The Decibel - Can big banks save us from climate change?

Episode Date: November 21, 2022

The year was 2021. And former Bank of Canada governor Mark Carney had a dream. In Glasgow, he announced that wanted to bring together the world’s financial institutions to help solve climate change. It was called GFANZ – the Glasgow Financial Alliance for Net Zero and since it’s launch that year, it has grown to include more than 500 members that manage $150-trillion in assets.But just ahead of this year’s COP27 in Egypt, the alliance started to crack. Report on Business reporter and columnist Jeffrey Jones explains why some banks are worried that Mark Carney’s GFANZ group might cause them legal headaches.Questions? Comments? Ideas? Email us at [e-mail]

Hey, I'm Cheryl Sutherland, sitting in for Manika, and you're listening to The Decibel. Last week, the UN Climate Change Conference COP27 wrapped up in Egypt. At last year's conference, climate activist Greta Thunberg criticized leaders for a lot of talk and little action. Blah, blah, blah. Green economy. Blah, blah, blah. This is all we hear from our so-called leaders. But there's one announcement that made a huge splash at the conference last year. A plan that promised to be more than blah, blah, blah. It's called GFANS, a group of financial institutions

that control trillions of dollars in the world's economy. Today on the show, we've got Jeffrey Jones. He's a reporter and columnist for the Globe's report on business. He'll tell us exactly what GFANS is, what it set out to do, and whether this powerful club can actually solve the big problem of climate change. This is The Decibel from The Globe and Mail. Jeff, thanks so much for joining me today. Thanks for having me. I want to start off by talking about the person behind all of this, which is Mark Carney, who I would call sort of a central bank celebrity if there is such a thing.

Can you tell me a bit about who Mark Carney is? Sure. Here's the short bio. He was born in the Northwest Territories, educated at some of the finest schools, including Harvard and Oxford, was a rising star at Goldman Sachs before joining the Federal Finance Department in the 2000s. He became well known to Canadians in the latter part of that decade because he was Bank of Canada governor during the financial crisis. So we heard a lot from Mark Carney at that point. He then became Bank of England governor, and he was there till 2020 when he went into the private sector and also went full on to climate finance. You know, it's interesting. I think he was early in seeing that the climate risk is equal to the economic risk.

So he's vice chairman of Brookfield Asset Management, where he is in charge of an impact fund, so investing in renewable technologies. But he is also the UN's special envoy for climate action and finance. So a little while ago, I think before the last federal election, where he was talked about as a potential candidate for the Liberals, but he has not jumped into the ring yet. And quite frankly, I don't know where he would find the time. Okay, so let's go back to COP26, which was back in 2021, when Mark Carney announced the birth of the Glasgow Financial Alliance for Net Zero. So people might be more familiar with its acronym, which is GFANS.

GFANS. GFANS. Yeah, GFANS. I'm not really a fan of the GFANS acronym, but I mean, let's talk about what was his vision for this organization when it started? Sure. And I should also say that there is a carbon budget in the world, but when it comes to climate finance, there is no budget for acronyms. So I'm going to talk about several of them in the next little while. So I'll make sure that I don't over acronym this discussion. I wonder if there are better ones than just GFANS. There are. Okay, so GFANS, yeah, the Glasgow Financial Alliance for Net Zero is a group of

banks and asset managers and insurance companies that have all banded together to align their investment decisions with the goals of the Paris Agreement. And that's, of course, to limit global temperatures to 1.5 degrees above pre-industrial levels. So no small task there. And of course, Mark Carney was very much the man who had succeeded in herding all these cats. When you talk about all these cats, like how many people are we talking about? How many members are we talking about here? Okay, so we're talking about a lot of members. So the number that came out was 450 companies representing $130 trillion in assets. And that's grown, actually, since 2021. So the latest numbers have been $140 trillion, $150 trillion.

This doesn't mean that all of that money is now directed at finding investments in climate change solutions. It just means that all of those institutions representing all of those assets have signed on to this program. When you say $130 trillion, $150 trillion, $140 trillion, that is a huge amount of money. It's something that it's hard to wrap my head around. Can you give me something to put that into context? What can we compare that to, to get an idea of just how much money that is? This is far larger than the GDP of many, many countries in the world. I think we're talking about something like 40% of the world's

financial system is involved. Wow, that's a lot of money. Yeah. So what exactly was the promise that Mark Carney saw in terms of the role that private markets could play to actually help climate change? Well, you know, there really isn't the ability to do what is necessary to fight climate change when it comes to reducing emissions, investing in technology, all the things that have to be done in order to limit temperatures without the private sector. Governments can make the targets, but it all flows down to where the money is flowing and how it is being directed at either reducing emissions in fossil fuel industries or seeking out renewable energy to replace dirty power elsewhere in the world. These are the taps that have to be opened in order to find these solutions.

So you mentioned that Mark Carney was successful at herding all these cats, I mean, 500 members plus, in fact, for this quote unquote alliance. I mean, how exactly did he manage to get all of these people on board? Well, you'll have to remember that all of these financial institutions have their own masters, whether it's their own board of directors, shareholders. A lot of this now is, here's another acronym for you, ESG related. So environmental, social, and governance. A lot of the shareholders that invest in these financial institutions have

criteria that they have to meet. So there is already this pull from their own investors to start doing what's necessary to first of all, deal with their own climate risk, things that could hurt the value of the company shares in the future, but also make some kind of a difference when it comes to actually dealing with environmental problems. So Jeff, what does being a member actually mean? What were they agreeing to in the beginning? One of the criteria of membership was that they had to sign on to the tenets of a UN campaign called Race to Zero,

which sets out a number of science-based measures to get to net zero. They came away from Glasgow as being the cool kids of the financial industry, filled with a sense of righteous capitalism that they were going to take responsibility for the finance industry's role in fighting climate change. And when we talk about race to zero, we're kind of referring to this idea of racing to net zero, quote unquote. So I need a reminder, like what exactly does net zero mean? And what that means is reduce or eliminate all of the carbon emissions that you can. And what you can't eliminate, you offset in other ways, whether it's carbon markets,

whether it's investing in things that counteract the emissions that you have. The idea here is that by 2050, we are a carbon neutral planet. Okay. Is this difficult for big banks? Because, you know, Canadian big banks are, in fact, sort of intertwined with fossil fuel companies. Yeah, they really are. So there is quite a bit of debate in the environmental and financial community over the bank's role in funding fossil fuels.

If you look at the environmental groups, the NGOs, they will tell you that it is the bank's responsibility to divest of fossil fuels, to stop lending. If you're a pension fund, you shouldn't be holding shares in oil companies. It goes against the tenets of trying to get to net zero emissions. If you're a bank, your philosophy in Canada anyway has been that your job is to go to the fossil fuel industry with your financial might and your expertise and help them decarbonize. There is a lot of tension in Canada over those two polar opposites. And it's very interesting because, you know, 5% to 10% of Canada's GDP comes from the energy sector here. So it must be kind of a difficult relationship.

Yes, and it is a big employer, especially in Western Canada, and a major exporter as well. So this is a tough nut to crack for the financial industry. After the break, the GFAN's unity starts to come apart. This is a tough nut to crack for the financial industry. After the break, the G fans' unity starts to come apart. Okay, so we've laid out what sounds like a very ambitious plan by Mark Carney that seemed to have a lot of buy-in. But Jeff, when did the first signs of trouble show up for Mark Carney and GFANS? You know, it almost feels like, you know, the sustainability officers and CEOs came back from Glasgow with sweetness and light,

saying that we have all agreed to this ambitious plan to reduce emissions, and now let's get to work and do it. Unfortunately, they also had to take all these documents to their legal departments, who looked at the fine print and said, wait a minute, we see some problems here, some pretty big problems from a legal standpoint. One of them is if we adhere to what Race to Zero is saying with regard to divesting from coal mines, from fossil fuels, from all of these things at once, we run into some very serious legal problems, especially when it comes to antitrust. We could be seen as colluding to dump entire industries.

So some US banks, especially, started to make some noise back in the summer saying, we may have to leave. Okay, Jeff, so you mentioned things like collusion. Can you help me understand this? Like, what was the precise legal concerns the banks had around these new net zero guidelines? So they saw this legal risk, said, we have to fix this somehow. We can't be told by an outside agency to all act in concert or we run into very serious antitrust concerns. So that's the US problems. In Canada, there was also some friction that we picked up on from our sources. We did a story, my colleague James Branshaw and I did a story back in the fall that showed the Canadian banks were upset with race to zero as well and the need to divest fossil fuels,

phase out and eliminate, I think were the words that they were most upset about. Also concerns about governance. Who's running these banks? Are we run by our own board of directors or are we being prescribed action by a UN agency? So what happens? You talked about the US banks and the Canadian banks having some issues with this. What happened when they raised these legal concerns? Well, Race to Zero updated its guidelines a little bit, changed some wording, but that didn't do the trick in terms of getting the banks to be more comfortable with their membership in GFANS. And specifically in another, here's another acronym for you, the Net Zero Banking Alliance or NZBA, which is their subgroup within GFANS. In the end, what happened was is that the NZBA put out a statement saying

that it isn't race to zero that dictates how banks operate. It is the banks themselves and us as a banking group. So they loosened the membership criteria for the NZBA, and that calmed some of the waters. And Jeff, outside of this GFANS agreement, are banks, asset managers, or pension funds divesting in fossil fuels in a meaningful way? I'd say that this is probably the biggest debate raging in asset management when it comes to climate. I mean, if you look at, for instance, the Caste de Depot in Quebec, that major pension fund has made a commitment to divest itself of

oil production. So that's on one side of the spectrum. The other is some other major Canadian pension funds like the CPP or Ontario Teachers that have said, we're not here to divest fossil fuels or other high-emitting industries. What we will do is use our financial might to, first of all, convince them to take climate consideration seriously and also use our financial might to help them invest in technologies and other ways to reduce emissions. So the fear is that if you divest of these companies, oil companies, steel producers, cement companies, if you just divest them, the fear is, well, they're still going to exist.

Somebody else will buy them, and the shareholders may not have that same commitment to climate action. And another point is that right now fossil fuel companies are making a lot of money because of the energy crunch caused by the war in Ukraine. So that's quite the incentive not to divest in them at the moment. That's one of them for sure. I mean, you could argue that that industry is very cyclical. That could change quickly. There is a strong movement out there saying that the oil industry, because it's making all of this money right now, should be diverting some of these funds to carbon capture, to other technologies to reduce their emissions. So Jeff, we've had all this excitement a year ago, but things have changed in terms of the expectations for members of this massive financial alliance. We're talking about GFANS here. I guess I'm left wondering,

is this just an exercise in greenwashing, or did Mark Carney revive hope that GFANS can create change at this year's COP, which has just wrapped in Egypt? Well, climate activists are concerned about greenwashing, that banks and insurance companies and asset managers have talked about major ambition when it comes to climate, but have yet to put in place what's necessary to get there. As far as the relaxed requirements for being a member of GFANS, I go back to Mark Carney's book, which he published last year called Values. And he's a fan of a phrase that he attributes to Timothy Geithner, the former US Treasury Secretary. It's plan is better than no plan. So I think from Mark Carney's standpoint, I don't want to get into his head because I don't think I have that ability. But I will say that

he is fond of that phrase. And I think you can take that to mean, look, the important thing is that everybody is rowing in the same direction now. It may not be perfect, but it's definitely better than nothing at all. So just lastly here, Jeff, from what we've learned so far with GFANS, I guess, can the likes of big banks be relied upon to be a part of the solution to climate change? A lot of this is in the hands of consumers, general public, bank clients, shareholders, all of which have a lot of clout when it comes to how the banks operate. That's the first point. The second one is that there has to be eventually pretty stringent

rules for putting all of these policies to reduce emissions in place. GFANS is a voluntary organization. And as we've seen with other voluntary initiatives that have come up in the climate world, voluntary measures can quickly be assumed by governments and regulators and made mandatory. And we may see that in the GFANS world as well at some point. You know, I don't think there's a lot of patience and that's completely understandable. Every year that we delay action, the much more difficult and expensive it gets to get to net zero. Jeff, thanks so much for coming on the show today. Oh, thanks so much for the opportunity. That's it for today.

I'm producer Cheryl Sutherland, in for Manika Raman-Wilms. Our other producers are Madeline White and Rachel Levy-McLaughlin. David Crosby edits the show. Kasia Mihailovic is our senior producer. And Angela Pachenza

is our executive editor. Manika is back tomorrow. Thanks so much for listening.