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Alberta oilpatch could face a lending crunch due to financial regulators’ concern about the risks of climate changes

Alberta oilpatch could face a lending crunch due to financial regulators’ concern about the risks of climate changes

A man wearing glasses at a press conference with a row of Canadian flags behind him.

New battle lines are being drawn between Canada’s financial regulators and Alberta’s oilpatch over the country’s climate change policies.

The Bank of Canada and Canada’s Office of the Superintendent of Financial Institutions (OSFI) recently released a pilot study that looked at how prepared Canada’s financial institutions are in understanding and managing climate change risks. The study showed that oilsands producers’ creditworthiness will decline dramatically over the next three decade.

As a political economist, my research on the changes in climate change regulations has been ongoing for many years. The friction between Ottawa and Alberta is also being played out around the globe.

Financial resilience

Financial regulators — including the Financial Stability Board, the international umbrella group for central banks and banking supervisors and the newly formed Network for Greening the Financial System, which comprises 31 central banks and regulators from around the world — are becoming increasingly concerned about the creditworthiness of borrowers exposed to the risks of climate change. These regulators fear that the financial system could become more unstable as climate change worsens.

The pilot study of OSFI focused on four climate scenarios that aligned with the Paris Agreement for limiting global warming below 2 C and the more ambitious 1.5 C goal by 20100. The focus of the analysis was the financial institutions’ exposures to 10 sectors most affected by climate change policies. These sectors were forestry, livestock and coal, as well as crude oil, gas, oil refinery, electricity, energy-intensive businesses, and commercial transportation.

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The pilot study analyzed six large financial institutions: the Royal Bank of Canada (TD Bank Group), Intact Financial Corporation and Co-operators Group Limited. It also included findings from Sun Life Financial, Manulife Financial Corporation, Sun Life Financial Corporation, Manulife Financial Corporation, Manulife Financial Corporation, Manulife Financial Corporation, Manulife Financial Corporation, Manulife Financial Corporation, Manu Life Financial Corporation, Sun Life Financial Corporation, Sun Life Financial Corporation, Co-operators Group Limited and Intact Financial Corporation. These institutions have loaned $240 million to companies in climate-exposed industries. About $70-billion of this total is for the oil and gas sector.

A man wearing glasses at a press conference with a row of Canadian flags behind him.
Canada’s top central banker Tiff Macklem announced in November 2020 that Canada’s financial system needs to become resilient to climate change.

One of the key metrics financial institutions use to calculate their loan-loss provisions — expenses set aside to cover potential losses on loans — is the probability of default, which is closely monitored by regulators.

The study’s key finding was that the probability of default to exposed sectors would rise over time. This was particularly true for oilands producers.

Under the 2C immediate scenario their likelihood of default will rise by at least 400% by 2050. The probability of default by other oil and natural gas producers is expected to rise 200 percent. The probability of default for renewable electricity producers is expected to drop by between five and 15%.

Alberta’s Implications

Federal jurisdiction over banking and federally incorporated insurance companies means that federal regulators can influence how much credit flows to Canada’s oil-patch.

The Calgary oil and gas industry is dependent upon bank loans and the sales of bonds and shares. Canadian banks are therefore crucial to the success of the industry. Environmentalists are well aware of this fact.

Over the past decade, fossil fuel divestment has gained significant attention. Many institutional investors and financial institutions have joined consortia that pledge to divest from oil and gas holdings.

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The road to climate justice is fossil fuel divestment

For example, the Caisse de dépôt et placement du Québec has stated it will End of 2022: Oil-producing holdings to be disposed off and Harvard University — and other academic institutions — has agreed to It must sell its holdingsfossil fuels. Norway’s US$1.3-trillion state pension fund has also Oilsands holdings were sold.

Environmentalists and the divestment community will now use the OSFI-Bank of Canada Report to argue that there are powerful national regulators involved in combating climate change.

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Climate-related disclosure policies

Canada is the only G7 country that does not have a national securities regulator. Instead, the Canadian Securities Administrators, a group made up of provincial securities regulators sets national policies to ensure smooth functioning of Canada’s securities market.

The CSA recently Set of disclosure requirements were releasedAll corporations that issue securities would be required to report their greenhouse gases emissions. Scope 1 (direct emissions), Scope 2, (indirect emissions, arising from the consumption of electricity, heat, steam, or steam) and Scope 3 (3 (any other indirect emissible substances)..

Alberta has stood firm in defense of its jurisdiction, and the Alberta Securities Commission will slow progress towards standardizing disclosures for oil and gas corporations it regulates.

The study is incongruous for Alberta. Where the oil and gas industry might now be spending more capital investmentWhere Premier Jason Kenney will face an April leadership review. Who will pay for the huge cleanup at the tailings ponds. Alberta’s auditor general keeps asking oilsands producers this question — and soon, so will their banks.

Aerial photograph of a large rectangular lake of mining waste.
A tailings lake at Syncrude oilsands near Fort McMurray, Alta. in July 2012. The northern Alberta tailings lakes store approximately 1.4 trillion litres worth of waste water.

The Supreme Court strengthened the polluter-pays principle in 2019 with its Redwater DecisionAn Alberta oil and gas company, owned more than 100 pipelines and wells at the time it went bankrupt. The decision stated that banks cannot evade environmental liabilities if a borrower goes bankrupt. A major rupture at one of the oilsands tailings ponds — the engineered lakes that contain waste water, sand, silt, residual bitumen and petrochemical waste from the oil sands mining process — would expose some of Canada’s largest financial institutions to enormous liability if an unforeseen event like this occurred.

In the coming months, federal financial institutions as well as their prudential regulators can expect to conduct extensive credit and supervisory checks of both oil-and-gas and oilsands borrowers. Oil and gas producers are currently enjoying healthy cash flows, which means banks will be less likely to lend to them and to raise money for oilands expansion.

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