Supporting Sustainable Finance: Practical Strategies

The call for environmental sustainability among investors is growing louder. So, sustainable finance is influencing various sectors of the economy and having serious impacts for investors. Among these, Canadian banks are standing at a crossroads. They are under increasing pressure from shareholders and employees to divest from oil and gas financing. While the goal is to align with sustainable development goals, it’s crucial to examine the potential consequences of such a shift. This blog post aims to shed light on the intricate dynamics at play and why investors passionate about environmental sustainability should be careful about what we’re asking for.

The Shift to Private Financing: A Double-Edged Sword

As Canadian banks face mounting scrutiny for their involvement in financing oil and gas projects, there’s a growing movement advocating for a complete withdrawal from this sector. The rationale is straightforward: reducing the flow of capital to fossil fuel projects could ostensibly curb their expansion, thereby mitigating climate change. However, recent trends suggest a different outcome.

Data from Preqin reveals a significant uptick in private credit deals within the oil and gas sector, jumping to $9 billion in just 24 months through 2023, up from $450 million in the preceding two years. This surge is attributed to private credit managers filling the void left by traditional banks. Which have begun retreating from these investments due to climate risk concerns. This transition from regulated, transparent bank financing to less transparent private funding channels may not decrease the oil and gas sector’s development. Instead, it shifts the financing to realms beyond the reach of stringent environmental oversight, potentially exacerbating the very issues sustainability advocates seek to address.

The Case of RBC: Sustainable Finance

The Royal Bank of Canada (RBC) finds itself at the epicenter of this debate. Despite its significant contributions to environmental causes and setting ambitious goals for sustainable finance. RBC has been criticized for its continued financial relationships with fossil fuel companies. This criticism highlights the tightrope financial institutions must walk between supporting Canada’s economic engine—significantly powered by the oil and gas sector—and adhering to environmental sustainability principles.

RBC’s situation underscores a critical point: the withdrawal of Canadian banks from oil and gas financing does not equate to the end of such projects. Instead, these projects may simply find alternative funding sources, potentially at higher costs and with less transparency, thereby diluting the impact of environmental advocacy efforts.

The Unintended Consequences for Investors

For investors holding shares in Canadian banks, this shift poses significant risks. Banks stepping away from oil and gas projects might see a short-term uplift in public perception and environmental ratings. However, the financial vacuum left behind could lead to diminished returns for shareholders. These shareholders include pension funds and wealthy individuals, but mostly include everyday Canadians who are saving for retirement.

As lucrative financing deals migrate to private equity and credit funds, it hurts average investors who rely on the steady performance of bank stocks in their portfolios.

Sustainable Finance: Strategic Engagement

This evolving landscape calls for a nuanced approach. Investors, environmental advocates, and financial institutions must collaborate to find balanced solutions that address climate change without inadvertently harming working Canadians or the very goals they aim to achieve. Strategies could include:

• Shareholder Engagement to promote transparency, better environmental practices, and investments in clean energy and technology.
• Supporting policy frameworks that encourage sustainable financing while ensuring that alternative funding sources for fossil fuel projects adhere to similar standards.
• Investing in transition strategies that recognize the current energy sector’s complexity and the time required to shift towards greener alternatives.

A Family Office Approach to Sustainable Finance

The journey toward a more sustainable future is fraught with complex challenges and dilemmas. While the desire to divest from oil and gas is well-intentioned, stakeholders must carefully consider the broader implications of such actions. A more strategic approach may prove to be the key in navigating this precarious balance. Ensuring that efforts to combat climate change are effective, sustainable, and inclusive.

Our family office uses shareholder advocacy services such as SHARE Canada. This association will advocate on behalf of shareholders to press public companies for various improvements based on certain values. We’ve also joined with other wealthy investors to fund and develop initiatives that engage with businesses to promote sustainable finance. Please contact us to learn more about how we help investors achieve their sustainability goals.