Canada faces significant financial risks if net-zero actions delayed

BY Reuters | ECONOMIC | 01/14/22 02:02 PM EST

By Nichola Saminather and Julie Gordon

TORONTO/OTTAWA, Jan 14 (Reuters) - Canada's low-carbon transition poses important risks for some sectors, and delaying actions to prepare could expose financial institutions and investors to "sudden and large losses," the country's central bank and financial regulator said in a report on Friday.

The transition, to be spread over 30 years, will hit Canada's economic growth as demand and prices for commodities fall, leading to less inflationary pressure and a need for more stimulative monetary policy, the Bank of Canada and the Office of the Superintendent of Financial Institutions said.

If actions are delayed and "there's a sharper policy reaction down the road, (it) will impose more transition risk on the economy and the financial sector," Bank of Canada Deputy Governor Toni Gravelle told reporters.

The pilot study, which looked at various climate risk scenarios, found Canada's economy will undergo "significant structural changes" to meet climate targets, made more difficult by its large carbon-intensive sectors.

Canada is the world's fourth-largest oil producer and has the highest emissions per barrel among major oil nations, according to consultancy Rystad Energy. Canada has committed to achieving net-zero emissions by 2050.

The report examined three "plausible but intentionally adverse" transition scenarios, with the 2019 climate guidelines as the baseline.

Progress with climate-related disclosures is hampered by poor and inconsistent reporting standards, said the financial institutions, which are in the early stages of risk analysis.

"There's much to be done to get to the level of quality in evidence to drive prudential decisions like capital requirements," Ben Gully, assistant superintendent at OSFI, told reporters on a conference call.

The agency's focus for the short term will remain risk management by financial institutions, he said. Any requirement for extra capital beyond that will depend on the effectiveness of firms' risk management measures, he added.

The pilot began in late 2020, and participants assessed the credit and market risks posed to their balance sheets by the climate transition. Participants included Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), and insurers Manulife Financial Corp (MFC), Sun Life Financial (SLF) , Intact Financial Corp (IFCZF) and the Co-operators Group. (Reporting by Nichola Saminather in Toronto and Julie Gordon in Ottawa Editing by Matthew Lewis)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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