Mark Carney, former Governor of the Bank of England, makes a keynote address to launch the private finance agenda for the 2020 United Nations Climate Change Conference (COP26) at Guildhall in London, England, on Feb. 27, 2020.POOL New/AFP/Getty Images
Canada’s big banks are growing uncomfortable about legal and governance risks stemming from their membership in a Mark Carney-led group of global financial institutions that has pledged to cut carbon emissions in line with the Paris Agreement, according to four banking sources familiar with the group’s internal dynamics.
The banks’ qualms about the Glasgow Financial Alliance for Net Zero, or GFANZ, are coming to light as some of their U.S. counterparts consider leaving the organization over fears they could face legal action stemming from antitrust concerns if they are required to divest from some high-emitting sectors in the imperative to decarbonize.
JP Morgan Chase, Morgan Stanley and Bank of America have signalled they could quit, according to reporting by the Financial Times and Bloomberg, which would deal a serious blow to the group’s credibility.
Senior officials at Canada’s six largest banks also recently expressed misgivings about legal risks tied to their GFANZ membership, the four sources said. The banks were latecomers to the alliance in 2021, agreeing to sign on only after months of discussions to gain assurances they would not have to abruptly abandon high-emitting industries that make up a large portion of Canadian exports, including oil and gas and mining.
Canadian banks have also recently discussed their concerns with U.S. counterparts, one source said.
One concern among financial institutions about membership in GFANZ is that its guiding criteria are set out by Race to Zero, a United Nations-sponsored climate campaign for entities below national government level. It has set targets for reducing emissions that suggest a need to eventually pull financing from fossil-fuel producers, said one of the banking sources and one senior official in Canada’s finance industry.
Canada’s big banks have all taken the stance that they will help oil and gas clients with decarbonization efforts rather than halt financing to them.
The Globe and Mail is not naming the sources because they were not authorized to talk about confidential internal discussions. Spokespersons with Royal Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada declined to comment on the situation. A spokesperson for GFANZ also declined to comment.
Creating GFANZ has been the signature effort by Mr. Carney, the former Bank of Canada and Bank of England governor, to mobilize massive financial resources in the fight to limit climate change. GFANZ made a splash at the COP26 climate summit in Glasgow last year. Mr. Carney, who is the UN special envoy for climate action and finance, brought together banks, insurance companies and asset managers to agree to transform their lending and investing activities to line up with the UN Race to Zero initiative.
Mr. Carney has said GFANZ has grown in the past year to 500 members representing US$140-trillion of assets. The alliance aims to give its members tools to achieve ambitious targets, while publicly disclosing their progress toward reaching milestones.
Tensions flared this month in response to an update the Race to Zero initiative, which sets the criteria for emissions cuts, published in mid-June. The updated text had more explicit requirements to “phase down and out” development and financing of new fossil fuel assets, and ban new coal projects.
The Net-Zero Banking Alliance (NZBA), the GFANZ subsidiary to which the banks signed onto last year, also updated a set of frequently asked questions in August. The seemingly innocuous, 10-page FAQ document is important because it gave Canadian banks’ lawyers comfort when the banks signed on, serving as a reference explaining their obligations in detail.
In a narrow sense, the banks worried that Race to Zero was moving the yardsticks without consulting NZBA members, three sources said.
Lawyers for the banks were concerned about potential legal exposure if environmental groups or regulators sought to hold companies responsible for UN criteria that appeared to be getting tougher without warning. The changes also raised broader concerns about how GFANZ and the NZBA are governed, and what is required to change or update its criteria, the three sources said.
The tensions within the alliance are playing out against an increasingly fraught global backdrop. A growing energy crisis following Russia’s invasion of Ukraine has shifted the momentum from efforts to reduce emissions to a focus on bolstering energy security as fuel prices skyrocket. Combined with concerns about inflation and food security, the economic and political calculus has changed since members of the alliance signed on.
In the United States, environmental, social and governance (ESG) principles are facing a backlash in several Republican-controlled states, and fear of legal and antitrust actions are giving some of the U.S. banks pause about their GFANZ membership. In Texas, for instance, legislators passed a law that penalizes firms for excluding oil and gas holdings by preventing those firms from doing business with the state’s pension and investment funds.
Pension funds from Australia and Austria already pulled out of the alliance earlier this year, citing insufficient resources to participate.
On Sept. 16, Race to Zero issued a clarification to its criteria in an effort to calm members’ concerns, saying it had become aware “there may be cause for legal concern with text” about fossil fuel and coal projects in its expert peer review group’s interpretation guide. It updated the wording to add “unabated” to its guideline for phasing fossil fuels down and out, with the change suggesting there is room for carbon capture technology.
And where Race to Zero previously said its members “shall restrict development, financing and facilitation of new fossil fuel assets in line with appropriate scenarios,” it changed the wording to say each member will undertake an approach based on the best available science to implement fossil fuel phase-down and elimination.
Mr. Carney told a UN Climate Action conference this month the initial guidelines “went too far” and noted that Race to Zero issued the clarifications. He said banks cannot have “legally binding strictures” and stay on side of antitrust concerns.
Race to Zero says all its members are still required to align to a scenario that limits global temperature gain to 1.5 degrees C above preindustrial levels. No 1.5-degree scenario sees a role for new coal projects, Race to Zero spokesman Matthew Phillips said in an e-mail.
Bankers are pressing GFANZ and Race to Zero’s leaders for more clarity about the text of the agreement and the way the alliance will be governed, according to three of the sources. But the possibility that some banks – especially the largest American ones – could withdraw from the NZBA and GFANZ poses a threat to the entire alliance.
“Those are some of the biggest players on Wall Street, and if they leave does that cause some kind of domino effect, giving the impetus to other parties to say, ‘Hey, if they left why can’t I leave? They have more resources than me,’” Baltej Sidhu, ESG analyst at National Bank of Canada, said in an interview.
In August, Greenpeace published a report that said none of Canada’s biggest five banks is onside with Race to Zero criteria, as all remain among the world’s top 20 lenders to oil and gas companies, and none has a fossil-fuel exclusion policy “consistent with a science-based net zero pathway.”
Canada’s banks are unlikely to leave individually or as a block, and would likely only pull out if a large number of banks withdraw from the NZBA en masse, according to three banking sources.
Mr. Sidhu said the legal and regulatory concerns could be discussed further as alliance members meet at the COP27 summit in Egypt in November. He had not heard Canadian banks expressing qualms about their membership, but said it does not come as a surprise.
“Given that 5 to 10 per cent of GDP is coming from the energy sector, the path of least resistance for decarbonization is going to be looking at these energy companies, the behemoths, and looking for ways to aid them to decarbonize.”