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Bank of Canada, OSFI to study the risk of a low-carbon economy

Jeff Lagerquist
·3-min read

The Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) have announced a new pilot project aimed at understanding the risks of transitioning to a low-carbon economy.

The central bank and the independent agency tasked with regulating the financial sector will work together with a group of banking and insurance institutions to study emissions reduction scenarios driven by changing policy, technology, and consumer and investor preferences.

“Climate change is a major challenge for the economy, and it is accelerating. We need to accelerate our work to understand the implications for the economy and the financial system,” Bank of Canada Governor Tiff Macklem stated in a news release on Monday.

“This project will generate valuable lessons for assessing and managing climate risks. With the private sector’s help, we will be able to combine climate analysis with economic and financial data to ensure we have the best information possible to fulfill our mandate.”

REUTERS/Chris Wattie
REUTERS/Chris Wattie

Voluntary participants include Intact Financial Corporation (IFC.TO), Manulife (MFC.TO)(MFC), Royal Bank of Canada (RY.TO)(RY), Sun Life Financial (SLF.TO)(SLF), TD Bank Group (TD.TO)(TD) and The Co-operators Group. The bank said the project is not intended to assess the risks for individual institutions, or to endorse the policies of the participants.

The bank and OSFI will develop a set of climate-change scenarios relevant for Canada. Participants will explore the potential risk exposures to their balance sheets. The bank and OSFI plan to publish a report based on the findings at the end of 2021.

“Everyone, including the financial sector, will have to adjust to the new reality of climate change. The shape of that new reality will depend on many complex issues and much that remains uncertain,” Jeremy Rudin, superintendent of OSFI, added in the release.

“This pilot project will allow us to refine our focus on the prudential aspects of climate change.”

Canada’s central bank first flagged concerns about the challenges of climate change for the economy and the financial system in its financial system health report released in May 2019. The report predicted the shift to a lower-carbon economy will be complicated and could be costly for some, highlighting carbon-intensive industries like oil and gas, as well as banks and asset managers.

More recently, the federal government has pledged to steer the economy out of the COVID-19 pandemic slump in part by supporting the clean energy sector and projects aimed at shrinking the nation’s carbon footprint.

In October, Prime Minister Justin Trudeau launched a $10 billion, three-year infrastructure plan to be managed by the Canada Infrastructure Bank. The money for clean power, broadband improvements, zero-emissions buses, and building retrofits is meant to lure partners in the private sector.

In a webcast speech to the Munk School of Global Affairs and Public Policy on Thursday, Bank of Canada senior deputy governor Carolyn Wilkins stressed the need for private sector investment in growth-enhancing initiatives and smart incentives, such as green technology, to spur growth.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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