A group that advocates for responsible investment is urging Canada's big banks to be more transparent about their exposure to fossil fuel-related industries and how carbon pricing might affect their portfolios.

Share, a non-profit that provides analysis and advice for responsible investing, says banks are particularly vulnerable to climate change related risks, as their portfolios span the entire Canadian economy.

With the Paris Summit in December approaching, banks have to be prepared for a price to be placed on carbon and for assets held by oil, gas and coal companies to become "stranded" because they can't be exploited without catastrophic climate change, Share's Shannon Rohan said in a report released Wednesday.

Calling climate change "one of the defining economic, environmental and social issues of our time," Rohan urged banks to commit to helping limit the rise in global temperature to 2 C above pre-industrial levels.

That commitment should be part of their investment ethic, she said, adding that banks should be analyzing the carbon footprint of their entire portfolio.

She outlines a number of risks banks are exposed to, among them:

  • Asset valuations, especially valuations of fossil fuel assets that may remain stranded as they can't be burned without pushing global temperatures up more than 2 C.
  • Damage to property of mortgage holders because of climate change effects such as flooding or severe storms.
  • Systemic risks from the cost of transitioning to a low-carbon economy.
  • Competitive risks from other countries moving more quickly to establish a low-carbon future.

Shareholders are looking for more disclosure about how banks value greenhouse-gas emissions in their portfolios and how they are planning to manage risk, Rohan said.

She recommends having executive compensation tied to targets for reducing carbon exposure.

"Because of the potential impacts of climate change on these financing activities, shareholders are interested in understanding how the banks are managing these risks including their overall exposure to carbon-intensive assets and how they are aligning their longer-term business strategies to a low-carbon economy," Rohan wrote in the report.

She said Canadian banks are lagging behind their European counterparts, some of which have begun to assign shadow carbon pricing for energy companies.

It's not an extreme position to advocate that businesses start pricing their carbon risk. Bank of England governor Mark Carney has begun research into the subject and some of the world's biggest oil companies are beginning to weigh the cost of having their assets stranded.