Bank of Canada and OSFI launch pilot project on climate risk scenarios

FILE: Tiff Macklem, Governor of the Bank of Canada. (Photo By Bank of Canada – Banque du Canada/Wikimedia Commons, CC BY 2.0)

The Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) today announced plans for a pilot project to use climate-change scenarios to better understand the risks to the financial system related to a transition to a low-carbon economy. A small group of institutions from the banking and insurance sectors will participate voluntarily in the project.

Scenario analysis is a useful tool for identifying potential risks in an environment of considerable uncertainty. Climate-change scenarios related to a transition to a low-carbon economy explore different pathways for emissions reductions – driven by changes in policy, technology, and consumer and investor preferences – and their implications for the economy and financial system.

The project aims to:

• build the climate scenario analysis capability of authorities and financial institutions, and support the Canadian financial sector in enhancing the disclosure of climate-related risks
• increase authorities’ and financial institutions’ understanding of the financial sector’s potential exposure to risks associated with a transition to a low-carbon economy
• improve authorities’ understanding of financial institutions’ governance and risk-management practices around climate-related risks and opportunities

“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,” said Bank of Canada Governor Tiff Macklem. “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.”

“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 on much that remains uncertain,” said Jeremy Rudin, Superintendent of OSFI. “This pilot project will allow us to refine our focus on the prudential aspects of climate change.”

Building on previous work on climate-change scenarios for the global economy, the Bank and OSFI will first develop a set of climate-change scenarios that are relevant for Canada. Using these scenarios, participants will explore the potential risk exposures of their balance sheets. The Bank and OSFI will publish a report, planned for the end of 2021, sharing details on the specific scenarios, methodology, assumptions and key sensitivities.

This project is not intended to serve as an assessment of individual financial institutions’ exposure to climate-related risks or the broader financial sector’s resilience to transition risks. Further, the selection of project participants is not an endorsement of their current approaches to the management or disclosure of climate risks.

The following financial institutions will participate in the project:

• Intact Financial Corporation
• Manulife
• Royal Bank of Canada
• Sun Life Financial
• TD Bank Group
• The Co-operators Group Limited

Additional information

• The Bank’s work on climate-related risks stems from its broader role in assessing risks to the stability of the Canadian financial system.
• The climate-change scenarios to be developed for the project will build on work conducted by researchers at the Bank of Canada.
• In 2019, the Bank joined the Network of Central Banks and Supervisors for Greening the Financial System and began building climate-related risks into its Financial System Review.
• Research and analysis that stem from the Bank’s multi-year climate research plan are published on the Financial System Hub.
• OSFI’s work on climate-related risks focuses on potential impacts on the financial soundness of individual banks, insurers and private pension plans and on the stability of the financial system as a whole.
• OSFI is working with international counterparts as an active participant in the Sustainable Insurance Forum, a UN-sponsored grouping of financial regulators.
• Early in 2021, OSFI will launch a discussion paper on preparing for and building financial resilience to climate-related risks.