Canada’s banks are prudent managers of risk and over the years have made significant progress in enhancing their risk management practices and strategies. Guided by strong leadership, banks have a longstanding track record of addressing a wide range of risks, including credit, liquidity, market, operational, and technological. It should be a source of pride that our country’s banks have shown themselves effective at identifying, measuring, and building resistance to diverse emerging challenges, while also contributing to the growth of the Canadian economy.
As the global financial system was mired in crisis in 2008‑09, Canadian banks proved resilient and largely escaped the turmoil that raged internationally. This was due in large part to the stability of the banking system, underpinned by sound risk management practices. In recognition of their resiliency, Canada’s banks have been ranked among the world’s most stable by the World Economic Forum.
A more recent example is one that we are still living through: the coronavirus pandemic. The Canadian financial system has demonstrated resilience despite the shock of the pandemic, thanks in part to a well‑capitalized banking sector. To quote Canada’s former Superintendent of Financial Institutions, Jeremy Rudin: "The [banking] system entered the pandemic period with the capital resilience, the liquidity resilience, and the operational resilience that we sorely needed."i Canada’s banks stood by their customers during a challenging time to cushion the economic blow and are dedicated to helping position our country for a strong, sustainable recovery.
Like all forward‑looking organizations, banks are always evolving their frameworks to factor in new types of emergent risks, and increasingly so, those associated with climate change. As they have in the past, banks will continue to focus on the resilience of their own operations and contribute to a well‑functioning financial system that is positioned to respond to present and future risks resulting from climate change.
Addressing and mitigating climate‑related risks
Several banks in Canada have already launched programs and strategies to limit the carbon footprint of their own operations through concrete actions aimed at lowering greenhouse gas emissions. Banks are making real contributions in lowering their own CO2 and are generally considered to be low-carbon intensive businesses.
In a further step forward, Canada’s banks and many of their global counterparts are starting down the path of assessing the risk of so-called "financed emissions" – that is, business customer emissions financed through loans, investments, and other financial services. The Office of the Superintendent of Financial Institutions (OSFI), the country’s prudential regulator, is working with banks, pensions plans and other federally regulated institutions to begin to assess the risks they face as the economy shifts, over time, to a more sustainable, low‑carbon future. Banks are committed to working with Canadian regulators, and indeed global bodies, to help safeguard the country’s financial system from climate shocks – and that starts with collecting a baseline of quality data on climate risks.
An essential first step in addressing and mitigating climate risks is to increase understanding of the impact of the gradual transition to a low‑carbon economy. To be sure, more data is required to adequately measure climate risks and manage them accordingly. Financial system participants need better information to appropriately assess physical and transition risks and, by extension, support the smooth transition to a net‑zero economy by 2050. To help that endeavour take shape, banks need better information about the climate-related risks faced by their customers to effectively price and manage these risks.
Through improved disclosure, more data on climate-related risks will be available for banks’ and investors’ decision‑making processes, but that information needs to be consistent and comparable to make informed decisions. Information about risks and opportunities will allow lenders and investors to more accurately price and manage risk, allocate capital to achieve desired financial results, and position Canada for sustainable economic growth over time.
Alignment with TCFD climate‑related financial disclosures
Significant work is currently underway internationally to develop and advance the evolving disclosure frameworks to more systematically assess risks related to climate change. The Canadian banking sector supports disclosures of climate‑related risks and backs efforts to establish a harmonized set of guidelines for climate change reporting that would support comparability across organizations and reduce the potential for global fragmentation in this area.
Now considered the gold standard for climate disclosures, there is increasing global alignment towards the Task Force on Climate‑Related Financial Disclosures (TCFD) framework for comparability across financial institutions. First established in 2015 by the Financial Stability Board, the TCFD framework is now used by many businesses and investors internationally, which helps build its recognition as a sort of lingua franca for climate‑related financial risk information. Every large Canadian bank is already working on implementing the disclosures developed by the TCFD. The framework is designed to be phased in over time, with the initial stage focused on qualitative disclosure followed by a sequenced introduction of quantitative measures.
Alignment to a globally recognized standard is important because it sets a clear path forward and provides consistent guidance and information for various stakeholders. Disclosure only matters if everyone understands it—that’s why alignment on TCFD is a significant step forward.
Last month, finance ministers from the Group of Seven (G7) countries backed the TCFD model for climate risks, saying: "We support moving towards mandatory climate‑related financial disclosures that provide consistent and decision‑useful information for market participants and that are based on the TCFD framework, in line with domestic regulatory frameworks." At the same meeting, G7 finance ministers also backed work by the International Financial Reporting Standards Foundation that will seek to develop a new global standard for sustainability reporting that builds on the TCFD framework. The Group of 20 countries also signaled their support of these efforts.
What gets measured, gets managed
The disclosure of risks to financial stability from climate change has two dimensions: physical and transitional. The value of financial assets or liabilities could be affected by:
- the actual or expected economic effects of continued climate change (physical)
- an adjustment toward a low-carbon economy (transitional)
Disclosure of the above risks will help financial institutions better assess the quantum of risk attributed to climate factors in their lending decisions. Moreover, disclosure of climate risks will help investors in their assessment of the strategies and portfolios of banks and other financial institutions in managing its exposure to climate‑related risk. So, while TCFD has value to lenders, it also has value in giving investors a clearer lens on how well the companies they invest in, including financial institutions, manage new climate‑related risks. This could then be factored in to how the market prices the public shares of those listed companies.
Committed to a sustainable economy
Canadian banks understand that tangible commitments are required to accelerate clean economic growth in Canada and to meet the ambitious goal of a net‑zero economy by 2050 set by the Paris Agreement on climate change. Immediate physical risks resulting from a rise in CO2 emissions and the low-carbon transition represent threats to Canada’s financial and economic stability. Some of that risk can be mitigated by pursuing an orderly transition rather than a disorderly one, one that also considers the unique composition of the Canadian economy.
Indeed, data shared through climate‑related disclosures, using a widely agreed upon framework, will increase common understanding of the challenge we face and how best to organize our collective response. Ultimately, the important work that is underway within the Canadian financial system will help ensure it continues to serve as a source of strength to the economy amid the gradual transition to decarbonization.
i osfi-bsif.gc.ca/Eng/osfi-bsif/med/sp-ds/Pages/jr20201123.aspx