Canada’s financial sector has its ‘mine truck’ moment
Historically speaking, Canadian energy issues haven’t always played as prominently on the global stage as they do today. In 2006, the oilsands were just an emerging story, known principally to investors on the hunt for returns (although Pembina has been working on oilsands issues since the mid-1980s). It took Ralph Klein, then-premier of Alberta, parking an oilsands heavy hauler within eyesight of the U.S. Congress for the broader environmental community to get well and truly fired up over oilsands development. Within a few short years, Canada’s bitumen mines would be making front-page headlines worldwide.
Canada’s financial sector appears to be enjoying its own ‘mine truck’ moment. The news broke last week that Mark Carney, the renowned governor of the Bank of Canada, will go to the rescue shortly of the British economy. And while European economies muddle along, Canadian banks such as RBC, Scotia and Toronto Dominion are setting earnings records and increasingly asserting themselves internationally.
So how did we go from living under the staircase to slaying dragons? A funny thing happened in 2008: our comparatively stodgy and unheralded banking sector sailed through the worst financial crisis since the Great Depression in far better shape than its peers. This was in part thanks to prudent regulation that kept it from the worst of excesses south of the border and across the pond (Iceland, anyone?), but it was also thanks to buoyant demand for Canadian natural resources while all else was fizzling. Indeed, Oilweek reports that today, roughly 400 of the world’s thousand or so publicly traded energy companies are now headquartered in Calgary. The Global Financial Centre Index includes four Canadian cities on its top-30 list, ranking Toronto, Montreal, Calgary and Vancouver next to exotic peers such as Zurich, Hong Kong and Sydney.
With global celebrity, however, comes global scrutiny. As it was for the oilsands nearly a decade ago, the Canadian financial sector’s period of anonymity is coming to a close — and environmental sustainability is increasingly becoming an important factor in how companies operating in this sector are judged. Our banks, insurance companies and investment advisors will need to be at the front ranks of sustainability leadership to make good on their global reputation.
The evolution of environmental awareness in the financial sector
While advocacy organizations have long recognized the importance of the financial sector in the development of mega-projects to which they have been opposed — mines and dams in particular — until the mid-1990s, their campaign efforts focused primarily on the World Bank and national Export Credit Guarantee agencies. In response, these institutions developed environmental and social performance safeguards, conditions they place on the finance they provide to major project developers. The conditions deal with informed consent of host communities, compensation, environmental impact assessment and protection of biodiversity. While the advocacy groups haven’t backed down by any measure, they have recognized the value of these standards in protecting human rights and the environment, and argue vigorously against efforts to sidestep them.
Engagement between advocacy groups and the insurance industry dates back to the early 1990s, when that industry was stung by Hurricane Hugo and became increasingly concerned about the impact climate change could have on its long-term viability. Greenpeace famously convened a first meeting of the minds in 1993.
‘wins’, including getting Citigroup, BankBoston and Bank of America to make high-profile global environmental commitments.But it wasn't until the early 2000s that the advocacy community began to turn its attention to private financial flows, and the banks and insurance companies behind them. Building on successful Apartheid-era corporate divestment campaigns, green groups began advocacy campaigns calling out investors in projects that were ‘bankrolling disasters’ such as clearing rainforest or building coal plants. In 2004, Rainforest Action Network reported several
At the highest level, many of the world’s largest public and private pension and sovereign funds and their managers (such as heavyweights CalPERS and the Norwegian Petroleum Fund) began to investigate the implications of environmental and social performance issues for long-term financial performance of investments. Building on the banking, insurance and investment work of the UN Environment Programme’s Finance Initiative and legal analysis showing a case for consideration of these non-financial issues as part of the manager’s fiduciary responsibility, these organizations initiated a process culminating in the emergence of the UN Principles for Responsible Investment (PRI).
Progress on sustainability in Canada’s financial sector
From humble beginnings, the UN PRI today represents $25 trillion US in managed funds. Some 47 of the 1,100 signatories are Canadian funds and managers, including Quebec’s Caisse de Depot, Alberta’s Investment Management Corporation and TD’s Asset Management division.
Roughly 70 per cent of global project finance, whether through the World Bank’s arms, Export Credit lending agencies, or private financial institutions, is now ‘bound’ by the same environmental and social performance conditions through the Equator Principles. And these principles are currently under review to ensure they keep pace with the World Bank/International Finance Corporation guidelines and maintain a level playing field for signatories. Of 74 signatories, Canadian adherents include EDC, Bank of Montreal, Nova Scotia, CIBC, Manulife, RBC and TD.
Finally, the global insurance and reinsurance industry is at the forefront of industry action on climate change. In 2008, Ernst & Young surveyed more than 70 insurance industry analysts around the world to determine the top-10 risks facing the industry. Climate change was rated number one. According to Munich Re, “Climate change is a fact. Countering it is a must. We are convinced that climate protection makes economic sense, as it would be more expensive in the long term to pay for the damage it causes.” In Rio this year, the UN launched its Principles for Sustainable Insurance; of Canadian insurers, so far only Sunlife is a member.
The path to Fort McMurray runs through Bay Street
Now that our financial sector has become a world-class industry, the eyes of the world will be watching. And it’s not hard to forecast what that might entail, given a recent example:
In 2008, Rainforest Action Network commissioned a report comparing the carbon footprint of investments made by Canada’s leading banks, in terms of financing renewable energy and oil, gas and coal production worldwide. Canadian banks made up three of the five most heavily invested in oilsands. At 5 p.m. on July 28, 2009, RAN activists unfurled a two-storey banner in front of the main entrance of the Royal Bank of Canada’s head office. The banner read, “Please help us Mrs. Nixon” — appealing directly to Janet Nixon, the wife of the bank’s CEO, to help end the bank’s support of the oilsands.
The Rainforest Action Network’s campaign could be a signal of the storm to come for the Canadian financial sector. But companies can prepare for this type of high-profile opposition by ensuring their sustainability efforts meet the new global standards.
Environmental organizations point to three key areas where the financial sector’s activities have a direct impact on climate change: the amount of greenhouse gas emissions that result from the activities they finance (such as oilsands extraction or landuse change); the conditions, oversight and policies they apply to and promote amongst their clients and fund recipients; and the services and strategies they use to support decarbonization, green power and clean energy technology.
The Pembina Institute has been working with leaders in the Canadian financial sector to identify and address environmental risks and opportunities. For instance:
- For more than five years, we have been helping one of Canada’s “Big Five” banks calculate and report its carbon emissions to support its efforts to reduce its contribution to climate change.
- For a leading Canadian insurer, we recently completed a review of international environmental codes and standards relevant to the financial sector, assessing the benefits, costs, risks and opportunities associated with adoption as a basis for their approach to environmental and stakeholder concerns.
- Earlier this year, we convened a major national dialogue on shale gas development that included participants from energy and financial institutions, ENGOs, First Nations and other stakeholders. As in other areas, if environment-related concerns drive opposition, investors need insight into which companies have the right mix of strong relationships and effective environmental practices to successfully secure social license through responsible development.
As the world increases its scrutiny of Canada’s financial sector, environmental performance and climate action initiatives will not escape notice. And while Canadian financial service companies are taking firm steps to account for and reduce their internal greenhouse gas emissions, water and paper use, it is the composition of their investment portfolios that poses the greatest climate risk — and the greatest opportunity to make a difference.
Jason works with a wide range of companies to help them find competitive advantage in more-sustainable practices.