Banking and insurance heavyweights to work with Canada’s central bank on climate scenarios

Canada’s largest banks and insurer – Royal Bank of Canada, TD Bank and Manulife – will take part in a pilot project by the country’s central bank on identifying climate risk in the financial sector.

In the latest sign that Bank of Canada (BOC) is stepping up on climate risk under new Governor, Tiff Macklem, it will develop a set of Canada-specific climate change scenarios to be road-tested by a select group of insurers and banks to establish their individual exposures to climate risk.

Intact Financial Corporation, Sun Life Financial and The Co-operators Group will also participate in the pilot. 

Before taking the reins at BOC in June, Macklem was one of four green finance advisors appointed by the Canadian Government. Among the recommendations made by the quartet last year was the creation of two or three climate scenarios that were suitable for Canada. 

BOC contributed to the development of climate scenarios released earlier this year by green central banking group the Network for Greening the Financial System, to serve as a guide for financial supervisors. 

Under the new project, the climate scenarios will be developed in collaboration with financial sector watchdog the Office of the Superintendent of Financial Institutions (OSFI), and build on exploratory research on scenario analysis conducted by the central bank earlier this year. 

The pilot study is expected to result in a technical report by the end of 2021, offering conclusions but not revealing individual results. It will focus instead on specific scenarios, methodology, assumptions and key sensitivities.

“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,” said Macklem.

In addition to enhancing disclosure, the project aims to increase supervisory understanding of how financial institutions manage climate-related risks. 

Aside from the BOC, only a handful of jurisdictions are actively developing country-specific approaches to assess financial sector climate risks including France, Holland and the UK.

Separately, OSFI is due to publish a discussion paper on building financial resilience to climate-related risks in early 2021.