Banks Swing into Action as Investors Demand Closer Look at Carbon Risk

With more and more investors taking an interest in the carbon footprint of the companies whose stocks they hold, the country’s chartered banks “are responding by offering tools and services to meet growing demand for transparency on carbon emissions,” the Financial Post reports.

In a report released last month, Toronto-based proxy consultancy Kingsdale Advisors stated that shareholder resolutions on companies’ environmental, social, and governance (ESG) performance have “arrived” in Canada, with shareholders taking a more active role on specific issues and big institutional investors like BlackRock and Fidelity Investments either putting forward more proposals or supporting them when they come up for a vote.

“This year, we saw a record number of majority-supported ESG proposals in the United States and a strong reception to proposals in Canada,” the report stated.

“ESG is an element that has increased significantly and, I daresay, exponentially over the last five years,” said CIBC Capital Markets equity strategist Ian de Verteuil. “In Canada, it’s probably been over the last two or three years. Canada’s been a little slower to deal with these things.”

But “more and more so, you’re hearing not just from niche investors that have a pure ESG mandate,” said Andrew Craig, director of environmental affairs at Royal Bank of Canada. “Some of our mainstream investors have been asking those questions as well, and that obviously gets the attention of the organization.”

Last month, de Verteuil was part of a team that updated CIBC’s carbon risk assessment, which competes against independent evaluations from companies like Sustainalytics and MSCI Inc. For companies that emit carbon, he said higher carbon taxes represent “a financial risk to the extent that these climate policies take hold.”

But that kind of assessment becomes more challenging when government carbon policies are volatile, as they’ve recently been in Ontario and could soon enough be in Alberta.

“Carbon has been a particular focal point for institutional investors, bank analysts, and credit ratings agencies, as carbon tax policies could have a material financial impact on several sectors, including the Canadian energy, utilities, and mining industries,” the Post states. “Analyzing carbon risk is difficult even in consistent policy environments, but recent dramatic changes and some outright reversals in environmental policy both in Canada and the U.S. add to the challenges.”

In April, Chicago-based Morningstar Inc. noted that a group of major investors with a combined US$28 trillion under management had committed to “actively engage with the 100 global companies that have the highest levels of carbon emissions.” That list included Canadian fossils and mining companies Suncor Energy, Imperial Oil, Canadian Natural Resources Ltd., and Teck Resources.

“Understanding carbon risk in a portfolio can help investors make better decisions,” Morningstar stated.

The Post notes that Moody’s Investors Services “has also been changing the ratings on account of climate change, and including more commentary in its ratings actions on how carbon risk assessments or climate change issues are affecting an issuer’s credit rating.”