This article appears in the April 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
The big banks are facing a barrage of shareholder advocacy efforts designed to bring environmental concerns to the forefront.
Bank of Nova Scotia had hosted its 2022 AGM on April 5, with the rest following in short order. All of the big banks had climate-focused shareholder proposals on their proxy voting agendas this year, and several other proposals were withdrawn after the banks engaged with shareholders about their concerns.
Votes on the proposals presented during the AGMs provide insight into how seriously investors, and the banks themselves, are approaching climate issues.
“The results from these votes will not only influence the banks, but will serve as an indicator of how much the wider investment community is walking its talk on going green,” stated Investors for Paris Compliance (IPC), a B.C.-based shareholder advocacy group that sponsored one of the resolutions on behalf of Royal Bank of Canada’s investors.
Shareholders stated the banks are not doing enough to scale back their funding of the energy sector, one of the largest sources of greenhouse gas (GHG) emissions in Canada.
These fears come amid growing alarm about the need to curb emissions quickly. A report this month from the United Nations’ Intergovernmental Panel on Climate Change warned that to limit global warming to 1.5°C, GHG emissions will have to “peak before 2025 at the latest, and be reduced by 43% by 2030.”
In late March, Canada’s federal government published its plan for meeting its climate objectives. The plan envisions cutting emissions to 40% below 2005 levels by 2030 with contributions from all major polluters, including a 31% reduction in emissions from the oil and gas industry (from 2005 levels). This would be a 42% decline from current levels, as the industry’s emissions have risen by about 20% since 2005, thanks largely to increased oilsands production.
The government’s plan for meeting its targets includes capping emissions, making more use of carbon capture and storage technologies, and scrapping fossil-fuel subsidies, with the aim of phasing out public financing for the oil and gas industry.
The big banks, as the industry’s primary private financiers, are coming under increasing shareholder pressure to scale back their own funding efforts.
For example, global consumer advocacy group SumOfUs filed a proposal with Toronto-Dominion Bank on behalf of a handful of shareholders. The proposal calls on the bank to stop financing new fossil-fuel exploration and development by the end of 2022.
A similar proposal, which called for an end to financing of new fossil-fuel supplies, was filed with Scotiabank by the Vancouver-based Shareholder Association for Research and Education (SHARE) on behalf of the Trottier Family Foundation. While the foundation agreed to withdraw the proposal, citing “the bank’s commitment to further engagement,” a representative still voiced concerns about the bank’s financing activities at the AGM.
The IPC proposal, meanwhile, called on RBC to revise its criteria for “sustainable finance” to exclude investments in fossil-fuel production, and to swear off projects opposed by Indigenous communities.
The IPC criticized RBC’s recent involvement in a $1.5-billion financing for Enbridge Inc., which the bank considered at least partly “sustainability linked.” These sorts of arrangements don’t require the bank to avoid financing fossil-fuel activities, IPC stated, and need not align with the bank’s net-zero commitments.
The SumOfUs shareholder proposal similarly stated that TD’s continued funding of fossil-fuel companies and projects “will ultimately prevent TD from reaching its net-zero commitment unless it makes significant changes.”
Ending new financing will help the bank meet its climate pledges while also protecting shareholder value, the SumofUs proposal asserted.
The banks disagree. All recommended that shareholders vote against the climate proposals, arguing that adoption will constrain banks’ ability to determine how best to meet their net-zero commitments. Each of the big banks has spelled out those plans — including targets for tackling energy sector emissions — in reports released in recent weeks.
However, most of the targets stated by the banks so far pledge only to reduce the intensity of financed emissions, not absolute financed emissions — meaning that actual emissions can still rise.
So far, the sole exception is Bank of Montreal, which has pledged to reduce absolute emissions by 24% in its energy sector lending portfolio by 2030.
One shareholder advocacy group is looking to give bank shareholders a greater voice with “say on climate” votes. The Mouvement d’éducation et de défense des actionnaires (MÉDAC), which is based in Montreal, filed proposals with several banks this year calling on them to hold annual advisory votes on their environmental plans. These “say on climate” votes echo the recently adopted “say on pay” votes that invite investors to weigh in on executive compensation.
Again, the banks argued against say on climate, reasoning that their action on climate risk should remain the responsibility of management and the board, not shareholders. Nevertheless, the say on climate proposal at Scotiabank’s AGM was the one that garnered the most shareholder support, with 20.7% voting in favour.
Another proposal from MÉDAC called on Scotiabank’s directors to establish a board committee devoted to climate and the environment. That proposal generated 9.2% support. The group withdrew similar proposals for board committees on climate at some of the other banks following engagement efforts.
Given this kind of support, the IPC suggested the results of this year’s bank AGMs could “accelerate action by bank regulators on managing climate risk.”
The Office of the Superintendent of Financial Institutions (OSFI) and the Bank of Canada are already devoting increased attention to climate risks. In January, they released the results of a pilot climate scenario analysis exercise carried out over the past couple of years with the big banks. In the wake of that effort, OSFI is now developing climate risk management guidance and is expected to eventually incorporate climate considerations into banks’ capital requirements.