Bank of Canada addresses Climate Change in their Financial System Review

It made a lot of headlines that the Bank of Canada listed climate change as one of their vulnerabilities in their 2019 Financial System Review.

The media subsequently went wild and instantly began to mis-characterize this as being a big vulnerability (headlines: “Climate change threatens ‘both the economy and the financial system,’ says Bank of Canada”, “Bank of Canada identifies climate change as important economic weak spot”, “Bank of Canada warns ‘fire sales’ of carbon-intensive assets could ‘destabilize’ financial system”, etc.)

I would suggest reading the actual passage as written by the Bank of Canada.

The move to a low-carbon economy involves complex structural adjustments, creating new opportunities as well as transition risk. Investor and consumer preferences are shifting toward lower-carbon sources and production processes, suggesting that the move to a low-carbon economy is underway. Transition costs will be felt most in carbon-intensive sectors, such as the oil and gas sector. If some fossil fuel reserves remain unexploited, assets in this sector may become stranded, losing much of their value. At the same time, other sectors such as green technology and alternative energy will likely benefit.

Climate change resolves into political risk for various companies, especially those in the fossil fuel industry – regulation under the guise of climate protection, which instead has the effect of increasing costs. In my opinion, it is not a risk that will cause the destabilization of the financial system.

I would rank the ability for climate change to cause a systemic financial disaster in the Canadian financial system to be on par with the risk of a moderately large asteroid hitting the planet and causing wide-scale disruption – both events would be “climate-related”, per se, and cause real disruption. The Bank of Canada might as well have included a discussion piece on the risk of an asteroid hitting the planet, perhaps directly on Ottawa.

So it leaves me to question the motivation of the Bank of Canada to include this in their report, and it is for the simple reason that they are playing politics and want warm and fuzzy attention for addressing climate change.