DBRS Morningstar Releases Commentary on Large Canadian Banks’ Climate Change Strategies with Restrictions on Fossil Fuel Lending

DBRS Limited (DBRS Morningstar) released a commentary titled “Climate Change Strategies Coming into Focus for Large Canadian Banks with Restrictions on Fossil Fuel Lending.”

The commentary highlights the following:
-- Energy sourced from oil, natural gas, and other forms of fossil fuels, such as coal, has been a key driver of the Canadian economy and its wealth creation. Given the important role that the oil and gas (O&G) and fossil fuels industries have in the global economy, Canadian banks have historically financed the energy sector.
-- However, these industries have also exposed banks to greater scrutiny from investors and activists as they are pressuring banks to reduce their lending to entities with high greenhouse gas emissions.
-- Recently, both the Royal Bank of Canada (RBC; rated AA (high) with a Stable trend by DBRS Morningstar) and The Toronto-Dominion Bank (rated AA (high) with a Stable trend by DBRS Morningstar) announced climate action plans that are aimed at balancing the transition to a low-carbon economy while supporting global energy needs. In addition, RBC indicated that it was placing new restrictions on lending to certain fossil fuel developments.
-- Overall, we do not expect these announcements to have a significant impact on reducing these banks’ exposures to the O&G sector, given current global demand and DBRS Morningstar's view of an expected rebound by 2022. We could, however, see exposure to the fossil fuel sector diminish over the medium term.
-- On average, the banks' lending to the O&G and mining (which includes coal) sectors represented a modest 2.1% and 0.7%, respectively, of their total aggregate gross loans as of July 31, 2020.

“Reflecting the relative importance that O&G will continue to play as a major component of the global economy's energy pie, particularly for Canada, we expect that the large Canadian banks will continue lending to the O&G sector, despite pressures on these banks to demonstrate their commitment to fighting carbon emissions and climate change,” said Robert Colangelo, Senior Vice President, Global Financial Institutions Group at DBRS Morningstar. “We expect green bond issuance from Canadian banks to continue to increase, and also believe that they will make progress in providing financing to the renewable energy and clean technology sectors, which will facilitate the transition to a low-carbon economy and support these banks' climate change strategies,” Colangelo added.

Notes:
The commentary is available at www.dbrsmorningstar.com.

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