In Canada, corporate strategy on climate-related risks, opportunities, disclosure and strategic planning has been largely voluntary to-date. However, there are new regulations and legal actions with implications that financial organizations should be paying attention to.
On May 26th this year, Canada’s Office of the Superintendent of Financial Institutions (OSFI) published a draft climate-related guideline. OSFI is the primary regulator for federally regulated financial institutions (i.e., banks, insurers, and credit unions). This regulation is a draft currently published on the OSFI website for consultation, with the consultation period ending September 30, 2022.
The guideline includes detailed expectations for how regulated financial institutions should report their GHG emissions. This includes scope 1 and scope 2 emissions from their operations (i.e., emissions from electricity and heating fuels used in offices or branches), but critically also scope 3 emissions, including the emissions from financed or insured activities.
Emissions should be calculated following the GHG Protocol and the associated Partnership for Carbon Accounting Financials (PCAF) standard. This means that the GHG emissions from every debt or equity investment in listed equities, private companies, project finance, commercial real estate, car loans, or residential mortgages will need to be ‘attributed’ to the bank/insurance company doing the financing. For insurance companies, they will also soon have to report the emissions from the forthcoming PCAF standard on insurance-associated emissions.
Of particular relevance to Canadian institutions, the PCAF standard requires that for mining and oil and gas investments, the attribution of financed emissions to an investor shall include attribution of not just the direct emissions from the company operations (i.e., scope 1 and 2 emissions) but the upstream and downstream emissions (i.e., scope 3). For financial organizations in Canada, who may be engaged with the oil and gas sector, this means that financing oil and gas companies will attribute a portion of both GHG emissions from oil and gas operations, and the downstream emissions from the burning of gasoline or diesel after the oil is extracted, refined, sold and combusted.
Currently, there is a wide range of financed emissions calculated among financial institutions in Canada, some including attribution of scope 3 emissions, some not. Many Canadian financial organizations, however, have made public commitments to net-zero financed emissions, and joined international branches of the Glasgow Financial Alliance for Net Zero (“GFANZ”). It is currently unclear how these previously voluntary commitments under GFANZ will mesh with the draft OFSI guidelines. For example, the potential exists for significant differences between the voluntary emission calculations considered when an organization planned and announced a net zero target in 2021, and the actual emissions reporting requirements under the OSFI guideline in 2022.
In addition, recent legal events bring potential climate-related liabilities into sharper focus. The Competition Bureau of Canada’s Cartels and Deceptive Marketing Practices Branch has opened up an inquiry into RBC, alleging that the bank advertises itself as compliant with the Paris Accord and 1.5 degrees of warming over pre-industrial levels, but at the same time is financing expansion of the oil and gas sector, incompatible with the same targets. The inquiry may level a $10 million CAD fine, which is not material to RBC - with annual income of over $16 billion. However, RBC could be forced to stop advertising itself as supporting the Paris Agreement and targeting net-zero emissions by 2050, probably a more material outcome.
It remains to be seen if this case also heralds further climate-related liability as well. It is likely that the core issue here is that the there is limited understanding of the actual scope 3 emissions and associated net-zero pathways in both the communications team doing RBC's advertising, and in the loans team making loans to oil and gas companies.
The solution to many of these issues is for financial organizations to have an accurate understanding of their scope 3 financed and/or insured emissions. This internal calculation should follow the evolving international standards (like PCAF) and changing regulations (like those drafted by OSFI). Zfolio is the only specialized Scope 3 calculation platform designed specifically for financial organizations to understand and manage financed GHG emission calculations, equipping financial organizations with the internal understanding required to manage disclosure and comply with new regulations and standards.
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