ESG-linked lending set to explode in Canada, says CIBC

Sustainability loans, a type of financing subject to the borrower’s compliance with environmental or socially responsible standards, should be boosted in Canada as government and businesses act aggressively to reduce greenhouse gas emissions.

“You will see that this product will be supported in virtually every industry going forward,” said Eric Metivier, managing director and head of Canadian business banking at CIBC. “This is the beginning of the history of sustainability loans in Canada.”

Sustainability Bridge Payday loans are a type of financing that ties borrowing costs to the extent to which a borrower adheres to a set of environmental or social parameters. CIBC’s bullish outlook on lending comes as the North American country moves forward with a related push on several fronts.

The Supreme Court of Canada ruled last week that Prime Minister Justin Trudeau’s national carbon tax was constitutional, bolstering the country’s most ambitious environmental policy to date.

Additionally, the Office of the Superintendent of Financial Institutions Canada is reviewing whether climate concerns should be added to regulatory capital calculations or warrant additional monitoring and reporting procedures, based on a request for feedback. Banks, for their part, develop their own internal ratings and take climate impact issues into account, Metivier said.

“There are a number of steps going on both at the regulator level and within the banks at the moment,” Metivier said in a telephone interview. “I think these two streams will combine in a very strong environment for the product.”

Taxation

The carbon tax is seen as a potential driver for businesses and industries, including the tar sands – most of which are based in western provinces like Alberta – to move forward with options large-scale reduction such as investments in carbon capture, use and storage known as CCUS. In this sense, loans linked to sustainability can be a good solution.

The loans “are about progress, they all aim to get from point A to point B,” said Metivier. “Our customers in Western Canada have a lot of activities going on to reduce their carbon footprint and carbon intensity.

So far, a small number of businesses in Canada have used sustainability loans. Since the start of 2019, loan volumes have amounted to the equivalent of $ 7.2 billion, according to data compiled by Bloomberg, including a C $ 1 billion revolving line of credit signed by Enbridge Inc earlier this year.

Any premium benefit for the product is relatively small as it is a developing market. The typical spread adjustment is equivalent to an increase or decrease of five basis points, according to CIBC.

“The price changes in these deals tend to be a little less than what you would see when the credit rating changes,” Metivier said. “I see that day coming when there will be a different capital allocation based on internal ratings around sustainability.”

© 2021 Bloomberg LP

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