MNI INTERVIEW: Canada To Drive Climate Risk Rules For Banks

Canada’s top bank regulator will move toward rules requiring the financial services industry to take account of climate risk even if work on estimating potential risks is partial, he told MNI, adding that preparations for detailed stress testing and ultimately new capital requirements in line with global emission targets must accelerate.

"The more comparable and common data we have, the better, and the more global those standards are, the better. But our urgency means we can't treat that as a 'need-to-have' before we make progress. We have to make progress,” OSFI Superintendent Peter Routledge said in a phone interview Wednesday from Toronto.

While next year should see much more detailed work on quantifying risks around climate change, delaying controls would be more costly, he said, expressing a view also shared by the Bank of Canada, which is working with OSFI on a risk assessment paper for January release outlining different scenarios. OSFI will move "in a measured way" toward options such as “more climate scenario testing, even stress testing, and ultimately capital guidelines around climate,” and could also set other expectations and rules, Routledge said.

DELAY WOULD BE COSTLY

“A pathway that begins in 2030 could be more disruptive to the economy and therefore more disruptive to the financial system,” he said, declining to share any specific estimates of potential climate impacts. “Now is the time to think about how do we ensure the financial system is resilient to any pathway to net zero that our trading partners ultimately move down.”

“The question we need to ask is will our system have the capital liquidity buffers to absorb a more accelerated pathway, a 20-year pathway, to net zero. I hope that doesn’t happen, to be clear. But from our perspective we don’t control that, we want a financial system that’s resilient no matter the path,” said Routledge, appointed in June for a seven-year term. Before that he was head of the country's deposit insurance authority, managing director of research at National Bank Financial, and led the Canadian Financial Institutions Group at Moody's.

While Canada is a major fossil fuel exporter and high per capita energy user, Routledge pointed to a recent carbon tax as a positive development, and was optimistic the nation's solid banking reputation, underlined during the 2008 housing crash, will carry into climate regulation. Insurers have already shown foresight to get ahead of rising damage claims linked to climate change to remain profitable and well-capitalized, "and we're happy for that," he said.

“That ethic we had in 2008, I think you're going to see over the next couple of years that people will be reminded in and renewed in their estimation of Canada, Canada's sensible approach,” he said.

REGIONAL VARIATIONS

Six of Canada’s largest banks have joined the Net‑Zero Banking Alliance, a group seeking to reach net-zero emissions by 2050, a goal the COP26 conference said is needed to limit global warming to 1.5 degrees Celsius. Fitch Ratings estimates that while oil and gas is no more than 5% of Canada’s banking assets, lenders are also indirectly exposed to additional climate risk via housing, which represents almost half their loan books.

Investor perceptions of climate risk are already detectable in the movements of Canada’s currency, as well as those of other major commodity exports, research shows. (see MNI INTERVIEW: Commodity Currencies Hit By Climate Risk).

With the provinces of Newfoundland and Alberta still seeking to develop major oil deposits, Routledge said the regulator’s “approach will be calibrated and bespoke to our regions.”

"Risk management within climate change, is not going to fall evenly across the country, it’s going to fall a little unevenly,” he said. "We’re going to complement the work we do by looking at Canadians everywhere and making sure that the way we progress this takes account of and aids all different parts of the country.”

“We're a small open economy that exports a lot of natural resources. That's why I vastly prefer that the globe starts now and has a longer transition to net zero, it’s better for the country.”