Royal Bank of Canada could soon be kicked out of Mark Carney’s Glasgow Financial Alliance for Net-Zero (GFANZ) when the global coalition begins to tighten its rules next year. But don’t worry, the bank’s climate policies have been deemed soft enough to pass a Texas government test of whether financial institutions are oil and gas company friendly enough.
Last week, Texas State Comptroller Glenn Hegar named 10 financial institutions, including BlackRock Inc., Credit Suisse Group AG and UBS Group AG, that he considers boycotting fossil fuels, reports The Canadian Press. . Under a law passed last year, that means they are barred from participating in the important government bond market.
“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 interests of their shareholders or customers, but instead use their financial clout to push a social policy and political agenda shrouded in secrecy,” Hegar said in a statement.
He added that the state’s investigation revealed a systemic lack of transparency, “particularly the use of doublespeak by some financial institutions as they publicly engage in anti-oil and gas rhetoric while presenting a much different story behind closed doors”.
The state’s definition of an energy company boycott includes any action, without an ordinary business purpose, taken to limit a bank’s business relationship with an oil and gas company because it does not go beyond minimum environmental requirements. .
The Royal Bank emerged unscathed from this assessment, writes CP. But that may not go so well as the $130 trillion GFANZ moves from voluntary to mandatory targets. “Strengthened UN checks on whether financial groups meet new criteria on ending coal finance and phasing out fossil fuels from portfolios could be announced during 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 stricter criteria in June, and participating institutions are expected to stick to it. comply by next June. Reports have since suggested that Canada’s five largest banks could be kicked out of GFANZ as a result, although there were widespread warnings that more specific and ambitious targets were part of the plan.
When Carney and his colleagues triumphantly announced GFANZ at the start of last year’s COP 26 climate summit in Glasgow, a spokesperson said The energy mix that its terms of engagement made no explicit mention of a phase-out of fossil fuel investments “because the rules are outcome-specific rather than process-specific”, leaving each bank to chart its own “trajectory of 1, 5°C”. GFANZ’s underlying assumption was that “no one knows a bank’s portfolio like they do”, he said, adding that it had also been “really difficult to get these banks on board”.
But in a later interview, the spokesperson said that financial institutions should become more specific and ambitious in their climate commitments over time, with a deadline of 12 to 18 months after joining the alliance to put in place. their goals. Now those timelines are starting to run out, though Canadian banks and many others would still prefer to run GFANZ as a public relations exercise, rather than an incentive 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 pledge not to net lend by 2050. Such pledges could cause the banks to make tough decisions about which companies to lend to based on their environmental performance, while the state said it also considered broader ESG ratings when trying to narrow the list.
In a written response to the state inquiry, RBC said it greatly values its relationship with Texas and does not boycott energy companies. “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,” he said. “RBC engages in multi-billion dollar financial activities with energy companies and counts many energy companies among its clients. »
The bank reported credit risk exposure in the oil and gas sector of approximately $25 billion.
Indeed, the bank’s substantial funding of fossil fuel projects has been criticized by environmental groups who have pushed Canadian banks to limit their funding to the sector.
“We haven’t seen any evidence that RBC is cutting its massive fossil fuel funding or even setting credible climate targets, so it’s no surprise they didn’t end up on Texas’ list, however inaccurate- her,” said Matt Price, director. corporate engagement at Investors for Paris Compliance.
A July report on bank climate action by the Transition Pathway Initiative found RBC lagging behind banks like UBS and Credit Suisse in its decarbonization strategy, while pointing out that most banks were still failing to define aims.
In its letter to Texas, RBC said that in addition to funding fossil fuel companies, it is committed to fighting climate change. It cites interim emission reduction targets funded by 2023 and its sustainable funding goal of $500 million. (Reports at the time put the total at $500 billion.)
It also says that, in the normal course of its business, it may refuse to provide financial services that expose it to undue risk, noting its limits on new coal-fired power plants and financing oil and gas exploration. in the Arctic National Wildlife Refuge.
Texas’ Fossil Fuel Boycott Act, along with a similar law targeting banks that boycott gun manufacturers and associations, has prompted several major U.S. banks, including Citigroup, Goldman Sachs, Bank of America and JPMorgan Chase, out of the market last year, according to a study. article published in June by Daniel Garrett, professor at the University of Pennsylvania, and Ivan Ivanov, senior economist at the US Federal Reserve Board. They found that Texas laws would likely force the state’s citizens to pay between US$300 million and US$500 million in additional interest charges due to reduced competition.
The newspaper also noted that TD Securities had submitted a letter last year stating that it was also in compliance with energy and firearms laws, but withdrew the letter in March to potentially flag that she was withdrawing from the market.
TD did not respond to a request for clarification.
While the withdrawal of several banks from the market may not be great for Texas taxpayers, it likely benefited RBC. According to Bloomberg, the bank was able to leapfrog last year to become the top issuer of government bonds.
The main body of this report was first published by The Canadian Press on August 29, 2022.