Advisors’ training for risk assessments should be boosted, IAP recommends

Weathering the transition to a low-carbon economy will be the chief climate challenge for the financial sector — and its regulators, says Canada’s top banking regulator Jeremy Rudin.

Rudin, superintendent with the Office of the Superintendent of Financial Institutions (OSFI), discussed the challenges posed by climate change for financial firms and the overall financial system on Tuesday at a conference in Vancouver.

He noted that the sector faces an array of physical, liability and transition risks.

The transition risks — which arise as the economy shifts to a lower-carbon approach — are likely to be the biggest concerns for financial regulators, he suggested.

“The impact on the economy need not be all negative,” he said, as the transition will also create opportunities.

“Indeed, we can hope that the overall impact on the economy will be mild, if not even positive,” he said.

Yet, given the lack of certainty about how this will play out, “the prudent thing to do is to prepare for the possibility that the overall economic impact of the transition will be sharply negative, at least for some time,” he said.

As a result, the central concern for prudential regulators will likely be, “Even if the financial system is prepared to navigate through a severe and prolonged recession, how might it still be unprepared for a transition to a low-greenhouse gas emission economy?” he said.

Existing regulatory policy addresses some of the financial system risks that arise from climate change, Rudin noted. But regulators in Canada and elsewhere are examining whether more needs to be done, he said.

Rudin noted that OSFI is working with other banking regulators from around the world on this question.

“As we always do when we are considering a significant new risk, we are seeking input from a variety of stakeholders,” he said. “These consultations will be a particularly important part of our work on climate-related risks.”

Rudin indicated that OSFI “will have more to say about our work in this area as the year progresses.”