Canadian banks caught in fossil fuel uproar
One of the growing trends in the finance and investment universe relates to environmental, social, and governance (ESG) governance. Everyone from individual retail investors to money management behemoths made it clear they will not hesitate to transition away from companies with “dirty” practices.
Expectations for major progress in 2021 were dealt a major blow in the first quarter of the year. Specifically, an expose blasted legacy banks and the traditional financial investment community for financing fossil fuels to the tune of trillions of dollars.
Many close observers note that banks aren’t able or willing to divest away from clients that operate within the dirty energy. But all hope is not lost as Canadian online banks that didn’t exist at the start of the century have an opportunity to gain respect and recognition by following a proper ESG framework since day one.
For example, digital bank EQ was launched in 2016 and within three years the company presented a compelling and credible plan detailing its ESG practices and reporting.
RBC, TD, Scotiabank Singled Out
An analysis of 60 of the world’s largest investment banks conducted by an alliance of US-based environmental groups found that 2020 was the worst year in recent memory for fossil fuel investments.
The worst culprit, according to the report, was Wall Street behemoth JPMorgan Chase. Ironically, the bank’s own experts sounded the alarm bell on the climate crisis yet it provided US$317 billion (C$398 billion) in funding for fossil fuel industries since the Paris Climate Agreement was signed in December 2015.
Combined with fellow Wall Street giants Wells Fargo, Citigroup, and Bank of America, the four US institutions accounted for just shy of $1 trillion in funding since the Paris accords.
Ranking as the fifth largest contributor of funds towards fossil fuel was Royal Bank of Canada at $160 billion in financing since the Paris accords.
Fellow Canadian bank Toronto Dominion ranked ninth at $121 billion and named the “world’s top tar sands banker.” The list of Canadian banks also includes Scotiabank at $114 billion in financing since 2015.
RBC, TD, and Scotiabank were included in the study’s “Dirty Dozen” list of the 12 worst global banks in terms of fossil fuel financing.
Other Canadian banks included in the list include Bank of Montreal ($82.01 billion since 2016), CIBC ($57 billion). National Bank is the only one of the big six Canadian banks left out of the list.
Profile Of EQ’s Sustainability Plans
Online Canadian bank EQ made its ESG strategy and policies public for all stakeholders to see. ESG practices and reporting were made a priority for the Governance and Nominating committee.
ESG best practices now govern the Canadian bank’s entire loan book with a focus on evaluating environmental risks. The company notes that a healthy environment is vital to the long-term well-being of not only its business and employees but the entire country.
It is also company practice to not lend to businesses that are classified as high carbon emitters.
EQ practices what it preaches. Some of the initiatives it mandates to lower its own emissions include an emphasis on alternative options to plane traveling, prioritizing office space near public transit, assessing the environmental impact of any new strategic initiative or business development, among others.
Aside from environmental practices, EQ prides itself on its efforts to identify and remove systemic barriers in the workplace and amplifying the voices of marginalized employees.
ESG Could Soon Be A Requirement
BlackRock, the world’s largest fund manager with a mind-boggling US$8.6 trillion in assets under management as of 2020, made it clear its position on ESG. Its CEO Larry Fink said in his annual letter to investors that “no issue ranks higher than climate change on our clients’ lists of priorities.”
BlackRock argues that sustainability and best ESG practices benefit all stakeholders, especially investors. Fink wrote:
“The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.”
As such, companies looking for funding from BlackRock must commit to a goal of eventually achieving net-zero greenhouse gas emissions. BlackRock is willing to put money where its mouth is as the money manager said it is “flagging holdings for potential exit”
How does this fit in with an online Canadian bank that likely never crossed BlackRock’s radar? While there is unlikely to be any sort of near-term impact or benefit, it serves as proof that EQ is better positioned to operate in the future of banking compared to one with a decade-long history of financing fossil fuels.
Conclusion: EQ Has A Lot Of Momentum On Its Side
EQ is seeing a lot of momentum from a business perspective. The bank’s fourth quarter 2020 earnings report states it had its best quarterly performance in history. Some of the more notable metrics include loans under management rose 7% to C$33.3 billion and the company opened 24,500 new accounts to bring its total count to more than 185,000.
As more customers become increasingly aware of how Canadian banks are among the worst financiers of dirty energy in the world, digital banks like EQ could certainly stand out as an appropriate alternative. This was emphasized in its earnings report:
The Bank’s commitment to sustainability is reflected in: no-fee bank accounts; financial services offered to underbanked communities; employee diversity and inclusion; generous support for its community partners; environmental management and the low carbon footprint afforded by its digital, branchless business model; and, service to customers who are also considered low carbon emitters.
And finally, EQ is living proof it doesn’t need to finance fuel. According to the company’s data, its stock is up 145% over the past five years and 408% over the past decade. This makes it the best performing bank listed on the Toronto Stock Exchange.