On January 14, the Bank of Canada (BoC) and the Office of the Superintendent of Financial Institutions (OSFI) released results of a pilot project on climate scenario analysis. In collaboration with six Canadian federally regulated financial institutions, the participants analyzed credit and market risks related to climate transition and the impacts on specific elements of asset portfolios under four different climate scenarios.
The report recognizes two factors influencing the transition to a low-carbon economy
The ambition and timing of global climate policy
The speed of technological change.
For Canada, changes and developments in climate policy may have significant macroeconomic costs.
The various outputs of these scenarios were mapped to risk factor pathways that reflect financial impacts from changes in direct emissions costs, indirect costs, capital expenditures and revenues. At the macroeconomic level, changes in earnings and expenses could affect debt repayment capacity, collateral of borrowers, increase credit risk and market losses, ultimately impacting the stability, safety and soundness of financial institutions.
In the survey of the pilot participants, “integrating climate change has become a key element of strategies and investment decisions.” Overall, the participants have established governance and risk management frameworks and processes. Moreover, they are adapting business models to the changing climate and related risks and recognize the need for more robust reporting and disclosure practices.