Canada risks posed by climate transition: central bank

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Canada risks posed by climate transition: central bank

TORONTO OTTAWA, January 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 regulators said in a report on Friday.

The Bank of Canada and the Office of the Superintendent of Financial Institutions said that the transition will affect Canada's economic growth as demand and prices for commodities fall and there will be less inflationary pressure and need for more stimulative monetary policy over the next 30 years.

If there is a policy reaction down the road, it will impose more transition risk on the economy and financial sector, said Toni Gravelle, Deputy Governor of the Bank of Canada.

The pilot study, which looked at various climate risk scenarios, found that Canada's economy will undergo significant structural changes to meet climate targets, made more difficult by its large carbon-intensive sectors.

According to Rystad Energy, Canada is the fourth-largest oil producer and has the highest emissions per barrel among major oil nations. Canada is committed to achieving net-zero emissions by the year 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, according to the financial institutions, which are in the early stages of risk analysis.

There is much to be done to get to the level of quality in evidence to drive prudential decisions like capital requirements, according to Ben Gully, assistant superintendent at the OSFI.

He said that the agency's focus for the short term will be on risk management by financial institutions. He added that any requirement for extra capital beyond that will depend on the effectiveness of firms' risk management measures.

The pilot began in late 2020 and participants assessed the credit and market risks posed to their balance sheets by the climate transition. The participants included the Royal Bank of Canada, Toronto-Dominion Bank and the Co-operators Group, Sun Life Financial Intact Financial Corp, and Manulife Financial Corp.