Opinion: Climate risk management will be rewarded with better economic results

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A person walks past a climate change-themed nature mural on Earth Day during the COVID-19 pandemic in Toronto on April 22, 2021.

Nathan Denette / The Canadian Press

Sonia Baxendale is the Managing Director of the Global Risk Institute in financial services

A recent Moody’s report suggested Canada could be a “climate winner” with up to 0.3 percent GDP growth through initiatives such as greater agricultural production. This optimistic outlook is in stark contrast to what Western Canada has seen this summer with wildfires, record temperatures and withered crops.

And last week, the United Nations Intergovernmental Panel on Climate Change (IPCC) released its report which clearly points to a narrowing of the path that can be taken to stabilize the planet’s climate.

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What these reports suggest is that countries that manage climate risk more effectively will be rewarded with better economic outcomes. And, as our country proved during the global financial crisis a decade ago, we are good enough at managing risk when industry, academia and government work together.

As a nation, we have an obligation to our stakeholders, shareholders and future generations to drive the innovation needed to create a sustainable, low-carbon economy today, not the distant future. Canadian financial institutions provide capital and leverage to the country’s societal and economic activity and must play their role in managing and mitigating climate risks and accelerating low-carbon opportunities. To do this requires a fundamental change in their business model to assess the risks when deploying capital.

The Global Risk Institute for Financial Services recently released a paper that examines the top five takeaways from the IPCC report that will affect Canada’s financial services industry.

1. Canada is in the crosshairs and the world agrees. An increase in the low-carbon ambition of other countries will have major ramifications for Canada’s energy and resource economy. For example, oil-producing economies face pressure to eliminate fossil fuel subsidies and increase the number of sectors paying a carbon tax in order to accelerate the diversification of the energy sector. The resulting effect on the bottom line is that borrowers in the fossil fuel sector or with a high emissions footprint will find it difficult to to get credit. At the same time, lenders and institutional investors will be forced by their own models of credit risk, as opposed to public opinion alone, to cut credit to high carbon companies.

2. Clearer, data-driven future scenarios are now possible. Recent scientific advances now provide better data to analyze climate risk scenarios. For those who allocate capital and lend, a clearer picture of what will happen if emissions are not reduced to adequate levels can improve the ability to accurately assess the risk associated with risk. On the insurance side, this could lead to higher premiums or restricted access to insurance or reinsurance. Risk-based capital allocation can be better defined and regulators are ready to respond. For example, the EU’s financial markets regulator is already considering additional capital requirements in response to climate risk.

3. The risk of liability is expected to increase as human influence on the climate is now “unequivocal”. Scientists are now able to link specific weather events to man-made climate change, something they had missed in recent decades. As a result, companies will reassess contracts, which may be exposed to climate-related liability. This area could follow a similar trajectory as the evolution of liability in the tobacco industry – more lawsuits for exposed industries, thus having a ripple effect on credit and market risk, and possibly a direct legal risk for financial companies if they have financed polluting industries that may be linked to damaging weather events.

4. Double transition funding and switch to a low carbon economy. The world’s leading financial institutions have joined the Glasgow Financial Alliance for Net Zero (GFANZ). GFANZ recognizes that it will take an economy-wide transition to achieve net zero emissions and that every company, bank, insurer and investor will need to adjust their business models, develop credible plans for the transition and put them into action. artwork. The report provides a clearer picture of the benefits of reducing emissions, such as reducing floods, fires, droughts and the many benefits of capitalizing on sustainable finance.

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5. Investment in the only entity that can soften the blow: Mother Earth. The IPCC study presents a clearer picture of climate processes which are now irreversible and worsening in an accelerating positive feedback loop. This information will lead to increased demand for funding adaptation, resilience and nature-based solutions to protect or modify existing risky infrastructure. Retrofitting, for example, is expected to become a bigger part of the sustainable finance market. Insurers, lenders and investors will better understand the long-term outlook for physical assets and infrastructure that can support better asset allocation, better underwriting and better pricing.

Canada was a world leader during the financial crisis ten years ago because of its ability to manage financial risk better than most countries. Now is the time for Canada to come together, do the right thing for future generations and move beyond our weight on the climate.

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