RBC shareholder resolution tackles greenwashing loopholes in ‘sustainable debt’

A shareholder advocacy group is challenging the Royal Bank of Canada’s (RBC) use of a fast-growing new financing tool called sustainability-linked debt, in which companies promise to pay financial penalties if they don’t. fail to meet social and environmental performance targets.

The new product line, which includes both bonds and loans, saw explosive growth over the past year, with total deals 150% higher in the first nine months of 2021 compared to all of 2020. Sustainable debt is “the fastest growing product segment on the financial markets today,” according to RBC, Canada’s largest bank.

While linking corporate debt to sustainability goals seems like a great way to incentivize companies to make environmental, social and governance (ESG) improvements, the lack of standardized rules has quickly opened the door to greenwashing. , with some companies using the funds to continue operations. usual with little ESG impact.

In response, Investors for Paris Compliance (I4PC), a Canadian shareholder advocacy group, filed a resolution with RBC on Feb. 17 calling on the bank to tighten its sustainable finance policies to prevent fossil fuel-related activities and projects opposed by indigenous peoples. This decision was triggered by RBC’s decision to join other Canadian banks in a $1.1 billion sustainability bond (SLB) issued by Canadian oil and gas pipeline giant Enbridge last year. As part of the offer, Enbridge is committed to reducing its greenhouse gas emissions by 35% from its 2018 emissions by 2030. In addition, by 2025, the company will commits to achieving 28% racial and ethnic representation, 40% gender diversity in its workforce and 40% female representation on its board of directors. If Enbridge fails to meet these targets, it agrees to pay investors an additional 0.5% interest.

A Reuters News Service study on Enbridge’s offer and 47 other SLBs issued in 2021 casts doubt on the relevance of ESG targets. Almost half of the offers – 23 – included a goal that allowed companies to improve at a slower rate than they had previously achieved.

In the case of Enbridge, the study found that the company’s emissions had already fallen by 23% compared to 2018, when it sold its gas gathering assets in British Columbia and Alberta. In other words, two-thirds of its 2030 target had already been met before the bond was issued. And the company was already more than halfway to achieving its goals for diversity and gender equality on the board when the bond was issued.

Enbridge defended its goal, saying its 2030 emissions target will require significant effort from the company and that an opinion from research firm Institutional Shareholder Services (ISS) concluded that the goals were relevant and essential to its business.

Although this is true, ISS also said the emissions target was not meaningful throughout the company’s value chain because the emissions target is based on the company’s direct operations and energy consumption (Scopes 1 and 2) and does not include emissions from oil and gas consumption itself ( Scope 3), which is responsible for approximately 80% of the company’s emissions.

In its shareholder proposal, I4PC noted that Enbridge was able to use SLB funds for its general financing, including financing the completion of its Line 3 pipeline expansion. should produce 193 million tonnes of CO2 emissionsthe equivalent of 50 new coal-fired power plants, and faced strong opposition from indigenous communities.

An RBC spokesperson said Bloomberg the bank was unable to comment on the issue until March, when it will issue a response to I4PC’s resolution. The resolution, filed on behalf of two I4PC investor clients, will be voted on at the bank’s annual meeting in April. Matt Price, director of corporate engagement for the financial sector at I4PC, said Enbridge’s offer shows the importance of strengthening the bank’s ESG investment policies, especially as the bank s is committed to providing $500 billion in sustainable finance by 2025.

It sounds like a big, much-needed commitment when you think of the desperately needed capital in the economy for net zero, but what does it actually mean? ” he says. “Definitions are lax and there is little consensus on what ‘sustainable’ means in this context.”

The rapid growth of sustainability-related debt challenges the Canadian banking sector’s commitment to sustainability. Net-Zero Banking Alliance (NZBA) principles.

Under the NZBA agreement, signed last year, banks had 18 months from joining to set their 2030 CO2 reduction targets. For Canadian banks that joined in October, that sets their deadline to April 2023, just over a year from now.

Price says it’s time for banks to act.

“Encouraging incremental change is fine, but only within a credible framework where we reduce emissions in accordance with climate science,” he says. “But right now the rules are so lax that banks are giving green labels to companies that take us in the wrong direction, so it’s really being broken.”

Eugene Ellmen writes on sustainable business and finance.

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