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If net-zero actions are delayed, Canada will face significant financial challenges

If net-zero actions are delayed, Canada will face significant financial challenges

The low-carbon transition in Canada poses significant risks to certain industries, and delaying preparation might expose financial institutions and investors to "sudden and large losses," according to the country's central bank and financial regulator.

The transition, which will be extended over 30 years, will impact Canada's economic growth as demand and commodities prices fall, resulting in less inflationary pressure and a need for more stimulative monetary policy, according to the Bank of Canada and the Office of the Superintendent of Financial Institutions.

If actions are delayed and "there's a sharper policy response down the road," (it) will expose more transition risk on the economy and the financial sector, according to Bank of Canada's deputy Governor.

The pilot study, which looked at a variety of climate risk scenarios, found that Canada's economy will undergo "significant structural changes" to meet climate targets, which have been reduced by its largely carbon-intensive industries.

According to Rystad Energy, Canada is the world's fourth-largest oil producer and has the highest emissions per barrel among major oil countries.

Three "plausible but intentionally detrimental" transition scenarios were examined in the report, with the 2019 climate guidelines as the base.

According to the financial institutions, progress with climate-related disclosures is hampered by poor and inconsistent reporting standards.

"There's still much to be done to reach the highest level of quality in evidence to enable prudential decisions like capital requirements," said Ben Gully, OSFI's assistant superintendent.

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

Participants included Royal Bank of Canada, Toronto-Dominion Bank, and insurers Manulife Financial Corp, Sun Life Financial, Intact Financial Corp, and the Co-operators Group.

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