A pilot study says it would be better for Canadian banks and investors to transition to a low-carbon economy sooner than later, but to do it slowly or risk “large losses.”
In November, the Bank of Canada (BOC) and the Office of the Superintendent of Financial Institutions said they were studying the risks to the country’s financial sector of becoming a net-zero-emitting economy by 2050.
The study, released today, is intended as a thought exercise to prepare financial institutions better, not to predict the future. Nor did the study include physical risks, such as rising temperatures and severe weather events, which will be analyzed separately.
What the study does show is that meeting climate targets will cause significant structural changes to the Canadian economy, because it relies heavily on carbon-intensive industries, especially oil and gas.
“Delaying climate-policy action increases the overall economic impacts and risks to financial stability,” the study concludes. “In the scenario analysis, the economic impacts for Canada are driven mostly by declines in global commodity prices.”
The study warns that abrupt changes to global climate-change policies could “expose financial institutions and investors to sudden and large losses” and delay the investments necessary to help mitigate the impacts of climate change.
“We found that the potential cost of delayed policy actions supports the urgency of our work on climate-related risks to ensure that the financial system is resilient to a range of severe but plausible transition pathways,” said Ben Gully, assistant superintendent of the Office of the Superintendent of Financial Institutions, speaking to reporters on Friday.
“This means that, for the near term, we will be focused on promoting sound risk management of regulated entities,” he continued. “The question of whether financial institutions should hold extra capital to cover the financial risks stemming from climate transition will depend on the effectiveness of risk management.”
The report’s scenarios can help the country plan ahead and minimize stresses on the financial system, Toni Gravelle, the BOC’s deputy governor, told reporters on Friday.
“This work does not capture the opportunities created by new technologies or their impacts, and it does not analyze fiscal risks associated with climate change,” he added.
Climate change has been at the core of the Liberal government’s agenda since it took office in 2015.
In December, Ottawa promised to table its “2030 Emissions Reduction Plan” by the end of March 2022, which Prime Minister Justin Trudeau repeated in his ministerial mandate letter to Environment and Climate Change Minister Steven Guilbeault late last year.
Finance Minister Chrystia Freeland’s mandate letter tells her to prepare the economy to become net-zero, including by setting up a fund for provinces like Alberta and Saskatchewan that rely on carbon-intensive industries for their revenue.