BUSINESS
04/28/2018 11:27 EDT | Updated 04/28/2018 15:01 EDT

Major European Banks Are Backing Away From The Oilsands. Will Others Follow?

U.S. banks and pension funds may pull out of the oilsands, but it's hard to see local institutions doing the same.

The Syncrude Canada Ltd. oilsands upgrading plant north of Fort McMurray, Alta., Thurs. June 4, 2015. The decision by Europe's largest bank, HSBC, to halt funding for new projects in the oilsands has some wondering if other financial institutions, including U.S. banks and pension funds, will eventually follow suit.
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The Syncrude Canada Ltd. oilsands upgrading plant north of Fort McMurray, Alta., Thurs. June 4, 2015. The decision by Europe's largest bank, HSBC, to halt funding for new projects in the oilsands has some wondering if other financial institutions, including U.S. banks and pension funds, will eventually follow suit.

The decision by Europe's largest bank, HSBC, to halt funding for new projects in the oilsands has some wondering if other financial institutions, including U.S. banks and pension funds, will eventually follow suit and what the impact that might have on Canada's energy sector.

HSBC last Friday became the latest European bank to announce that it would no longer finance new greenfield oilsands, coal power plant and arctic drilling projects. It follows BNP Paribas and ING, both of which made similar announcements in the past year.

The company says it will still finance existing operations it has a $6.1 billion wholesale loan portfolio in the energy sector and it says it will remain an engaged partner in the industry but it will stop funding "new mines or in situ productions that are geographically separate from existing ones," and new oilsands-dedicated pipelines, says Sharon Wilks, a spokesperson for HSBC Bank Canada.

Andrew Winning / Reuters
HSBC's headquarters in the Canary Wharf financial district of London, March 2, 2009. HSBC has stopped financing any new oilsands projects, as well as new oilsands-related pipeline projects.

The reason for the change in policy, says Wilks and it's why others have done the same is that it wants to help meet Paris Agreement targets, specifically the goal of keeping global warming under 2 degrees Celsius.

"We are committed to doing our part in supporting the transition to a low carbon economy," said Sandra Stuart, HSBC Bank Canada president and CEO, in a statement. "Our role is to help the country, its families and its businesses to adapt and responsibly balance a healthy economy with a healthy environment."

While HSBC, ING and BNP don't have as much of a presence in Canada's energy sector as the major Canadian banks do, this move does raise the question of whether others will follow.

Changing investor mindset

Lisa Kramer, a professor of finance at Toronto's Rotman School of Management, does think that this is the start of something bigger.

"It's the beginning of a trend," she says. "Many others are trying to align their investment with the support of a low carbon economy and the idea of addressing climate change."

Watch: Alberta's laid-off oil workers may now be replaced by machines

It's no coincidence that it's the European banks leading the way, she adds. While having less invested in the sector than their Canadian counterparts makes it easier for them to take a stand, its shareholders, which are global, are collectively more progressive than Canadian banks' shareholders, who may have closer ties to the oilsands.

However, she does think Canada's banks will eventually follow suit, especially as more millennials rise through the ranks.

"Investor mindset is changing, with more millennials increasing the trend of sustainable investing," she says.

Continued demand for oil

Still, it's unlikely the Canadian banks will join in any time soon, says Martin Pelletier, managing director and portfolio manager with Calgary's TriVest Wealth Counsel.

According to the Rainforest Action Network's Banking on Climate Change report, Canada's big five banks are heavily invested in the sector, accounting for about $30 billion in financing in 2017. RBC led the way with more than $11 billion, while HSBC was seventh with $1.4 billion in funding.

"The Canadian banks provide funding across all sectors in Canada, so to pull funding for oilsands? I just don't see it," he says. "They have a different shareholder base and a lot of huge institutions in Canada own the banks. But I don't see it impacting HSBC either."

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There's another reason why Canada's banks won't be quick to follow: the oilsands are going to need financing for years to come, in part because of increasing demand for oil from China.

According to Canada's National Energy Board, raw bitumen production should climb from just under 2.6 million barrels per day in 2016 to 4.5 million barrels per day by 2040. Most of that growth, though, will come from existing operations, which HSBC will continue to finance. Greenfield projects will account for a sliver of that growth.

"People in China want to move their families forward, but when they do, when they go from walking to biking to driving, the cheapest, most available and easily transportable source of energy is fossil fuels by a large margin," says Jim Davidson, deputy chairman with Calgary's GMP First Energy.

Reuters Staff / Reuters
Traffic congestion in Shanghai, April 19, 2017. Growing demand for oil from Asia is expected to keep oilsands production growing in the coming years.

While Davidson isn't a fan of HSBC's move, he says it's possible that decisions like theirs will influence other institutions.

"There is a possibility," he says, that U.S. banks, many of which do fund oilsands projects, could decide to change their policies, too, he says. "The world is worried about the environment."

However, it will still be a long time before Canada's energy sector finds itself at risk of losing financial backing.

"Regardless of whether the world moves forward to a renewable energy system, which I ultimately believe will transpire, it won't be in our lifetimes," Davidson says. "Demand for hydrocarbons is growing every year. It's a viable business."

Pressure on pension funds

If the sector should be concerned about anything it's the pressure some of the country's pension plans are under to divest from the oilsands.

For instance, Ontario Teachers' Pension Plan has been admonished by many of its members for holding billions in oilsands assets. It holds shares in Exxon and Kinder Morgan and owns Cenovus, an oilsands extractor that it bought for $3.3 billion in 2015.

If pension plans to were abandon the oilsands, "that would be a big deal," says Pelletier. "That's a story that would get attention."

In the shorter term, though, the energy industry has other things to worry about than financing, says Pelletier. The Trans Mountain saga may be scaring off foreign investors, while looser regulations in the U.S. are making Canada less attractive to potential financiers. That in itself may reduce the need for financing.

"Are companies going to expand their capital programs in this current environment?" asks Pelletier. "Probably not. So, there may not be a need for additional financing."

In time, HSBC will likely be seen as being ahead of the curve, says Kramer. Canadians are more aligned with Europeans on climate change than they may be with Americans, at least with the current administration, and will push energy sector companies and financial institutions to become more environmentally friendly.

"I'm optimistic that Canadian companies will do their part to support the sorts of initiatives that we've entered into as a country," she says.

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