Investors globally are increasingly concerned with the investment risks associated with climate change and are starting to take steps to understand and address those risks. Investors looking to green their portfolios and contribute to the shift to a low carbon economy, however, may be overlooking hidden risks and opportunities. Through their financing and lending activities, Canada’s banks are connected to every market,industry and region in the country, making them vulnerable to the economic, social and political impacts caused by climate change. At the same time, Canada’s banks have an immense opportunity to support the transition to a low carbon economy by financing and investing in renewable energy, energy efficiency and other emerging innovations.
Last quarter, SHARE released a new report called Banking on 2°: The Hidden Risks of Climate Change for Canada’s Banks. The report outlines the climate change-related risks that Canadian banks are exposed to and the potential impacts of those risks in terms of asset valuations, operational costs, reputation, new markets and cash flows. It also provides a four-point framework of recommendations on how Canada’s banks can improve their performance in addressing climate change. First, it asks the banks to establish a climate change strategy that is grounded in climate science, establishes a commitment to limiting the average surface temperature rise to two-degree Celsius and explains how they plan to be a part of the solution. Second, it recommends a recalibration of risk management to address climate change-related risks across their portfolios. Third, it asks the banks to establish aspirational targets to reduce the carbon emissions associated not only with their operations, but also with their financing. And just as bank executives are paid bonuses when they deliver profits it highlights the need for decision-makers to be incentivized to deliver on carbon reduction targets
Some of Canada’s banks are taking important steps and being recognized globally for their leadership. For example, Toronto-Dominion Bank was the highest-ranking Canadian financial institution in the recently released CDP Climate Disclosure Leadership Index. The Bank of Montreal and Scotiabank were also included in the Index, with both banks making notable improvements from 2014 in their level and quality of disclosure.
SHARE will continue its engagement efforts with Canada’s banks on behalf of its investor clients to encourage improved performance in managing and adapting to climate change-related risks and opportunities.