Canada faces significant financial risks if net-zero actions delayed
By Nichola Saminather and Julie Gordon
TORONTO/OTTAWA, Jan 14 (Reuters) - Canada's low-carbon transition poses important risks for some sectors, and delaying actions to prepare could expose financial institutions and investors to "sudden and large losses," the country's central bank and financial regulator said in a report on Friday.
The transition, to be spread over 30 years, will hit Canada's economic growth as demand and prices for commodities fall, leading to less inflationary pressure and a need for more stimulative monetary policy, the Bank of Canada and the Office of the Superintendent of Financial Institutions said.
If actions are delayed and "there's a sharper policy reaction down the road, (it) will impose more transition risk on the economy and the financial sector," Bank of Canada Deputy Governor Toni Gravelle told reporters.
The pilot study, which looked at various climate risk scenarios, found Canada's economy will undergo "significant structural changes" to meet climate targets, made more difficult by its large carbon-intensive sectors.
Canada is the world's fourth-largest oil producer and has the highest emissions per barrel among major oil nations, according to consultancy Rystad Energy. Canada has committed to achieving net-zero emissions by 2050.
The report examined three "plausible but intentionally adverse" transition scenarios, with the 2019 climate guidelines as the baseline.
Progress with climate-related disclosures is hampered by poor and inconsistent reporting standards, said the financial institutions, which are in the early stages of risk analysis.
"There’s much to be done to get to the level of quality in evidence to drive prudential decisions like capital requirements," Ben Gully, assistant superintendent at OSFI, told reporters on a conference call.
The agency's focus for the short term will remain risk management by financial institutions, he said. Any requirement for extra capital beyond that will depend on the effectiveness of firms' risk management measures, he added.
The pilot began in late 2020, and participants assessed the credit and market risks posed to their balance sheets by the climate transition. Participants included Royal Bank of Canada RY.TO , Toronto-Dominion Bank TD.TO , and insurers Manulife Financial Corp MFC.TO , Sun Life Financial SLF.TO , Intact Financial Corp IFC.TO and the Co-operators Group.
Reporting by Nichola Saminather in Toronto and Julie Gordon in Ottawa Editing by Matthew Lewis
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.