The Royal Bank of Canada may soon be at risk of being kicked out of Mark Carney’s Glasgow Financial Alliance for Net-Zero (GFANZ) when the global coalition begins toughening up its rules next year. But not to worry—the bank’s climate policies have been deemed mild enough to pass a Texas government test of whether financial institutions are sympathetic enough to oil and gas companies.
Last week, Texas State Comptroller Glenn Hegar named 10 financial institutions including BlackRock Inc., Credit Suisse Group AG, and UBS Group AG that it deems to be boycotting fossil fuels, The Canadian Press reports. Under a law passed last year, that means they are barred from participating in the state’s sizable bond market.
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“The environmental, social and corporate governance (ESG) movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy,” Hegar said in a statement.
He added that the state’s investigation found a systemic lack of transparency, “especially the use of doublespeak by some financial institutions as they engage in anti-oil and gas rhetoric publicly yet present a much different story behind closed doors.”
The state’s definition of boycotting energy companies includes any action, without ordinary business purpose, taken to limit a bank’s commercial relations with an oil and gas company because it does not go beyond minimum environmental requirements.
The Royal Bank came through that assessment unscathed, CP writes. But it might not fare so well as the US$130-trillion GFANZ moves from voluntary to mandatory targets. “Beefed-up checks by the UN on whether finance groups meet new criteria on ending coal financing and phasing out fossil fuels from portfolios could be announced at New York Climate Week in September and launched at the COP 27 climate talks to be held in Egypt in November,” the Financial Times reported last week, citing an announcement from the UN-backed Race to Zero initiative.
While the Glasgow alliance “was designed as a big tent to bring together as many new members as possible,” the Times added, Race to Zero introduced the tougher criteria in June, and participating institutions will be expected to comply by next June. News reports since have suggested that Canada’s five biggest banks might be kicked out of GFANZ as a result—even though there was plenty of warning that more specific, ambitious targets were a part of the plan.
When Carney and colleagues triumphantly announced GFANZ in the early days of last year’s COP 26 climate summit in Glasgow, a spokesperson told The Energy Mix that its terms of engagement made no explicit mention of a fossil investment phaseout “because the rules are outcome-specific rather than process-specific,” leaving it up to individual banks to chart their own “1.5°C trajectory”. GFANZ’ underlying assumption was that “no one knows a bank’s portfolio like they do,” he said, adding that it had also been “really tricky to get these banks onboard”.
But in a subsequent interview, the spokesperson said financial institutions would be expected to get more specific and ambitious in their climate commitments over time, with a deadline of 12 to 18 months after joining the alliance to get their targets in place. Now those timelines are starting to run down, even if Canadian banks and many others would still prefer to manage GFANZ as a PR exercise, rather than a prompt to rethink their investment priorities.
In Texas, CP says RBC was one of 19 financial institutions initially flagged for further investigation, in part because of the bank’s commitment to net-zero lending by 2050. Such commitments could lead banks into tough decisions about what companies they lend to based on their environmental performance, while the state said it also factored in wider ESG ratings when trying to narrow down the list.
In a written response to the state’s inquiry, RBC said it greatly values its relationship with Texas and does not boycott energy firms. “RBC provides a wide range of financial services—including financing, underwriting, and advisory services—to many companies in the oil and gas industry, including those located in Texas,” it said. “RBC engages in billions of dollars of financial activity with energy companies and counts many energy companies among its clients.”
The bank reported credit risk exposure to the oil and gas sector of about $25 billion.
Indeed, the bank’s substantial funding of fossil fuel projects has been criticized by environmental groups that have pushed Canadian banks to limit their funding to the sector.
“We’ve seen no evidence that RBC is curtailing its massive fossil fuel financing or even setting credible climate targets, so it’s not surprising they didn’t end up on the Texas list, inaccurate though it may be,” said Matt Price, director of corporate engagement at Investors for Paris Compliance.
A July report on bank climate action by the Transition Pathway Initiative found that RBC lagged banks like UBS and Credit Suisse on its decarbonization strategy, while also highlighting how most banks are still falling short on setting targets.
In its letter to Texas, RBC said that along with funding fossil fuel companies, it is committed to addressing climate change. It cites interim financed emission reduction targets by 2023, and its $500 million sustainable financing target. (News reports at the time put the total at $500 billion.)
It also says that in the ordinary course of business it may decline to provide financial services that expose it to undue risk, noting its limits on greenfield coal-fired power plants and funding oil and gas exploration in the Arctic National Wildlife Refuge.
The Texas fossil energy boycott law, along with a similar one targeting banks that boycott gun manufacturers and associations, pushed several major U.S. banks including Citigroup, Goldman Sachs, Bank of America, and JPMorgan Chase out of the market last year, according to a research paper published in June by University of Pennsylvania professor Daniel Garrett and Ivan Ivanov, a principal economist at the U.S. Federal Reserve Board. They found that the Texas laws would likely leave citizens of the state paying between US$300 to $500 million in added interest costs because of reduced competition.
The paper also noted that TD Securities had submitted a letter last year attesting that it, too, was in compliance with the energy and gun laws, but withdrew the letter in March to potentially signal it was withdrawing from the market.
TD did not respond to a request for clarification.
While the withdrawal by several banks from the market might not be great for Texas taxpayers, it has likely benefited RBC. According to Bloomberg, the bank was able to jump up last year to become the No. 1 bond issuer in the state.
This main body of this report was first published by The Canadian Press on August 29, 2022.
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