How do Fossil Banks and Pension Plans Invest your Money in Oil?

Finance and public policy are the biggest drivers of change in most industries, and the oil and gas industry is no different. Banks have often been overlooked as a lever for change. Their complicity in profiting from climate disaster is now coming into sharper focus with groups like Rainforest Action Network and Bank Track publishing annual reports about the extent to which these institutions are funding fossil fuel extraction.

The time for debate around the causes and effects of climate change is over and most people realize that we need to make fundamental changes to address this crisis. There is no room to expand fossil fuel extraction at this point and any short-term profit made through investment in fossil fuels can be tangibly linked to future suffering. We can only hope to avoid the worst effects of climate change through unprecedented speed and will from policy makers and institutional investors to not only cut off funding from fossil fuel extraction, but actively fund renewable energy projects and enable a quick transition to a new and sustainable energy system. 

Why is public trust important for banks?

Public trust is one of the most important requirements for banks. People would not entrust banks with their life savings if they did not believe that the banks are looking out for their interests. Personal and commercial banking makes up the bulk of banking revenue representing close to half of RBC’s revenue in 2020 (1). Majority of the revenue made by banks is through interest rates charged on loans (2). These loans are given out to individuals and industries in the form of mortgage loans, auto loans, capital investment loans etc. The money used for these loans is the money that the public deposits in banks.

Canadian banks (RBC, Scotia, BMO and TD) have collectively invested a total of $111 billion in fossil fuels in 2019 (3). These are funds that individuals are saving for their future. Climate change is the biggest immediate crisis. Investing for the future is about more than just returns; it is about ensuring the future will be livable, just, and sustainable. 

How is your money invested by banks?

Savings accounts, Guaranteed Investment Certificates (GIC), Group Registered Savings Plan (GRSP), Registered Retirement Savings Plan (RRSP) are the most popular savings and investment plans used by Canadians; and Canada Pension Plan (CPP), Healthcare of Ontario Pension Plan (HOOPP), and Ontario Teachers’ Pension Plan are some of the largest pension plans in Canada. Each person selects the portfolio that is best suited for their financial needs and having a better understanding of how these investment vehicles work will help you decide the best investment for you. 

Savings accounts provide you with interest on the deposited funds. Banks make money on these funds by charging a higher interest rate for credit services than the interest they provide to the depositors. These funds will be lent out as mortgage loans, auto loans and credit card loans. While the money can be withdrawn at any time, typically there is a limit on the number of transactions that can be made in a month. 

GICs work like loans in reverse where the money you use to buy the GICs are used by banks to invest in other areas and the banks provide you interest for a fixed period of time in exchange (4). GICs guarantee initial funds plus interest and are hence seen as a safe investment. The banks lend out this money as loans and earn a greater return on these funds. Individuals do not have any control over how these funds are invested. The banks invest these funds to maximise returns for minimum risk. Reporting shows that even funds advertised as sustainable are not fully transparent and may still invest in fossil fuels (5).

GRSPs (Group Registered Savings Plan) and RRSPs (Registered Retirement Savings Plan) are very popular investment options for individuals to save for retirement. These plans defer tax on contributions until retirement when income is generally lower and hence there is significant saving on tax for individuals. The GRSP and RRSP funds are invested by banks in equity and bond markets. This is one of the main ways your money is directly invested in fossil fuels. Individuals do not have control on how their money is invested and can only specify the level of risk they are willing to accept. These funds are invested in a combination of stocks and bonds. As we can see from the bank track report, a significant amount of money is invested by banks in fossil fuel projects such as pipelines, new equipment, and exploration.  

Pension plans such as HOOPP, CPP, and Ontario Teachers’ Pension Plan invest member contributions to grow the funds to provide members with a financially secure retirement. The two plans manage $104 billion and $221 billion respectively (6,7). Although these plans claim to have established guidelines on ESG (Environmental, Social and Governance) metrics that ensure responsible investing, they have not stopped investing in fossil fuels completely. Reporting has exposed the extent of CPP’s investment in fossil fuels (8). Since the details of these portfolios are not released to the public, there is no way for individuals to know how their money is being invested. While individuals do not have the option to opt out of a pension plan without jeopardising their financial future, as members of the plans, they can push these fund managers to divest from fossil fuel companies.

What can we do about it?

Individuals have a role to play in driving markets, but only if we can come together to pressure banks and policy makers to enact change. Fossil fuel investment is not only detrimental to the future, but it is also risky. We must achieve net zero emission by the second half of this century to achieve the Paris Agreement goals (9). Considering that the emissions are still increasing yearly, this requires all options to be explored and implemented to change the current trajectory toward a 4+ degree increase in average temperatures. Individuals have more tools than just their vote in effecting this change. Money is what enables companies to extract fossil fuels and ending the supply of funds to producers can stop fossil fuels from the supply side. These funds can then be put towards transitioning to a more sustainable future to ensure the health of the planet and that the gains made in the recent decades in reducing global hunger and poverty is not temporary. Bankswitch (10) has resources to help you select a bank which invests your money sustainably and lets you invest your money that is best for your and the planet’s future.