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 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.
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 regulations such as the Office of the Superintendent of Financial Institutions’ B-15 guideline on climate risk management 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.
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.
1 “Financing the transition: Energy supply investment and bank-facilitated financing ratios 2022,” Bloomberg NEF, Dec. 14, 2023