On the eve of the 2021 United Nations Climate Change Conference (COP26) in Glasgow, six of Canada’s largest banks – BMO, CIBC, National Bank of Canada, RBC, Scotiabank and TD – announced that they had subscribed to the Net-Zero Banking Alliance (the “NZBA“), a global banking initiative focused on sustainability.

With these announcements, the Big Six join other major international financial institutions such as BNP Paribas, Citi and HSBC that have already committed to the NZBA. Earlier this year, Vancouver-based Vancity Credit Union became the first Canadian institution to join the NZBA as one of the founding signatories.

Background

On April 21, 2021, the United Nations assembled an international alliance that brought together several net zero initiatives across the financial system in a strategic forum called the Glasgow Financial Alliance for Net Zero (“GFANZChaired by former Governor of the Bank of Canada and UN Special Envoy for Climate Action and Finance Mark Carney, GFANZ has four main initiatives – Net Zero Asset Owner Alliance (NZAOA), Net Zero Asset Managers Initiative (NZAMI), Net-Zero Insurance Alliance (NZIA) in addition to NZBA. Although there are specific guidelines for each initiative, in general, GFANZ requires signatories to set intermediate targets and long-term science-based approach to achieve net zero emissions by 2050 or earlier.

The Alliance

Facilitated by the United Nations Environment Program – Financial Initiative (“UNEP-FI“), which also acts as a secretariat, the NZBA is the banking arm of GFANZ. In April 2021, an initial group of 43 banks from 23 countries joined the NZBA as founding signatories and pledged to do so. evolve their loan and investment portfolios to achieve carbon neutrality by 2050 or earlier, in line with the 1.5 ° C temperature targets of the Paris Agreement.

Commitments

To join the NZBA, member banks must sign the alliance’s declaration of commitment and accept the UNEP-FI guidelines for setting climate goals for banks. At a high level, each of the institutions has committed to the following:

  • Long-term and intermediate goals: Within 18 months of joining, signatories are required to set and publicly disclose long-term and interim targets for their greenhouse gas emissions (“GHG“) which support the goals of the Paris Agreement. Long-term goals must include a 2050 goal and intermediate goals must include a goal for 2030 (or earlier). Intermediate goals must be reviewed every 5 years.
  • Sector targets: For the 2030 targets, signatories will set targets that cover a significant majority of their financed emissions within 18 months of signing, including at least one of the carbon-intensive sectors where they can have the most impact. After an additional 18 months (within 36 months of signing), banks will set a new set of sector targets for all or a significant majority of the specified carbon-intensive sectors. Agriculture, aluminum, cement, coal, commercial and residential real estate, iron and steel, oil and gas, power generation and transportation were first identified as some carbon intensive sectors.
  • Scope of emissions: Banks ‘targets will include their clients’ Scope 1, Scope 2 and Scope 3 issues, where material and data permitting. Scope coverage should increase between each review period.
  • Activities covered: Targets will cover lending and investment activities. Initially, only investment and lending activities shown on the balance sheet will be included and securities held for customer facilitation and market making purposes are excluded. Off-balance sheet activities, including activities facilitated in capital markets (such as underwriting), should be taken into account in the next version of the guidelines.
  • Scenarios: Targets should be based on decarbonization scenarios from credible and well-recognized sources that prudently rely on negative emissions technologies and, to the extent possible, minimize misalignment with other sustainable development goals.
  • Disclosures: Each bank has also committed to annually disclose absolute emissions and emissions intensity in accordance with best practice and, within one year of setting targets, disclosing progress against a revised transition strategy to board level defining the proposed actions and sectoral climate-related policies.

Business and legal considerations

Scenarios

Achievement of NZBA goals may vary depending on the underlying approaches used to generate data. Accordingly, special attention is paid to models used as a reference. The UNEP-FI guidelines note two approaches – the first is based on research from the Intergovernmental Panel on Climate Change (“IPCC“) and the second is derived from a recent report on tracks published by the International Energy Agency (“OUCHAs some have noted, although the IPCC and IEA scenarios provide broadly similar results in terms of climate scenarios, an important issue for banks is that the IEA establishes a roadmap that assumes that no new oil and gas project will be developed from this year.Given the capital requirements of the energy industry, the choice of models will have an impact on the company’s strategy.

Transitional finance

Reallocating credit from carbon intensive to less intensive sectors will create political headwinds and banks will need to skillfully manage the associated stresses. A likely consequence will be the increasing attention paid to transition finance instruments such as sustainability loans and bonds. Negotiators will need to be dexterous and recognize the unique circumstances of each industry, especially in economies with large natural resource sectors like Canada, while ensuring that transition finance can lead to climate progress. tangible.

Legal and Governance

Although based on a compliance or explanation model, NZBA commitments require that goals be approved at the highest level of management in each signatory. Executives and administrators will need to strike a balance between overly prescriptive policies on the one hand which may affect their flexibility in decision-making and under-ambitious goals on the other hand which may not meet NZBA standards. While these voluntary commitments are not necessarily binding on banks, the board of directors and executives will need to refine their governance frameworks and corporate strategy so that they live up to their public statements and reduce the possibility liability in the secondary market for misrepresentation. .

Offsets

The statement of commitment also calls on NZBA banks to commit to a strong approach to offsets. After frequent reports of questionable use of offsets by entities to achieve their goals, the alliance gave a cautious nod. Signatories are allowed to use offsets to help meet their net zero targets, although these “should be limited to carbon removals to balance residual emissions where there are technologically or financially limited alternatives to eliminate emissions.” Offsets should always be additional and certified. ”Banks are also urged to ‘perform appropriate due diligence on customer claims in accordance with other internal processes’.

Welcome step

While the financial community has widely greeted the news, there have also been comments from stakeholder groups urging further action. For example, ShareAction, a London-based charity focused on sustainability, noted that “the NZBA, while a welcome step forward, has yet to set sufficiently high standards. The NZBA has set lower standards for banks than the Net Zero Asset Owner Alliance has set for insurers and pension plans.

Overall, financial institutions are under considerable pressure to act quickly on their climate commitments. Earlier this month, more than twenty Quebec financial institutions with $ 900 billion in assets under management also signed the Sustainable Finance Declaration of the Quebec Financial Center and committed to making decisions. investment and capital allocation based on the principles of responsible investment.

As each institution will tailor its policies, objectives and disclosures according to its business needs, the increasing granularity required by the NZBA provides a welcome boost to the banking sector’s overall approach to climate alignment.

The foregoing is only an overview and does not constitute legal advice. Readers are cautioned not to make a decision based on this document alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2021


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