Management of Climate Risks in the Financial Industry of a Resource Based Economy: A Canadian Scenario Analysis

Although some studies exist on how the financial industry is affected by climate risks and how it might manage them, no such studies exist for a country with an economy that is mainly based on carbon-intensive resources, such as oil, gas, and mining. We conduct a scenario analysis based on an impact matrix that uses both physical and transition risks to model impacts on the financial portfolio of Canadian chartered banks. We will complement findings about climate-related risks and opportunities in Europe, Asia, and Africa that are different from climate change-related risks to North America and that are in countries with different regulatory frameworks.

Our research will be based on a formative scenario analysis and an impact matrix will be created based on the Intergovernmental Panel on Climate Change climate scenarios and climate scenarios for Canada. Based on different data sources, we will conduct a MICMAC analysis (a system of multiplication of matrices applied to the impact matrix) to calculate both direct and indirect impacts on Canadian banks’ financial risks. The expected results will help policymakers in countries with carbon-intensive economies to create financial policies, regulations, and supervision regimes that could be applied by central banks and other financial regulators to mitigate climate risk for the financial industry without creating otherwise significant negative impacts for these countries’ economies.

The results of this INSPIRE research will help banks to implement strategies to reduce their exposure to climate-related financial risks. Consequently, negative impacts on the Canadian financial industry could be avoided. This is important given that the Canadian banking sector is dominated by five chartered banks that are similar with regard to their businesses.