Canadian Banks will require info on your climate risks - are you ready?

Last week’s budget was full of little nuggets, as most budgets are. But one line really jumped out at me: “OSFI will also expect financial institutions to collect and assess information on climate risks and emissions from their clients.”

While the details are still being hammered out, this means that all federally regulated Canadian financial institutions (think - the big banks) will soon be required to gather information on the greenhouse gas (GHG) emissions of their clients and start assessing the climate risks that these businesses face.

Many Canadian banks were already working hard to start calculating their “Scope 3 carbon emissions” – including the emissions from clients’ activities that are financed by the bank. But this is no easy task. Unlike more direct greenhouse gas emissions from the bank’s own buildings, corporate travel or energy use, this scope of emissions requires banks to understand their clients’ climate impacts and make significant estimates when good data isn’t available.

And these “financed emissions” are a big deal. According to CDP Worldwide: “Greenhouse gas emissions (GHG) associated with lending, underwriting and investment activities are more than 700 times higher, on average, than a financial institution’s direct emissions.”

Progress to report on these “financed emissions” is slow-moving. TD, which was the first Canadian major bank to set a target to achieve net-zero GHG emissions associated with its operations and financing activities by 2050, only reports on its financed emissions for the Energy and Power sectors in its 2021 report. And, to do that, the bank had to convince its customers to share information and make significant investments to develop auditable and reliable metrics and reporting standards.

Now that the Federal Government will require banks to gather information on their clients’ climate risks and emissions, this type of “financed emissions” reporting may be easier to produce and may allow banks to more transparently report out to their shareholders and stakeholders on the progress they are making towards their Net Zero objectives. Since they have their own targets to achieve, this may also lead banks to direct more of their capital to companies that are actively reducing their GHG emissions and managing climate risks.

But what does this mean for SMEs?

The government fully expects that these new requirements will have a big impact on Canadian businesses. “As federally regulated banks and insurers play a prominent role in shaping Canada’s economy, OSFI guidance will have a significant impact on how Canadian businesses manage and report on climate-related risks and exposures,” the budget document read.

For SMEs who still think that Net Zero commitments and ESG reporting are reserved for large publicly traded companies, it’s time to think again. According to the Western Canadian law firm MLT Akins: “Now more than ever, companies that do not have a credible net-zero plan risk losing access to capital. Even companies in a high-emitting sector can still be viewed as an attractive investment by many institutional investors if they have a credible net-zero plan and meaningful targets for reducing emissions.”

Where do you start?

Soon, tracking emissions and climate risks will become table stakes for any SME that needs to access financing from Canadian banks. For SMEs that foresee the need for more growth capital, the time is now to start figuring out their own GHGs and set targets to reduce climate impacts and manage climate risk. This becomes even more urgent if you operate in an energy-intensive industry. By starting early to understand your company’s climate risks and GHG emissions you will be better positioned to manage these risks and clearly articulate how your business contributes to your bank or investors’ own plans to reduce their financed emissions.

At Cardinalis, we help you understand the environmental and social issues that matter most to those who have the greatest influence on your business success. We equip you with clear reportable metrics that you can use to authentically and accurately tell your brand story. And we help you continue to have a positive impact on people and the planet as you grow your business. Contact us today to see how we can help.