms of its own planning and policies, whereas other general policies, for instance on climate change, are set by Desjardins Group. The critical thing is that investors and shareholders cannot engage directly with Desjardins Group, only with their own Caisse, which may or may not respond to requests to transmit concerns to the umbrella organization. EIG then, is restricted to direct interactions with the Caisse d’économie solidaire Desjardins (“the Caisse”).

In February 2021, EIG sent a letter which noted our pleasure with recent environmental commitments:

• From the Caisse: use of the PCAF methodology to measure and publish its emissions, moreover becoming the first North American bank to do so;  and commitment to invest $250,000 over three years to finance a sustainable transition.
• From Desjardins Group:  offering of a series of funds 100% free from oil and gas; and being the first North American financial institution to join the Powering Past Coal Alliance.

Our letter continued by asking whether the Caisse was prepared, itself, to commit to reaching net zero in its financed emissions by 2050 and, more importantly, whether they were prepared to pose this question to Desjardins Group at the latter’s AGM.

In a phone conversation with EIG, in May 2021, a Director of the Caisse, made the following points:

• The Caisse  did not ask the question at the Desjardins Group AGM about committing to net zero emissions by 2050. In fact, this was rendered unnecessary with the recent announcement from Desjardins Group of an ambitious plan to achieve net zero emissions by 2040. 
• Because of its focus on social economuy, the Caisse is in a rather unusual situation in that approximately 60% of its financed emissions come from housing. They are trying to work on the impact of this particular type of investment. 
• Relatively few of the Caisse's emissions come from transportation as they already have different initiatives (promotion of public transport and few travel-related emissions). 
• An action plan evaluating loans and greenhouse gases, with proposals for concrete solutions is expected later this year (possibly in September). 

Conclusion

We have been delighted to see the spate of activity around climate change for banks. It is making its way into AGMs, and executives are forced to take note. SumOfUs tabled a similar proposal with RBC, which received a significant 32% of shareholders voting for the proposal. Banks are hearing about climate concerns from a range of stakeholders and investors. We will continue to participate in this collective push towards climate responsibility from financial institutions and will continue to engage with both Desjardins and Scotiabank to encourage them to become climate leaders.

For full details about our shareholder engagement including the letters exchanged, see our website here for Scotiabank and here for Desjardins.

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[i] It’s time to acknowledge the role banks and insurers have in reaching climate goals. Globe and Mail, May 3, 2021. 

Banking regulator to shift focus to technology, climate risks. Globe and Mail, 27 April 2021

What does ‘net zero emissions’ even mean for Canadian business? Without set standards, it’s hard to tell. Globe and Mail, April 10, 2021.

Which Canadian companies have pledged net zero carbon emissions, and by when?. Globe and Mail, April 10, 2021.

Banking on Climate Chaos: Fossil Fuel Finance Report 2021. Rainforest Action Network et al.

Greenpeace petition: Tell Canadian banks to stop funding fossil fuel companies.