Canada: Financial Sector Assessment Program-Technical Note on Climate Risks Analysis

This Technical Note on Climate Risk Analysis highlights that the financial sector in Canada is exposed to both physical and transition climate risks. Canadian regulators are working on advancing climate risk management in financial institutions. The Financial Sector Assessment Program also performed an independent analysis of key physical and transition risks for large deposit takers. The focus of these analyses is on developing methodologies and enhancing awareness of climate risks and associated challenges in climate risk assessment. Results are sensitive to several parameters, such as the damage function and the rate of passthrough of damages to Deposit Taking Institutions. The transition risk analysis finds heterogeneous results by sectors, with notable impacts for heavy emitters. Under the transition scenarios, Non-Financial Corporates’ credit risk would generally increase modestly but with significant variations across sectors. Notable impacts are observed for the oil and gas sector. Both analyses focus on a specific credit risk channel and only capture direct impacts, ignoring indirect and systemic effects, hence potentially underestimating overall climate risks facing the Canadian banking and deposit taking sector.