At first glance, Canada’s big banks look to be solidly behind the country’s major energy companies when it comes to exploiting the massive reserves locked up in Alberta’s oil sands.
Toronto-Dominion Bank showed its faith this week by committing $3.25-billion to Canadian Natural Resources Ltd., a loan the Calgary-based company used to snap up 1.5 million acres of oil sands properties from Devon Energy Corp., the latest foreign player to exit the sector.
The same support shone through in recent speeches bank chief executives delivered in Calgary, a city that’s still reeling from a downturn in energy prices that dates back five years. Bank of Nova Scotia boss Brian Porter pounded the table for new pipelines and quicker government approval of energy projects. That followed a pitch from Royal Bank of Canada CEO Dave McKay for using the oil sands to transform the country’s economy.
To date, global banks have also stood fast in the face of criticism from environmentalists over their involvement in what they brand, with considerable venom, the “tar sands.” Groups such as Greenpeace and the Rainforest Action Network have spent years staging protests against JPMorgan Chase & Co. over its close ties to energy companies. Yet JPMorgan, along with Goldman Sachs Group Inc., proudly stepped forward this week as advisers to Devon Energy on the sale of its Canadian assets.
Look deeper, and it becomes clear the bankers’ support for energy companies in general and the oil sands in particular is becoming more qualified. There are clear trends in finance circles that will make it far more difficult for energy companies to raise capital, such as institutional investors’ widening embrace of environmental, social and governance (ESG) criteria in managing portfolios.
European investors were early to the idea that ESG principals are central to deciding what stocks to buy and sell. Their influence played a part in last year’s decision to curtail lending on new oil sands projects at Europe’s largest bank, HSBC Holdings PLC.
For some time, ESG concepts have percolated through North American institutions, including massive index-fund managers such as BlackRock Inc. and Vanguard Group Inc., which are among the largest shareholders in every Canadian bank. Placing a larger emphasis on ESG criteria puts oil sands investments in a different light.
Scotiabank held a well-attended conference on ESG trends this spring. One oil-company chairman who was in the room said institutional investors talked of being fed up with companies that attempt to gloss over their environmental impact with public-relations stunts, such as an airline company that highlighted a program to recycle paper straws rather than dealing with fuel consumption and other material issues. Energy companies can be guilty of the same sleight of hand – focusing on steps taken to ensure ducks don’t land in tailings ponds rather than on their emissions of greenhouse gases.
Bank CEOs can afford to ignore protests from environmentalists. They can reason with regulators. Bank CEOs cannot disregard demands from their largest shareholders. If significant numbers of institutional investors start telling bank boards and management teams that they no longer support lending on oil sands projects, including pipelines, then capital will dry up.
Bankers can read the tea leaves. TD Bank CEO Bharat Masrani is stepping up for oil sands clients by lending billions to the likes of Canadian Natural Resources. He’s willing to wade into the public debate around energy policy by devoting a few lines of his speech at the bank’s recent annual meeting to the need for new pipelines and new global markets for Canadian oil.
But Mr. Masrani spent a far larger portion of his presentation to TD’s shareholders talking about what the bank is doing to support Canada’s transition to a low-carbon economy. He said TD plans to devote up to $100-billion to green projects by 2030, a bank-wide initiative that sweeps in lending, financing and asset management. The bank is already 30 per cent of the way to this target, and Mr. Masrani estimates this contributed $15-billion to GDP, supported 76,000 jobs and avoided 780,000 tonnes of greenhouse gas emissions. He said: “Clearly this transition can be good for the environment and the economy.”
Today, the banks are shoulder-to-shoulder with Alberta’s oil sands companies. That support cannot withstand a shift in sentiment among institutional investors. Over time, the financial crowd will push for a greener future.
Andrew Willis