Export Development Canada has agreed to partly guarantee $1-billion of loans Bank of Montreal BMO-T plans to make to companies in carbon-intensive industries in order to help them lower their emissions, reducing the risks of the bank’s foray into funding an urgent but uncertain energy transition.
The three-year guarantee agreement will provide financing for medium-to-large-sized Canadian companies, rather than the largest corporate entities, which have easier access to capital. EDC, the federal export credit agency, will guarantee up to half of BMO’s term loans to a maximum of US$60-million per borrower for up to seven years.
The partnership is an early result of a federal effort to help reduce the risks of funding investments in early-stage technologies that could be crucial to cutting greenhouse-gas emissions, such as carbon capture or hydrogen fuel.
The pilot program’s financing is intended to help banks and companies meet their goals to reach net-zero emissions by 2050. In late March, Ottawa released an ambitious plan that would require the oil and gas sector to slash emissions by 42 per cent by the end of the decade, compared with 2019 levels.
The guarantee agreement with BMO was a result of continuing discussions between the bank and EDC, rather than a directive from the federal government, said Justine Hendricks, the export agency’s chief corporate sustainability officer. BMO is the first major bank to partner with EDC for a sustainable financing guarantee, but other lenders are expected to follow.
“We recognize that working in partnership with banks is key,” Ms. Hendricks said. With trillions of dollars likely needed to finance a transition to net zero, she characterized the billion-dollar program as “a start” and a chance to “get some capital out there to learn.”
If the program succeeds, EDC’s “interest and availability to scale, I would say, it’s definitely there,” she added.
BMO will provide the entirety of the loans, but EDC’s agreement to guarantee half of the amount allows the bank to extend its lending further than it otherwise would, while reducing the amount of capital on its balance sheet consumed by each loan. That should allow the bank to make larger loans, and in some cases accept riskier forms of collateral to secure them, said Jonathan Hackett, BMO’s head of sustainable finance and co-head of its energy transition group.
No loans have been made yet using the EDC guarantee. Mr. Hackett said the bank might finance, for example, an energy company’s efforts to install carbon capture and sequestration technology in its flue stacks.
“We know that that’s challenging today, to have a company deploy that capital that’s not against their primary operations,” Mr. Hackett said. “I think this is a really great example of where collaboration between government entities like EDC and the private sector can accelerate what’s happening.”
Banks face scrutiny from investors and environmental advocates over lending to carbon-intensive industries, and sometimes impose limits on their own exposure to industries or individual companies, such as oil and gas, mining, or power and utilities. The EDC-backed financing targets nine areas, including hydrogen, renewable infrastructure and grid modernization.
BMO has promised to deploy $300-billion of sustainability-related lending and underwriting to companies by 2025. Last fall, Canada’s major banks joined the UN-convened Net-Zero Banking Alliance, and in March BMO announced that it aims to reduce the intensity of emissions from oil and gas clients it finances by 33 per cent by 2030.
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James Bradshaw