Canadian financial institutions appear ready to absorb projected potential losses from physical and transition risks caused by climate change, according to a new report by the Autorité des marchés financiers and the Office of the Superintendent of Financial Institutions.

The report, which engaged more than 250 financial institutions in Canada, found organizations are prepared for the short and medium terms but over the long term, they face credit losses, asset devaluation, liability exposures and operational disruptions from intensifying and more frequent physical hazards. This risk could significantly impact institutions with concentrated regional or sectoral exposures, it noted.

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The two organizations joined forces last year to conduct a standardized climate scenario exercise to enhance the financial sector’s understanding of climate-related financial risks with the goal to standardize physical and transition risks.

In the future, both the OSFI and the AMF will incorporate the findings from the report to ongoing supervisory expectations and risk management guidance. It will also help inform assessment of financial institutions’ ability to measure climate-related financial risks.

As part of the climate transition assessment, the report found that financial institutions hold a portion of their commercial exposures in sectors vulnerable to transition-related risks. “These exposures could experience a substantial increase in expected losses over a long term. The impact is especially pronounced in the case of a delayed transition.”

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The report found the industry urgently needs strategic investment in climate-related data infrastructure tools like maps of floodplains and wildfire hazards.

“Enhancing the methods for measuring, assessing and managing climate-related financial risks is key to maintaining confidence in the financial system,” said Yves Ouellet, president and chief executive officer at the AMF, in a press release. “Ongoing efforts in this area will help safeguard financial stability and reinforce institutional resilience as climate-related challenges evolve.”

Peter Routledge, superintendent at the OSFI, added the two organizations are laying the groundwork for a more resilient Canadian financial system.

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