Canadian banks caught in ESG backlash from U.S. state officials

Open this photo in gallery:

Two Canadian banks are in the crosshairs of an anti-ESG U.S. state treasurer, who has boycotted one for a purported stand against fossil fuels and given another a pass for loosening a policy on coal lending.

West Virginia State Treasurer Riley Moore on Monday placed Toronto-Dominion Bank TD-T and three other banks on its restricted financial institutions list. As a result, they will not be allowed to provide banking services to the state.

Mr. Moore said the state had determined that TD, along with Citigroup Inc. C-N, The Northern Trust Co. NTRS-Q and HSBC Holdings PLC HBCYF, “are engaged in boycotts of fossil fuel companies as defined under state law.”

He is among several U.S. state officials who have waged battle against the use of environmental, social and governance principles in guiding investment decisions as part of a Republican backlash against the risk-management field. Texas, Kentucky, Oklahoma and Florida have made similar moves. A recent report by National Bank Financial said it had identified 20 states with rules that could be construed as anti-ESG.

“My action today represents our continued commitment to protect state funds from furthering these politically motivated, subjective ESG policies that attempt to cut off financing for our coal, oil and natural gas industries and harm our state,” Mr. Moore said in a statement.

In 2022, TD established its position of avoiding lending to companies that get more than 30 per cent of revenue from mining thermal coal or unabated coal-fired power generation, or lend to new clients expanding coal operations. It also said it would not provide project-specific financing for new or expanding thermal coal mines.

It was the coal policy specifically that led to TD being added to the list, said Jared Hunt, spokesperson for the West Virginia Treasury Department.

A spokesperson for TD did not respond to a request for comment.

West Virginia previously barred BlackRock Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. from providing financial services within the state, saying their actions harm the energy industry and limit economic activity.

Another of Canada’s Big Five banks, Bank of Montreal BMO-T, skirted the blacklist after removing a policy that restricted lending to new coal projects, Mr. Hunt said. In 2021, the bank published a statement saying it would not provide financing for new greenfield coal-fired power plants, thermal coal mines or significant expansions of such projects. It also placed restrictions on lending to new clients that operate significant coal mines or coal-fired power generation.

However, it dropped that language last November. The West Virginia treasurer’s office had warned BMO in February that it could be placed on the state’s restricted list based on the policy, and the bank’s counsel responded by saying it had already removed the statement, a source familiar with the situation said.

The bank decided the coal statement did not reflect its risk-based approach to business decisions, and it wanted to make clear that it does not boycott energy companies, the source said.

”Our policies represent a comprehensive, risk-based approach that underscores our commitment to sound and prudent business practices while complying with the laws and regulations of the markets we serve,” BMO spokesman Scott Doll said in a statement.

Canada’s big banks all have similar policies for lending to the fossil fuel industry. Rather than halting oil and gas lending, they have said they are setting aside funds and providing research to help them in decarbonization efforts, while also trying to achieve their own net-zero targets. Climate activists have pilloried the institutions, saying this has not resulted in reductions in greenhouse gas emissions.

In 2022, Texas’s state comptroller flagged Royal Bank of Canada among several financial institutions it was investigating for boycotting fossil fuels. Those deemed doing so would be prevented from participating in the state’s bond market. RBC assured the state government that it remained a significant lender to the oil and gas sector, including companies based in Texas, and it passed muster with officials there.

BMO’s change in stated policy shows how voluntary measures are failing to achieve the climate goals the banks have set for themselves, said Keith Stewart, senior energy strategist for Greenpeace Canada. He has tracked the banking industry’s response to the growing ESG backlash in GOP-controlled U.S. states and published a report on the topic last year.

“They’re just going to embolden these guys by giving in so easily. For us, it basically points to the real need for regulation. These voluntary commitments are very much a fair-weather friend to climate action, and we’ve seen this consistently,” Mr. Stewart said in an interview.