Canadian finance industry has “an obligation” to act on climate change

Global Risk Institute says there are five key takeaways for financial institutions from the IPCC report


By Steve Randall
Aug 12, 2021

This week’s report from the UN-backed Intergovernmental Panel on Climate Change (IPCC) has sent shockwaves through industries and governments.

Its clear message that it’s not an option to delay significant measures to meet the targets set by the Paris Agreement has sparked renewed calls for action, and the financial services industry has an important role to play.

The Toronto-based think tank, Global Risk Institute (GRI) in Financial Services, has published its top five takeaways from the IPCC report that Canada’s financial institutions (FIs) can use to seize the opportunities from building a greener economy.

"Now is the time for Canada to come together across government, industry and academia and punch above our weight," says Sonia Baxendale, President and CEO, Global Risk Institute.

Canada in the cross-hairs

The urgency for Canada to lower carbon emissions in the short term is one of the biggest calls to action and the first of the GRI’s takeaways.

With modelling projecting larger-than-average temperature increases for the country, the prospect of more catastrophic storms, droughts, and wildfires is a rallying call.

With global pressure to reduce the reliance on fossil fuels, this will impact those lenders that are most exposed to the sector.
Better data

The second takeaway is that the better data available to FIs offers greater insights into the risk and gives the industry enhanced ability to manage and price risk.

It also allows for the development of products that meet the needs of the low carbon economy, such as new insurance products; and for potentially higher premiums to reflect the risk.

Liability risk

With the IPCC report clearly linking certain specific weather events to human-made climate change, a rise in liability risk is expected.

Financial firms could face litigation if they have financed known polluting industries that lead to weather incidents.

GRI likens the potential outlook to that of the tobacco industry where exposed industries face court cases and legal suits, which may increase market and credit risk.
Financing the transition

Of course, Canada’s financial sector will continue to play a major role in financing the transition to a greener economy.

Specifically, GRI sees a doubling down on transition finance and the move to a low carbon economy.

“Financing and underwriting of fossil fuels must support energy diversification toward renewables, and transparency from firms about net zero portfolio alignment and climate-related financial risk must increase,” the report says.
Investing in the planet

The fifth takeaway is that investment in Mother Earth must be at the heart of climate change action.

With a scramble for financial resources to adapt, build resilience and invest in nature-based solutions to buffer the impacts, GRI says the financial sector should develop 'climate adaptation finance' as a tool within the sustainable finance umbrella.

"Industry must pick up the pace. We have an obligation to our stakeholders, shareholders and future generations to face an unprecedented challenge and drive the innovation needed to create a sustainable low-carbon economy today – not in the distant future,” concluded Baxendale.