The Bank of Canada has released its first annual report outlining the risks that climate change poses to its mandate and operations. The report evaluates how the physical effects of climate change and potential disruptions from the transition to a low-carbon economy could impact the Bank’s ability to deliver its core functions. It explains what the Bank is doing to manage the risks to its balance sheet and pension fund, and outlines its plan to reduce the carbon footprint of its operations.
“The Bank does not set climate policy—that’s appropriately the purview of elected governments and, ultimately, parliaments. But to fulfill the Bank’s mandates to control inflation and promote financial stability, we need to understand the implications of climate change for the Canadian economy and financial system,” writes Bank of Canada Governor Tiff Macklem in the report’s Foreword.
Around the world, the effects of climate change are becoming more visible, widespread and severe. In recent years, Canada has seen an increase in the frequency and severity of natural disasters and a surge in physical damage affecting both people and property.
Climate change has brought the world to a pivotal moment. The Bank of Canada has an obligation to better understand and manage the threat climate change poses. Canada’s economy and financial systems are not immune to the effects of climate change. In fact, the country is facing two distinct forms of risk:
- from the physical impacts of climate change itself
- from the disruption that will accompany the global transition to a low-carbon economy
This report is the first public disclosure for the Bank in this area. In the content that follows, the risks associated with climate change are assessed in terms of their impact on the Bank’s responsibilities and operations. This report lays out elements of the Bank’s strategy related to climate change and details how the issue will be managed holistically across the organization, following the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.
The first section of this report provides an overview of the Bank’s primary roles and responsibilities and elaborates on both the physical and the transition risks that could affect the Bank’s efforts to accurately predict and control inflation. This section also discusses climate-driven changes that could undermine the stability of the financial system and affect the value of assets the Bank holds as investments or collateral.
The second section focuses on how the Bank’s integrated approach to climate change is reflected in its governance structure. The Bank’s Board of Directors, Executive Council, Senior Management Council and key committees all have distinct roles and responsibilities in overseeing the management of climate-related risks. Each of their relevant functions is described in this section, including those of the newly created Climate Change Steering Committee, which provides broad oversight of the issue across all Bank operations.
The third section of this report outlines the Bank’s strategic objectives related to climate change—particularly the goal of better identifying and quantifying climate-related risks across all areas of the organization. By enhancing its overall monitoring capacity, the Bank will be better positioned to manage risks and achieve targets in both its corporate operations and its broader policy work. This section also describes how improved measurement and transparency feed into other core objectives, such as greening the Bank’s physical operations and maintaining the health of the Bank’s balance sheet and pension fund.
The fourth section describes how a risk assessment lens is applied to all aspects of the Bank’s physical operations and provides detailed objectives and targets. For example, it outlines efforts to build resilience and strengthen business continuity in response to natural disasters, especially in critical areas such as supplying bank notes to Canadians, supporting the smooth functioning of the financial system and conducting monetary policy. This section also lays out the Bank’s strategy to reduce the environmental impact of its physical operations. With the goal of eliminating waste and achieving net-zero emissions in the coming decades, the Bank’s strategy in this area includes:
- transitioning to renewable energy sources
- implementing various approaches to reduce the use of energy
- establishing strategic partnerships with suppliers and other global organizations
The Bank’s balance sheet contains many assets and liabilities that are central to the effective conduct of monetary policy and the smooth functioning of the financial system. To assess the risks to its balance sheet, the Bank monitors a series of backward- and forward-looking metrics that provide insight into current and future exposure. Similarly, as part of the broader management of its investment portfolio, the Bank gauges the exposure of its pension fund assets to physical and transition risks associated with climate change. These efforts are detailed in this section of the report.
The disclosure of climate risks in this report represents the start of a journey the Bank is committed to pursuing. Through this report—and future iterations—the Bank aims to increase awareness of climate-related risks and highlight the management strategies it will employ to address them.
To read the complete report, click here.
Feature image credit: Getty Images.