ESG-linked loans grow in Canada as regulator takes on climate

Bank of Montreal Source: Flickr/Jorge Castro

Canadian lenders and borrowers are increasingly turning to sustainable-linked loans ahead of potential regulations from the banking supervisor to deal with climate change.

The facilities, which adjust pricing according to the level of environmental, social or governance compliance, may reach C$20 billion ($16.6 billion) this year, said Jonathan Hackett, head of the sustainable financial group at Bank of Montreal. At least eight companies, including energy firms Gibson Energy ULC and Enerplus Corp., have signed or converted conventional facilities into sustainability-linked loans for the equivalent of C$8.44 billion, according to data compiled by Bloomberg.

“It is to some extent pent-up demand,” Hackett said in an interview. The “conversations we’re having with our clients really are across all industries.”

Sustainability-linked loans are gaining traction in Canada ahead of the Office of the Superintendent of Financial Institutions’ release of its proposals to deal with climate-related risks in the third quarter. In the document used to solicit feedback from the industry, the regulator explored whether climate concerns should be added into regulatory capital calculations or if additional supervisory procedures and reporting are warranted.

Canada would need to invest around C$128 billion over 10 years in order to reduce greenhouse emissions by its initial target of 30 per cent below 2005 levels by 2030, according to a report from the Institute for Sustainable Finance in September. Since then, the federal government has bolstered its goal of cutting greenhouse gas emissions twice and is currently aiming for a reduction of 40 per cent to 45 per cent below 2005 output.

Running in place

Banking regulation can be a driver to bolster the appeal of the sustainability-linked loans, said Hackett.

“It will create a virtuous cycle, where we’re able to deploy capital in a way that helps our clients to their sustainability (goals) that reduces our long-term risk on lending to companies that have exposure to the transition,” said Hackett. In turn, “that allows us to help support the economy in making that transition.”

At the end of 2019 – the latest available data – emissions stood largely where they were 14 years earlier, according to government data. That’s partly because the oil and gas industry, one of the country’s largest exporters, kept increasing discharges.

It will be necessary to improve data on emissions before a banking and lending framework can be put in place said Ryan Riordan, head of research at the Institute for Sustainable Finance, whose founding contributors are the country’s five largest banks, including BMO.

So far the banks’ regulatory capital models are built on backward looking information, with the goal of helping banks to navigate through the economic cycles, said Hackett, who had been a member of the financial services, strategy and risk practices team at Boston Consulting Group. In contrast, climate change “is really about a future trend and a risk that we’re all trying to manage.”

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