Why isn’t the Bank of Canada talking about climate change?

In December, Bank of Canada Governor Stephen Poloz delivered his annual speech discussing the state of Canada’s financial system. He outlined a number of risks facing the Canadian economy, including rising levels of household debt, global uncertainty around trade, and a continued downturn in the energy sector.

However, there was one risk to Canada’s economy that did not receive a single mention: climate change.

In fact, you would be hard pressed to find the Bank of Canada talking about climate change at all. The last time a senior member of Canada’s national bank referenced climate change was in a speech delivered by deputy governor Timothy Lane two years ago.

Lane’s speech made the case for the Bank to put more focus on climate risks. “Climate change itself and actions to address it will have material and pervasive effects on Canada’s economy and financial system...they are already starting to become important. So, the Bank needs to consider these effects as we deliver on our mandate to promote the economic and financial well-being of Canadians.”

That was two years ago, but as governor Poloz’s year-end speech made clear, climate risk is not on the Bank’s radar.

What do we mean when we talk about climate risk? It can mean the transition costs of the global shift to a low-carbon economy. Sectors that aren’t prepared for this transition will experience lower returns for investors and less access to markets. If Canadian industries like energy or agriculture remain as carbon-intensive as they are today, they will be vulnerable to a painful disruption.

Climate risk can also mean the costs of physicial damage from extreme weather events occurring more frequently and with greater intensity. According to the Insurance Bureau of Canada, floods, windstorms, ice storms, and heat waves led to $1.9 billion in insured damage across Canada last year.

Abrupt transition increases risk

While the Bank of Canada may not be talking about climate risk, other central banks around the world are sounding the alarm.

Last November Mark Carney, Bank of England governor and former Bank of Canada governor, delivered a speech outlining climate change’s devastating impacts, and the financial risks from delaying the transition to a low-carbon economy.

“If the transition is delayed and then happens abruptly, financial stability risks will rise considerably," Carney said. "Given this combination of immediate physical risks and prospective transition risks, the Bank of England has become increasingly active consistent with our financial stability and prudential mandates.”

European Central Bank Executive Member Benoît Coeuré delivered a speech late last year arguing that the horizon for central banks to view climate change is rapidly shrinking. What was once considered an uncertain threat in the future now has an impact on the financial system in real time.

“Climate change is likely to affect monetary policy one way or the other – whether it is left unchecked or humankind rises to the climate change challenge,” Coeuré said. “There is scope for central banks themselves to play a supporting role in mitigating the risks associated with climate change while staying within our mandate.”

Unlike many other central banks, the Bank of Canada is not directly responsible for regulating banks or insurance companies. That rests with the Office of the Superintendent of Financial Institutions (OSFI). However, the Bank works closely with OSFI, and sits on Canada’s Financial Institutions Supervisory Committee, which meets quarterly to discuss the supervision of federally regulated financial institutions.

As deputy governor Lane said about climate change and the Bank: “We do, however, have a broader set of responsibilities to support financial stability, including identifying, analyzing and assessing both imminent and emerging systemic risks.”

This position was reinforced by the Federal Task Force on Sustainable Finance, which includes Tiff Macklem, former Bank of Canada senior deputy governor. In its interim report released last year, the task force wrote, “The Bank of Canada plays a key role in assessing systemic economic risk and has the analytic capacity to assess the risk impact of improved climate-related financial disclosures and sustainable investment practices.”

So there is acknowledgement that the Bank of Canada has a leadership role to play in identifying climate risk. Has the Bank done any further work assessing the systemic risk of climate change to Canada’s economy?

Politicians are increasingly posing that question to their central banks. In January, twenty U.S. Senators sent a letter to U.S. Federal Reserve Chair Jerome Powell asking what steps the Fed is taking to ensure the U.S. financial system is prepared for climate change.

“We request detailed information on the steps each of your organizations have taken to identify and manage climate-related risks in the U.S. financial system,” they wrote. “However, we have seen no evidence that your agencies have seriously considered the financial risks of climate change or incorporated those risks into your supervision of financial institutions.”

Those are good questions to be asking the Fed chair. It is time we started asking the Bank of Canada similar questions about climate change.