Canada: Financial Sector Assessment Program-Technical Note on Climate Risks Analysis
IMF Staff Country Reports, August 8, 2025
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Bibliographic details
- Published: August 8, 2025
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9798229021920.002
Overview
- Technical Note highlighting that the financial sector in Canada is exposed to both physical and transition climate risks.
- Canadian regulators are advancing climate risk management in financial institutions.
- The Financial Sector Assessment Program (FSAP) performed an independent analysis of key physical and transition risks for large deposit takers.
- Focus: developing methodologies and enhancing awareness of climate risks and challenges in climate risk assessment.
Key findings
- The Canadian financial sector faces both physical and transition climate risks.
- Results of the analyses are sensitive to several parameters, such as the damage function and the rate of passthrough of damages to Deposit Taking Institutions.
- Transition risk analysis yields heterogeneous results by sectors, with notable impacts for heavy emitters.
- Under the transition scenarios, Non-Financial Corporates’ credit risk would generally increase modestly but with significant variations across sectors.
- Notable impacts are observed for the oil and gas sector.
- Both the physical and transition analyses:
- Focus on a specific credit risk channel.
- Capture only direct impacts, ignoring indirect and systemic effects.
- Hence potentially underestimate overall climate risks facing the Canadian banking and deposit taking sector.
Methodological notes and sensitivities
- Analyses emphasize methodological development and awareness-raising rather than comprehensive system-wide stress testing.
- Sensitivities highlighted include:
- Damage function specification.
- Rate of passthrough of damages to Deposit Taking Institutions.
- Outcomes depend critically on parameter choices, implying wide variation in estimated impacts.
Transition risk analysis (summary)
- Finds heterogeneous sectoral outcomes.
- Heavy emitters face notable impacts.
- Non-Financial Corporates’ credit risk:
- Generally increases modestly under transition scenarios.
- Exhibits significant variation across sectors.
- Oil and gas sector: identified as having notable impacts.
Physical risk analysis (summary)
- Physical risk exposures are identified for the Canadian financial sector.
- Analysis concentrates on direct credit-risk channels to large deposit takers.
- By focusing on direct effects, the analysis may understate aggregate risks due to exclusion of indirect and systemic channels.
Limitations and caveats
- Both analyses only capture direct impacts via a specific credit risk channel.
- Indirect and systemic effects are ignored.
- Potential underestimation of overall climate-related risks to the banking and deposit taking sector.
Policy implications and recommendations (implied within text)
- Continue development of climate risk management frameworks within financial institutions.
- Advance methodologies for climate risk assessment, including:
- Refining damage functions.
- Improving estimates of passthrough rates of damages to Deposit Taking Institutions.
- Enhance sectoral analysis granularity to capture heterogeneous impacts, particularly for heavy emitters such as oil and gas.
- Expand analysis to include indirect and systemic channels to better estimate aggregate financial sector risks.
International Monetary Fund. Monetary and Capital Markets Department "Canada: Financial Sector Assessment Program-Technical Note on Climate Risks Analysis", IMF Staff Country Reports 2025, 234 (2025), DOI: https://doi.org/10.5089/9798229021920.002.
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