January 14, 2022

Using scenario analysis to assess climate transition risk

Together with six Canadian financial institutions, the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) developed scenarios that will help the financial sector identify, measure and disclose climate-related risks. These scenarios were not intended to be forecasts or predictions. Rather, they were specifically designed to capture a range of potential outcomes and illustrate the kinds of stresses on the financial system and economy that could occur as the world transitions to a low-carbon future.

All scenarios showed that this transition will entail important risks for some economic sectors. Mispricing of transition risks could expose financial institutions and investors to sudden and large losses. It could also delay investments needed to help mitigate the impact of climate change.

The scenarios highlighted that meeting climate targets will lead to significant structural changes for the Canadian and global economies, and that this transition will be more challenging in countries like Canada that have large carbon-intensive sectors. As well, the analysis showed that delaying climate policy action increases the overall economic impacts and risks to financial stability. In the scenario analysis, the economic impacts for Canada are driven mostly by declines in global commodity prices.