"Leaving the Net-Zero Banking Alliance doesn’t exempt Canadian banks from climate accountability", 22 January 2025

" When we launched our guide on effective climate governance for Canadian banks, William Knight, former Chair of the Vancity Community Investment Bank, stated “As bank directors, we should be taking a leadership role in mobilizing capital for a net-zero emissions economy; this guide offers timely information on law and best practice that can support our decisions”.

Banks have an important role in the energy transition by way of their capital allocation decisions. They act as intermediaries for many Canadians by offering checking and savings accounts, investment products, loans, and services to small and medium businesses and large corporate entities. Being at the core of our financial system, they can play a proactive role in the transition to a net-zero emissions economy. Banks can scale investments towards green solutions, restrict their investments in activities that produce high amounts of greenhouse gas emissions like oil and gas extraction, and support their clients in the transition to cleaner forms of energy.

Earlier this week, five of Canada’s biggest banks, BMO, National Bank, TD Bank Group, CIBC, and Scotiabank, left the Net-Zero Banking Alliance, an initiative of “leading global banks committed to aligning their lending, investment, and capital markets activities with net-zero greenhouse gas emissions by 2050.” These five banks hold over 80% of the country’s assets...

Do the current politics and the pull out from the Net-Zero Banking Alliance mean that Canadian corporate directors of banks and other financial institutions alike should not oversee the management of climate-related risks and opportunities? Are they no longer accountable?

The short answer is no.

The risks climate change poses have not disappeared. Environmental risks dominate the risks landscape over the long term, according to the Global Risks Report 2024 from the World Economic Forum. The “degradation of natural assets such as forests and soils, or the acidification and pollution of the ocean, act as a risk multiplier on the impacts of climate change and vice versa,” according to a recent report published by the Institute and Faculty of Actuaries. The report also emphasizes that our current traditional risk management techniques, which typically focus on single risks in isolation, have the potential to miss network effects and interconnections, and underestimate cascading and compounding risks. The Institute outlines that we are at risk of “Planetary Insolvency” if we do not change the course of climate change and nature loss. So yes, climate change still poses a systemic risk to our economy and financial system.

Legally, corporate directors of banks still have a duty of care and prudence under the Bank Act. They have to act in the best interest of the company, with an objective standard of what a reasonable prudent person would do in comparable circumstances. Given that climate-related risks are widely recognized by the scientific and financial communities and are financially material to most sectors, including the financial sector, corporate directors of banks “have a duty to be proactive, and to critically evaluate and address the material financial risks and opportunities associated with climate change.”

The highest decision-making authorities of a company (the board of directors and senior management) need to align decision-making with scientific and financial realities to conduct proper risk management. They must embed climate change considerations into governance structure and processes, strategy development, and risk management. Boards must ensure their executive teams are giving them the most up-to-date and relevant information on climate-related risks and opportunities, to allow them to approve the overall strategic plan for the bank and effectively oversee the short-, medium-, and long-term risk management. Failure to do so leaves bank directors vulnerable to climate-related liabilities...

Climate governance is not optional. It is a necessity for long-term financial stability and securing a resilient future for all Canadians."