How CUs can be a driver for positive action
In April, Earth Day turned 51—a bleak and sombre milestone, more than a celebratory one. The decade 2011-2020 was the warmest on record. Global temperatures have risen 1.2 C, due to carbon dioxide emissions largely from coal, which has generated electricity for homes and factories since the late 19th century.
India and Pakistan have experienced heat waves above 50 C, while temperatures have risen to 48 C in parts of Australia. Dystopian scenes abound: massive fires with billions of dead animals in Australia, thousands of people in India and Pakistan perishing in the extreme heat, the North Pole ice cap melting into a lake, coral reefs bleaching due to thermal stress, extreme weather events and mass population displacement from flooding, drought, water insecurity and crop failure.
In late 2015, 196 nations came together to confront the crisis, hammering out the Paris Agreement, which called for holding global temperature increases to less than 2 C above pre-industrial levels, with a temperature increase limit of 1.5 C. To achieve this, anthropogenic carbon emissions must be cut to about 45% of 2010 output by 2030, according to the United Nation’s Intergovernmental Panel on Climate Change. As quixotic as this goal seems, it nonetheless brings hope. Climate models show that if the globe achieves net-zero emissions by 2050, warming could stabilize within a few decades. (Net-zero means creating a balance between the greenhouse gases put into the atmosphere and those taken out. It is similar to carbon neutral, however, that can be achieved with offsets in other jurisdictions.)
With the Earth’s future balanced on a knife edge, battle lines are being drawn. In North America, United States President Joe Biden has made the fight against climate change a pillar of his economic plan to create millions of new jobs. In Canada, a new federal budget, tabled last month by the ruling Liberal Party, set out new targets to mitigate climate change. The changes—CDN $17.6 billion (USD $14.2 billion) worth—will accelerate the shift to a low-carbon economy, with the objective being a reduction of emissions to 36% below 2005 levels by 2030.
The global financial sector has been slow to react. But with the typical strategic plan lasting about three years, climate change isn’t yet showing up as a risk for many financial institutions. The finance sector is also a driver of climate change, investing in fossil fuel extraction for Arctic drilling, Alberta oil sands and coal extraction. Yet, because retail financial institutions control the flow of capital, their potential role in climate change mitigation is vast.
The urgency of climate change is shifting attitudes. Earlier this year, the federal Office of the Superintendent of Financial Institutions launched a three-month consultation with the publication of a discussion paper, Navigating Uncertainty in Climate Change: Promoting Preparedness and Resilience to Climate-Related Risks. The paper analyzes how climate change might affect federally regulated financial institutions and pension plans. Some institutions are leaning in—hard—to find solutions to this existential threat. In Canada, this includes a growing number of credit unions.
Vancity’s Ambitious Commitments
Vancouver City Savings Credit Union in British Columbia, Canada’s largest credit union with $30.5 billion in assets and 550,000 members, pledged in early 2021 to reach net-zero carbon emissions by 2040, along with four other ambitious climate commitments. Already carbon-neutral in its operation since 2008, Vancity’s commitment means it is aiming to become net-zero by 2040 across all of its mortgages and loans. This means that carbon emitted from anything it finances will be eliminated or significantly reduced, with any remaining emissions brought to net-zero by purchasing carbon offsets.
To reach this goal, Vancity, as part of the Global Alliance for Banking on Values Climate Change Commitment, signed up to track greenhouse gas emissions, applying a methodology developed by banks in the Netherlands called the Partnership for Carbon Accounting Financials. (PCAF offers free technical assistance to institutions that want to begin measuring emissions financed by loans and investments.)
This month, Vancity will take a “significant step on that by disclosing the financed emissions in our annual report for the first time,” says Jonathan Fowlie, Vancity’s chief external relations officer. The emissions data are approximations, says Fowlie, as information for precise emissions isn’t yet available.
However, Vancity does have such information as structure type, location, and what the average energy consumption of a particular building is. This allows the credit union to look at its portfolio of mortgages and obtain a rigorous estimation of total emissions. The next step is to assess how to reduce them, which will require collaboration with governments and regulators on things like building code changes, says Fowlie. “What is the aggressive and achievable pathway that allows us to credibly say we can get to zero? Part of that is identifying where the emissions are and focusing on those areas.”
Members appear poised to support Vancity in its goal of net-zero emissions. In its own public opinion research, the CU has found an “expectation from members and the community at large that they want financial institutions to be part of the solution,” Fowlie says. The credit union will need to provide resources, however, such as affordable new financial products. Vancity will also likely need to advocate for public policy changes and incentives to help members reduce their carbon footprint, Fowlie adds.
Complementing Vancity’s net-zero ambitions are its environmental, social and governance investments. (ESG refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business.) Since 2015, Vancity has divested global equity investments from coal and oil and gas companies. One of the credit union's five climate commitments is to offer only responsible investment options that can demonstrate the integrity of their ESG screening and stewardship process. This will involve Vancity developing its own screening process to ensure that the credit union is giving investors (the CU offers wealth management services) credible information about companies and projects that are part of the climate change solution, says Fowlie.
In 2020, Vancity led a member resolution at the Canadian Credit Union Association annual general meeting to establish a working group that would “explore the emerging issue of climate-related financial disclosure.” Called the Climate Change Disclosure Working Group, it is exploring measurements that other credit unions could use to track and disclose carbon emissions in their portfolios. Numerous Canadian credit unions have joined the group, with many undertaking initiatives that fit their unique social, geographical and economic landscape.
Socially Responsible Investments
Kindred Credit Union, with 25,000 members and $1.6 billion in assets, is headquartered in Kitchener, Ontario. Ben Janzen, Kindred CU’s director/values integration, says that the credit union is taking substantial steps towards climate change mitigation by embracing the recommendations set out by the PCAF, acknowledged as setting the gold standard for financial institutions undertaking greenhouse gas accounting of loans and investments.
This complements Kindred CU’s social and environmental screening approach to lending decisions. The credit union is the first financial institution in Canada to have all of its Canadian Guaranteed Investment Certificates—a deposit investment sold by financial institutions and trust companies, often purchased as part of individual’s retirement plan—validated as socially responsible investments. Janzen says that the program was developed in partnership with Sustainalytics, a global provider of environmental, social and corporate governance research and ratings.
Because loans are funded by members’ GIC deposits, the screens mean that the GICs become SRI-validated. This approach enables Kindred CU to offer loans and investments that connect values with finances. It also means, says Janzen, that Kindred CU can screen out businesses that might be directly involved in weapons or tobacco manufacturing. In terms of climate-change mitigation, this means that Kindred CU can screen out any industry that “has a significant detriment to the environment,” Janzen says. This includes the nuclear power industry, because of the “long-term effects of radiation and nuclear waste, which is not dealt with appropriately.”
The methodology—Kindred CU has set tolerance levels of 10% of a business’ portfolio—can get complicated for companies that serve or distribute products related to these industries. For example, a Kindred CU business member was doing work for one of Ontario’s three nuclear generating stations. Kindred looked closely at the business to determine if this would mean it would be screened out for future lending. However, the value of the work was under Kindred’s 10% threshold, which meant the business still qualified for credit union loans, says Janzen.
Lending to members who might be involved in mitigation of greenhouse gas emissions is further complicated by government subsidies and incentives, Janzen says. A decade ago, the Ontario government supported the creation of solar power companies and solar co-ops, and Kindred CU financed some start-ups, as well as individuals, farms and churches. However, when government incentives ceased, financing became more challenging for the credit union, says Janzen.
Adding to the complexity is determining emissions from homes within Kindred’s residential mortgage portfolio. In the Netherlands, homes have ratings based upon energy consumption, which makes it easier to assess GHG emissions. “That’s one of the things that the credit union industry can advocate for,” Janzen suggests. Such factors have also prevented Kindred CU from establishing net-zero emission goals by a set date, unlike Vancity. However, the Waterloo region in which the credit union is located has set a goal to reduce emissions by 80% by 2050, which is motivating Kindred CU to set public targets soon, Janzen adds.
A Delicate Position
CUES member Daniel Johnson is CEO of Innovation Credit Union, with 58,000 members and $3.8 billion in assets, located in the prairie province of Saskatchewan, a region susceptible to climate extremes. Two years ago, says Johnson, the credit union joined about 220 other financial institutions in becoming a signatory to the United Nations Environment Programme’s Principles for Responsible Banking. The principles provide a framework for signatory institutions to align strategies and practices with the UN's Sustainable Development Goals and Paris Climate Agreement. Becoming a signatory complements a momentous development: Innovation CU will become a federal credit union this autumn.
With such an undertaking in the works, Innovation CU has not set any hard targets for reducing emissions, although it is working on a strategy. For example, the credit union has just articulated a position on sustainability and climate in its annual report, Johnson says. Innovation CU is also in the early stages of initiating things like portfolio stress testing, a risk management tool analyzing potential portfolio risks.
Innovation CU is a delicate position, says Johnson, in that climate change mitigation is a serious concern, yet the credit union is located in oil and gas country. The petroleum industry in Canada lags behind other countries when it comes to climate-change mitigation initiatives, with the result that the 2021 Climate Change Performance Index ranks Canada 58 out of 61 countries on climate policy and energy consumption, as well as progress in reducing greenhouse gas emissions. (Saskatchewan produces more than 10% of the country’s oil and gas, while Alberta produces the lion’s share. Innovation CU’s oil and gas-related investment is about 3% of its portfolio.)
Despite Canada’s poor record on reducing its GHG emissions, Johnson sees positive advances in renewable and clean energy investments. Innovation CU is developing a “green line of products and services,” such as offering incentives for members who choose such green products as solar panels, energy-efficient appliances and homes and electric vehicles.
With Innovation CU still formulating a foundation for climate-change mitigation, conversations are just opening up with members on possible initiatives, “inventorying the things that we’re doing, leading to further conversations about how we can engage our membership,” Johnson says. “We’re starting to see some serious economic trends and decisioning that is ensuring this conversation continues.”
Johnson points to the dramatic shift in electricity costs derived from renewable power sources. In the past decade, the cost of renewables has dropped to less than that of fossil-fuel powered in many places around the world. “When I drive from here to Saskatoon,” says Johnson, “the amount of solar panels that are on farms is substantial. And the reason farmers are doing this is not necessarily because they want to lead climate changes. They are finding that is going to save them money and be more economical.”
Assiniboine CU, One of Canada’s Greenest Employers
Winnipeg-based $5.4 billion, 125,000-member Assiniboine Credit Union is known for numerous environmental initiatives, resulting in it being named one of Canada’s Greenest Employers for 10 consecutive years. The Manitoba credit union has been carbon-neutral since 2018 and was the first credit union in Canada to purchase Bullfrog Power Green Natural Gas, which provides green energy offsets. (For every gigajoule of natural gas used, a gigajoule from a renewable source is put on the grid.) This complements such operational improvements as retrofitting branches to reduce electricity use, making dramatic cuts to paper usage and waste emissions and encouraging staff to shift to green and active commuting modes by offering subsidized bus passes, creating a service matching people for carpooling and installing showers and lockers at new branches to encourage those who want to cycle to work.
Assiniboine CU understands that the future of financing climate resilience will include advisory services, says Dennis Cunningham, manager/environmental sustainability. Whether it’s refinancing mortgages, undertaking renovations or erecting new structures, buildings need to be constructed to withstand 30 to 50 years of dramatic changes in climate, Cunningham says. This likely includes warmer winters and severe summer droughts, with short bursts of intense rainfall, he adds. Superior materials, as well as the installation of highly efficient heating and air conditioning systems, will be needed to make buildings “more adaptable and resilient to future climate scenarios."
Such construction, referred to as a “passive house,” is mandated in many parts of Europe and becoming increasingly popular in North America. A potential challenge is that credit union members may need to be convinced that the higher initial outlay is worth the long-term benefits, Cunningham says. “Over time, the premium is paid back in reduced operating costs.”
The main difficulty in preparing members and credit unions for climate change is the range of possible scenarios. “Today’s actions or inactions will determine what our climate of the future looks like,” says Cunningham. “The challenge for credit unions will be both figuring out what the scale and impact of climate change looks like in a way that is relevant to our members and how to integrate climate scenario methodologies into future stress testing. We want to manage risk as it emerges, but I’m not sure that the existing tools allow us to do that. We have a fair bit of work to do to bring all our members along and build that capacity.”
Cunningham likens climate change to the COVID-19 pandemic, with its seemingly unstoppable and highly destructive second and third waves. “Climate change is like COVID, but in slow motion,” Cunningham says. “The impacts on our economy will be similar if we don’t act and don’t do things to address and mitigate, or don’t take action to adapt. This is a challenge all credit unions must act on.”
Roberta Staley is a Vancouver, British Columbia-based magazine writer and editor, author and documentary filmmaker.