Canadian financial institutions are urged not to underestimate climate risks.
The Bank of Canada, the Office of the Superintendent of Financial Institutions and six of them recruited from banks and insurers engaged in a simulation exercise articulating the climate transition around four major scenarios. The pilot project was not meant to be forward-looking or predictive. Rather, the exercise aimed to explore plausible but intentionally unfavorable transition trajectories that incentivize decarbonization, we are careful to point out. And the chosen scenarios are intentionally focused on transition risks, not physical risks.
From the outset, we see that the public and private sectors are just beginning to develop their capacity to assess the risks associated with climate change. For the financial industry, an erroneous assessment could expose institutions and investors “to sudden and significant losses”. It could also delay the investments needed to mitigate the effects of climate change. For reference, the sectors to which institutions participating in the exercise are most exposed are oil and gas, power, commercial transportation and energy-intensive industries. Together, these four sectors represent almost 90% of their total exposure to credit risk, we can read.
Pandemic Distortion
The reference scenario incorporates the global climate policies in place in 2019. The choice of this year aimed to eliminate the distortion that the pandemic could have caused. According to the projections, at most this scenario can barely stabilize greenhouse gas emissions by 2050. It is compared to an intervention sometimes immediate, sometimes deferred, the aim of which is to contain global warming below 2 °C, while the more ambitious scenario assumes carbon neutrality in 2050 and an average global warming of 1.5°C.
In any case, the total impact of the climate transition would take the form of a drain on Canadian GDP that would hover around 10% in 2050 compared to the reference scenario, mainly due to a reduction in demand. and commodity prices, an impact that would reflect the full weight that sectors with high GHG emissions represent in the Canadian economy.
Globally, the effect of the transition on GDP in 2050, relative to the level it would be in the reference scenario, would be around 5%, but 13% for countries exporting products basic.
Price increase
The analysis also shows that the emission targets cannot be achieved without an increase in carbon pricing. Not to mention that delayed climate action amplifies economic impacts and risks to financial stability, leading to a sudden revaluation of assets. “Delayed intervention will require a more abrupt transition and will have stronger macroeconomic impacts, notably in the form of a steeper increase in the theoretical price of carbon to achieve the same effect on climate change. »
But at the end of the day, even if the transition to a low-carbon, low-emissions economy appears costly, it makes it possible to avoid physical risks which, combined with avoidance or mitigation measures, would have a significant impact on economies and on the financial system. “We know that, normally, the advantages associated with the physical risks avoided for the world economy exceed the costs of the transition”, we would like to specify.