Climate change board
iStockphoto

The withdrawal of five of Canada’s largest banks from the Net-Zero Banking Alliance (NZBA) likely reduces short-term transition risks, but increases the longer-term risks of failing to address climate change, says Morningstar DBRS Inc.

In a report Tuesday, the rating agency noted that the Big Five banks have joined several large U.S. banks in leaving the NZBA — which committed the participating banks to align their financing and investing activities with net-zero greenhouse gas (GHG) emissions by 2050 — a shift that is expected to curb their efforts to address climate risks and curb emissions, at least in the short term.

“Despite their restated commitments to achieving their individual climate goals, the exit of big North American banks from the global sector’s largest climate coalition will likely slow the climate transition momentum in the region and increase physical climate risks over time,” the report said.

“In terms of physical risks, we are concerned that in the now-more-likely scenario of insufficient transition to net-zero carbon emissions, the frequency and severity of extreme climate events is expected to accelerate,” it said, noting that these risks are already rising faster than expected on a global basis, leading to higher financial and economic losses.

For instance, the rating agency said 2024 was the worst year on record for insured losses in Canada, “following wildfires in Jasper, a hailstorm in Calgary and flooding in major cities.”

Additionally, while more timid efforts to address climate risks may reduce the banks’ short-term transition risks, “these risks could intensify in the future, ultimately requiring more dramatic, more expensive efforts, as a result of the reversal of government policies, technological developments and changes in market and customer attitudes towards a low-GHG economy,” DBRS said.

The report suggested that the banks’ moves to drop out of the global initiative was primarily driven by the shifting U.S. policy climate.

“It appears that the Canadian banks’ decision to pull out of the alliance was also driven by political considerations as their operations in the U.S could be threatened if they continue to reduce financing to the fossil fuel linked industries,” it said, adding that the reputational risk associated with financing the fossil fuel industry has diminished, while the legal risks of limiting industry financing have heightened in the U.S.

“Rising pressure to leave the alliance is also related to a lack of a firm commitment from some governments to climate transition because of insufficient regulatory approaches, competing priorities for policies and funding and insufficient public engagement,” the report said.

Longer term, however, the report suggested that the banks’ failure to manage climate-related risks, “could amplify credit, market, insurance and liquidity risks and lead to heightened operational and reputational challenges.”