You can defang GFANZ, but the damage is already done for Canada's oil patch

The Glasgow Financial Alliance for Net Zero (GFANZ) may have fallen apart in the weeks leading up to Mark Carney’s selection as Liberal leader, but Mr. Carney’s efforts to decarbonize bank lending while he was Top Dog at the international Financial Stability Board bore serious fruit here in Canada — according to the recently-released financial statements of Canada’s Big 6 banks.

GFANZ is/was “a global coalition of financial institutions committed to accelerating the transition to a net-zero economy.” Launched in April 2021 by Mr. Carney while he was the UN Special Envoy on Climate Action and Finance, GFANZ was the perfect vehicle to ensure that he could continue to pursue a regulatory framework regarding his concerns about the coming “tragedy on the horizon” — courtesy of climate change.

Fans of such initiatives say that net zero alliances are “the opposite” of an activist, as Peter Stensgaard Morch, the chief executive of PensionDanmark explained to The New York Times. For his organization, such “work is driven by the fiduciary duty of its members to seek the highest possible returns.” This is a point of tension for a small nation like Canada, as I tried to remind Star readers last September (see prior post “There’s a better — and more lucrative — way to help the environment than Justin Trudeau’s carbon tax” Sept. 18-24):

That Canada’s share of annual global greenhouse gas emissions is reported to have dropped from three per cent to 1.5 per cent post-Second World War is a function of many things. What can’t be denied is that if Canadians cut that remaining 1.5 per cent share to zero tomorrow, some combination of China, India, Indonesia, South Korea and Vietnam will backfill our environmental sacrifice as they continue to build new coal plants to support their own needs.

Billions of our fellow global citizens want the same modern conveniences and standard of living that we enjoy here in Canada. Until there’s a more cost-effective, environmentally-friendly and scalable source, most nations will consume carbon to drive their vehicles, heat their homes, and all the other things that we took for granted as Canada industrialized.

As Canada’s bank CEOs prepared for a Parliamentary hearing last summer, I was conscious that they were walking a tightrope between two very differing perspectives (see Star column “Bank chiefs walk tightrope on energy evolution” June 12-24)

In the current political and media climate, one can sympathize with bank boards for appointing a “chief sustainability officer” and generating 60-page reports about creating “a more sustainable world.” If Starbucks is going to exit plastic straws, it’s natural that the omnipresent banking sector has wanted to “step up.”

What gets less attention is that global banking regulators have spent the last decade jawboning the financial sector about “Breaking the tragedy on the horizon — climate change and financial stability,” as outlined in a 2015 speech by then-Bank of England Gov. Mark Carney. The same fellow who may well be a leadership candidate for the carbon-hating Liberal party.

As a regulator, Carney ominously warned financial institutions to plan for “the likely future cost of doing business” with “companies that produce and use fossil fuels.” Canada’s own bank regulator, Peter Routledge, the Superintendent of Financial Institutions, followed suit last month during his appearance before the same house environment committee when he outlined OSFI’s expectations for “sound climate risk management.”

Banks face a multi-faceted dilemma: are they taking on undue risk if they don’t favour the environment over the fossil fuel industry?

With the election in full swing, and Mr. Carney now PM (and not merely a potential leadership candidate), the timing feels right to remind you all about the impact that FSB Chair Carney had on OSFI, long before he was their boss’s Boss (OSFI reports to Canada’s Minister of Finance, who reports to the PM).

Last summer, I only had the Big 6 2023 financials to quote from (see prior post “Bank chiefs walk tightrope on energy evolution” June 12-24). They weren’t pretty:

Canada’s O&G sector accounted for $71.4 billion (greater than 3 per cent) of GDP at last count, employing hundreds of thousands. Provincial governments will rake in more than $20 billion of royalties in 2024 — cash that pays for countless schools and hospitals.

Given the sector’s economic impact, bank CEOs may be asked to explain the eye-popping $23 billion drop (48 per cent) in the Big 6’s drawn O&G loans between 2020-23. MPs may also wonder why drawn O&G loans have fallen, on average, from 5 per cent to a modest 1.9 per cent as a share of the banking sector’s total lending to business/governments over the same short period.

Bank executives will assure MPs that this is merely a function of the heady cycle, as a profitable O&G sector pays down its debts. That may be true, but lender JP Morgan’s O&G credit exposure dropped just 12 per cent during this time frame.

Now that the 2024 fiscal year is over and the annual financials are out, we can confirm how things played out both for domestic Oil & Gas firms, as well as the energy clients of the largest U.S.-based banks:

Look at average figures for 2020 vs 2004, for starters. Net loans and acceptances for Oil / Gas / Energy as a percentage of the Canadian banking industry’s entire Business & Government loan book represented 5.0% and 5.3%, respectively, which is pretty consistent over that 16 year period. For the U.S.-based cohort, it grew from 2.8% to 3.5% between 2004 and 2020; while the relative exposure is substantially lower than the Canadian sector (given the relative dominance in Canada’s economy) — it makes sense directionally, in light of the growth of the U.S. shale industry over this century.

The shocking news continues to be the negative swing in Canada, primarily between 2020 & 2023.

With the benefit of 2024 data, Canada’s Big 6 banks cut their drawn exposure to the O&G industry by an average of 48% vs. 2020, while the four largest U.S. banks saw a reduction of just 14%. In absolute terms, the loan reductions represented C$22.9B in Canada vs. US$10.9B for the U.S. bank group — the actual dollar amount is relevant as Canada’s banks otherwise grew their loans to Business & Government clients at a faster clip (45%) than their U.S.-based peers (19%) — open for business, they were!

That every large bank I reviewed (but Citi) grew their Business & Government loan book during the 2020-24 period proves that they all had excess capital to lend against. The data suggests that American bank executives and their Regulators didn’t react to Mr. Carney’s hectoring in the same manner as Canada’s crowd (except for RBC, which appears to have stood firm for its clients) shines through in this round of financial statements.

Canada’s Oil & Gas entrepreneurs will be keen to hear from all political parties how they intend to handle the availability of growth capital, including bank debt, post-election. Will anyone be instructing their Finance Minister to ensure that Canadian banks go even further in planning for “the likely future cost of doing business” with “companies that produce and use fossil fuels?”

After all, there’s still another C$25.1 billion of drawn exposure to go.

MRM

(this post, like all blogs, is an Opinion Piece)

(photo credit: Welder, New York 1951 by Irving Penn)