Climate Change and the Canadian Financial Services Sector

Abstract

Canada is highly dependent on the emission intensive sectors and at the same time, sectors that are vulnerable to variations in weather and extreme events. This makes the Canadian economy especially vulnerable to the impacts of climate change and any efforts to address it. The financial services sector is responsible for the provision of capital to all economic sectors and, therefore, it must consider all climate change-related risks and opportunities in its capital allocation decisions. This study explores the perception of climate change by the financial services sector in Canada and the extent of the sector’s response to climate-related impacts to date. The study adopted an institutional view of isomorphism to explain the behaviours of the financial sector in relation to climate change. The research was conducted through qualitative analysis of interviews with representatives of the Canadian financial sector and a review of the latest available responses to the Climate Disclosure Project’s (CDP) climate change questionnaire. The research’s primary focus was on climate change consideration in the lending and investment portfolios of the financial institutions. The research involved investigation of the industry’s awareness of five climate-related risks – physical, reputational, regulatory, litigation, and transition risks – in the Canadian context and the level of substantive actions taken by participating institutions. The study found that the level of the sector’s preparedness is low because coercive, normative, and mimetic isomorphic pressures have only existed for a short time. The Canadian financial institutions are in early stages of exploring climate change-related risks and opportunities for their lending and investment businesses. The study concludes with recommendations for the industry and proposals for further research on climate-related risks and opportunities for the financial sector through quantitative methods.