Bank Of Canada Declares Climate Breakdown A Financial Risk. So, Now What? [View all]

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This month, the Bank of Canada released its 2019 Financial System Review. For the first time, it listed climate change as one of six major vulnerabilities facing Canada’s economy. It’s significant given that for years, the bank has been virtually silent on the issue. In fact, until March of this year, not a single member of the bank’s leadership team had publicly mentioned the words climate change for two years. Now, the Bank has identified the physical and transition risks of climate change as vulnerabilities facing Canada’s financial system, mentioned in the same breath as household debt and housing market imbalances.

This is important because when the bank speaks, people listen – especially those making investment decisions worth millions, if not billions, of dollars. It is easy for Bay Street or Alberta Premier Jason Kenney to dismiss warnings about climate risk when they come from think tanks or environmental NGOs. It is a lot harder to ignore those warnings when they are coming from the Bank of Canada, known for its data-driven reports and inherently cautious nature – an institution acutely aware that its words move markets.

The bank’s section on climate change in the financial system review discussed both physical issues, such as extreme weather, as well as transition issues, such as sudden policy moves, being triggered by a changing climate. An issue highlighted as a particular concern is the limited understanding of climate-related risks in financial markets. The bank warns that the lack of transparency around carbon exposure – with much of it left up to companies to disclose on a voluntary basis – could lead to mispricing and ultimately increased costs of transitioning to a low-carbon economy.

The Bank of Canada’s statements bring it in line with other central banks such as the Bank of England and the European Central Bank, which have been increasingly sounding the alarm about the need for the global financial system to properly account for, and disclose, climate risk.

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https://www.theglobeandmail.com/business/commentary/article-the-bank-of-canada-declared-climate-change-a-financial-risk-now-what/