One of the main opportunities AI presents for financial oversight and regulation is analyzing large data sets and identifying new opportunities. Several research projects have explored how AI can assess climate risk cases from text, and how it can be used to track and disclose the environmental impact of supply chains.

But questions remain about its effectiveness and whether its energy use is worth the cost.

Central banks are experimenting with AI

Central banks are already exploring how AI can be used in their own work, including for understanding climate risks.

A Banque de France research note explores how AI could help estimate corporate carbon emissions and finds that it predicts carbon intensity in 69% of cases but struggles with extremes such as heavily polluting emitters. And in Vietnam, the deputy governor at the State Bank of Vietnam has said that AI could be used to improve ESG reporting.

Meanwhile, the Bank for International Settlements (BIS) has two projects in its innovation hub focused on AI use around climate: Project Gaia and Project Symbiosis. Project Gaia uses a large language model (LLM) to automatically extract climate-related indicators from publicly available reports. The objective, BIS says, is to overcome a lack of global reporting standards in order to compare information on climate-related risks. The Gaia project is still ongoing with additional use cases and “is relevant in a much broader context than climate-related data analysis,” a BIS summary of the project states.

Project Symbiosis builds on the work done in Gaia by using various machine-learning subsets like LLM, deep learning and natural language. The collaboration looks at how AI can be used to collect, interpret and calculate Scope 3 emissions, identify opportunities to reduce emissions, and use the data to match suppliers with funding sources to decarbonize the supply chain.

With 95% of financial sector emissions falling within Scope 3, the project aims “to showcase how novel technologies offer a viable technical pathway to positively impact core stakeholders . . . by reducing critical information gaps impeding the climate transition.”

The findings from the project are in line with other AI and risk work and could set the basis for more standardized emissions and help improve issues around standardizing Scope 3 calculations.

AI’s usefulness for assessing climate risk

Interest in the use of AI for climate risk mitigation goes beyond central banks.

Several projects are exploring how to apply AI to imagery data, such as satellites, and advancing multi-input models that compile data points from imagery and text together.

This includes aspects like using image segmentation to look at the carbon footprints of certain areas, or classifications based on which plants are known to grow in those areas, says Peter Schwendner, a machine-learning expert at the Zurich University of Applied Sciences.

If done with intention, and if the levers are applied in a focused manner using AI production, the impact can be really, really meaningful and positive.

 – Mattia Romani, partner, Systemiq

From a regulatory perspective, he says, such AI use is “about improving market transparency, and then the financial market should improve the asset allocation with the objective of allocating more capital to, say, sustainable assets. This should work both in investing and in lending.”

It’s exactly the type of project that spaceborne AI firm Kuva Space hopes to expand on. The Finnish company has partnered with WWF Indonesia to explore how AI can be applied to hyperspectral imaging to understand changes to the region’s coastal ecosystem.

Hyperspectral imaging uses advanced satellite cameras to capture images in areas that are often difficult to reach. Kuva Space’s AI system is able to signal potential changes or anomalies, such as changes in the status of seagrass, an important marine carbon store, which can then be confirmed by scientists on the ground.

While the program is in a pilot stage, the project could have a larger impact for not only tracking ecosystems; it could also help regulators and investors identify and track project areas for sectors like blue carbon.

Investors and regulators are asking for this information, but they don’t have it, says Malathy Eskola, commercial director at Kuva Space. “We’re actually going to be making it more science-based or evidence-based, and provide that information so that the decision-makers can be confident.”

Needed: better data (and more of it)

But for AI to be truly effective in understanding climate risk and nature loss, more data is needed, especially from companies, Schwendner says.

Companies themselves do not need to crunch the numbers or create the models, but they do need to provide the raw data for analysis. “Academics and data providers are very eager to work with this data, so I don’t think it’s necessary for the public to invest a lot here,” he says. “This can be done by, say, collaborations between scientists and data providers, but the raw data on the company’s operations needs to be available.” 

This includes information such as which companies are sourcing raw materials, at what volumes and from which locations. “At the moment, we only know this in very rough terms, and we need to know exact numbers . . . If we know that, and if we know the production volumes, if we know the energy, where it comes from at this local production facility, then we can estimate . . . the environmental consequences. Then we can estimate the climate impact.”

While more data was expected this year as a result of the European Union’s climate disclosure rules, the bloc’s sustainable omnibus measures have meant there may be less information available than anticipated.

Will AI be positive or negative for the environment?

The other burning question around using AI to mitigate climate-change risk is whether it’s worth the energy use and environmental impacts.

AI consumes a lot of energy and water, and those working on AI projects in the climate space are aware of the contradiction in using something for environmental aims that itself uses a lot of natural resources.

The biggest issue with AI consumption, experts say, is the type of models being used and how they are being applied. Training models requires a lot of energy, increasing the electricity demand for data centres. It accounted for 1.5% of all demand in 2024, but is projected to account for 10% of energy demand growth by 2030.

Even researchers from the BIS innovation hub noted in their report on Project Symbiosis that “any use of AI is likely to generate significant emissions, even as electricity grids worldwide continue to slowly decarbonise at different paces.”

But some say AI could have a positive environmental impact.

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A study from the London School of Economics finds that AI could reduce global emissions by 3.2 to 5.4 billion tonnes of carbon dioxide equivalent by 2035 if applied in key areas such as innovating resource efficiency, nudging behavioural change, modelling climate and policy system interventions, and managing resilience and adaptation. “If done with intention, and if the levers are applied in a focused manner using AI production, the impact can be really, really meaningful and positive,” says Mattia Romani, a partner at Systemiq and one of the authors of the report.

AI could also be used to help streamline the collection and accessibility of company data. There is an issue around responsible data sharing, Romani says, which is where regulators can step in to ensure safe data practices to “enable private actors to contribute data without risking a competitive or legal exposure.”

If AI is used for practical applications like emissions reductions, then its intentional use could justify the added cost of energy, Romani says. “If you continue to use AI to sell you more stuff on Instagram, then the emissions associated with the additional power, I’m afraid, are going to be substantial.”

Moriah Costa is an award-winning U.S. journalist based in Paris.

This article was originally published by Green Central Banking. It has been edited to conform with Corporate Knights style. View the original here. 

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Those questions go to the heart of this week’s court action by four young Canadians against the world’s sixth-largest pension fund manager, the Canada Pension Plan Investment Board. CPP Investments manages the retirement savings of 22 million Canadians, an ever-growing money pot currently worth more than $750 billion. With a licence to invest those funds into high-return opportunities anywhere in the world, the CPPIB doesn’t just invest in the future – its decisions help shape the future.

The primary duty of any pension manager is to serve the interests of contributors, whether they’re near retirement age of just starting in the workforce. On October 27, four young people who will be retiring after 2050 (the year by which the United Nations hoped to achieve net-zero emissions) announced they are suing the CPPIB for mismanagement of climate risks. They claim that the fund’s continuing investment in fossil-fuel companies delays the energy transition and risks their financial futures.

According to the Toronto not-for-profit Shift Action for Pension Wealth and Planet Health, the CPPIB may have breached its legal duties “by subjecting pension contributions to undue risk of loss from poorly managed climate risk.” The proponents aren’t suing for compensation; their goal is to nail down the meaning of “undue risk” and ensure that the board “does a better job of managing the long-term financial risks of climate.”

Underestimating the risks

Toronto-based Ecojustice, which is representing the four applicants along with Goldblatt Partners, has published a critique of CPP Investments’ “transition risks” model that claims that the pension fund is not accounting for all the long-term negative effects of climate change, “including irreparable loss.” The CPPIB’s worst-case scenario estimates that a “hothouse” world in 2050 would reduce investment returns by just 4%.

“That looks like a wild under-estimate to me,” says Shift senior manager Patrick DeRochie. “You can’t diversify your way out of three degrees of warming. It will become impossible for pension funds to create returns if we fail to get the climate crisis under control.”

“The way CPP Investments is assuming climate risks is not in line with their fiduciary duties. Fossil fuels are a very short-term investment vehicle. By the time I retire, those investments will either be outdated, or the whole economy will have tanked.

 – Travis Olson, plaintiff

One applicant in the suit puts things in simpler language. “Every payday, CPP Investments is using our mandatory pension contributions to fund fossil fuels and worsen the climate crisis,” alleges Aliya Hirji, a 20-year-old self-described community activist who has engaged with climate issues for six years. “By underestimating climate-related financial risks, CPP Investments risks exposing us to reduced retirement benefits, higher contribution rates – or both. We could end up paying more than previous generations and getting less back when it’s our turn to retire.” (Hirji was recognized by Corporate Knights in 2021 as one of Canada’s 30 Under 30 sustainability leaders.)

The four applicants – Hirji, from Vancouver; Rav Singh and Chloe Tse, from Ontario; and Travis Olson, from Alberta – met for the first time this month just prior to filing the lawsuit. Their filing alleges that CPP Investments lacks adequate measures to manage climate-related financial risks.

CPPIB’s commitment to oil and gas

At a time when the Trump administration is working hard to discredit green energy and revive the lagging prospects of the oil, gas and coal sectors, CPP Investments has been surprisingly willing to follow Trump’s lead. In recent months, it has promoted its investment in Canada’s largest oil and gas producer, Canadian Natural Resources, as a model of “long-term partnership and value creation”; it has supported investee companies’ plans for new gas plants and pipelines; and its 11%-owned California Resources Corp. has pushed for looser climate and environmental regulations so it can do more drilling.

Most importantly, last May CPP Investments quietly backed off its 2022 commitment to achieve net-zero greenhouse gas emissions by 2050. “Forcing alignment with rigid milestones could lead to investment decisions that are misaligned with our investment strategy,” the board claims. It prefers to focus “on delivering results, not managing legal uncertainty.”

Here’s how Shift reported on that reversal: “This unacceptable abdication of responsibility by CPPIB stands in stark contrast to other Canadian pension giants, six of which released annual reports this year that unambiguously confirmed that they remain committed to net-zero by 2050.”

The authentic risks from climate change

Scientific consensus maintains that a failure to hold the rise of global average temperatures to below 1.5°C by 2050 will result in significant climate disruptions, reducing crop production and turning arable and forest lands into deserts. “Our case is alleging that CPP Investments is mismanaging our pension fund by failing to adequately respond to climate change,” says applicant Singh. “We should all be concerned that our CPP benefits may not be as dependable as we’d like to think.”

Indeed, CPP Investments may not be the only pension fund underestimating climate risks. A January 2025 report on Planetary Solvency by risk-management experts at the United Kingdom’s Institute and Faculty of Actuaries found that most policy-making organizations are using analytical methodologies that understate the economic risks of climate change. By ignoring “tipping points” such as soil degradation or the melting of Greenland’s ice sheets, “they often exclude many of the most severe risks that are expected and do not recognize there is a risk of ruin.”

The report’s own findings point to a 50% contraction in economic activity between 2070 and 2090, “unless an alternative course is [charted].”

Ironically, the four youths’ suit was announced on October 27, the same day UN Secretary-General António Guterres urged world nations to “recognize our failure” to hit the 1.5°C target. “It is absolutely indispensable to change course in order to make sure that the overshoot is as short as possible and as low in intensity as possible,” he told The Guardian. “We don’t want to see the Amazon as a savannah. But that is a real risk if we don’t change course and if we don’t make a dramatic decrease of emissions as soon as possible.”

CPPIB plays hardball

Reacting to the suit, CPP Investments wrapped itself in the flag. “An action against CPP Investments and its efforts to maintain the sustainability of the CPP is an action against the retirement security of 22 million Canadians,” the fund wrote in a note following the announcement of the lawsuit. “We intend to do whatever is needed to uphold their interests.”

Applicant Travis Olson, a 22-year-old retail worker and labour activist in Alberta, was surprised to see CPP Investments play hardball. “It’s really disappointing to be sent a response like that to such a serious case.” He says the four are acting in the long-term interests of Canadians – not against them.

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“The way CPP Investments is assuming climate risks is not in line with their fiduciary duties,” Olson alleges. Given the increasing cost-effectiveness of renewables, “fossil fuels are a very short-term investment vehicle. By the time I retire, those investments will either be outdated, or the whole economy will have tanked.”

Advisers to the group of four declined to discuss how the youths were selected for this ambitious test case. Karine Peloffy, Ecojustice’s sustainable finance lead, would only discuss the applicants to say, “They’re lovely individuals. They’re passionate, dedicated, and they’re asking good questions.”

For his part, Olson insists that he and his colleagues are more than just a front for activist Toronto lawyers. “Yes, we’re working with them. But we’re the ones in the driver’s seat.”

Rick Spence is the editor-at-large at Corporate Knights. He is based in Toronto.

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The Office of the Chief Actuary (OCA) is failing to consider worst-case scenarios or the true extent of the potential impacts of global warming on the sustainability of Canada’s public finances, say Tanya Jemec and Karine Peloffy of Ecojustice, Canada’s largest environmental law charity, writing on behalf of the pension watchdog Shift Action for Pension Wealth and Planet Health (Shift). “While it is a fundamental duty of all actuaries to act in the public interest, the OCA’s obligation is particularly acute as its reports are used to inform policy direction and highlight risks for government and other decision-makers on matters that affect millions of people,” they write. For Canada’s public pension plans, “mismanaged climate change risks could harm the financial security of beneficiaries, reduce benefits and increase costs or require government bodies to cover shortfalls.”

The OCA has already published reporting that forecasts how climate change could affect Canada’s gross domestic product under three transition scenarios. But what the OCA fails to include in its reports and assessments, Shift and Ecojustice claim, is the systemic risks of climate change, such as crossing critical thresholds that would lead to irreversible changes to Earth systems. “The collapse of ice sheets, the halting of major ocean currents and permafrost melt are all examples of tipping points that are increasingly likely to be triggered if the global average temperature rises more than 1.5°C above pre-industrial levels,” they write.

In 2023, the Institute and Faculty of Actuaries (IFOA) in the United Kingdom published a report stating that tipping points must be included if scenarios are to be realistic. Such events are now considered “high impact, high likelihood, and we need to mitigate and plan for them. Ignoring them in scenarios and modelling significantly understates risk,” the authors write.

The chief actuary needs to do its job by ensuring its statutory actuarial valuations of federal plans and programs actually reflect the reality of these risks, so that they can be managed before it’s too late.

– Adam Scott, executive director, Shift Action

The OCA is also underestimating the consequences of climate change for GDP, according to the standard of “the most recent, authoritative climate science and risk modelling,” Ecojustice and Shift say. While the OCA estimates no impact on baseline GDP by 2030 under a failed transition scenario and only an 8% decrease by 2050 and a 30% decrease by 2100, by contrast, the IFOA predicts a negative GDP impact of 65% to 73% by 2100 under the same scenario. “Climate change is undoubtedly an existential threat of the highest order, a fact the OCA should recognize,” the authors of the letter argue.

Responding to a request for comment, media relations for Billig’s office said they were still considering the contents of the letter from Ecojustice and Shift. This article will be updated when further response is provided.

Risk exposure for Canadian pensioners

As fossil fuels are the primary cause of climate change, and the Canada Pension Plan Investment Board (CPPIB) holds significant investments in the sector, Canada’s public finances are exacerbating the problem – and the risks to beneficiaries. “By directly contributing to the accumulation of greenhouse gases in the atmosphere, CPPIB’s fossil fuel investments facilitate rising physical risks across the portfolio,” Ecojustice and Shift argue. These investments are vulnerable to such transition risks as asset stranding, devaluation and sudden repricing as a result of policy changes, technological advances or market changes.

In a white paper published last September, the risk management firm Ortec Finance analyzed the climate risk exposure of five large pension systems worldwide, including the United States and Canada. The report found that North American pension funds could see their investment returns decline by 50% or worse by 2040 under a business-as-usual scenario where global warming reaches 3.7°C.

Left unaddressed, climate change will affect the U.S. pension system the most out of the five included in the report, but Canada also faces severe consequences. “A large majority of Canadian pension funds are highly exposed to physical risks,” according to Ortec. “The country’s exposure to severe climate events such as wildfires and droughts exacerbates these risks.”

The factors harming asset performance include rising temperatures, extreme weather and declining agricultural productivity.

“Many of Canada’s largest pensions are sleepwalking into a climate crisis with existential consequences for their members,” Adam Scott, executive director of Shift, said in a statement. “The chief actuary needs to do its job by ensuring its statutory actuarial valuations of federal plans and programs actually reflect the reality of these risks, so that they can be managed before it’s too late.”

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Shift and Ecojustice have made five recommendations to the chief actuary’s office: 1) include realistic climate tipping points and cascading impacts in risk assessments; 2) reassess economic models to avoid underestimating worst-case climate scenarios; 3) provide clearer qualitative descriptions of climate uncertainties and risks; 4) give greater consideration to risks from fossil fuel investments; and 5) integrate climate impacts into baseline financial projections.

“As a multifaceted crisis with severe impacts on the planet and its inhabitants, climate change impacts pension plan liabilities and assets, as well as beneficiaries and contributors,” the letter concludes. “The risks cannot be ignored until 2030 or 2050: They must be addressed now.”

Mark Mann is the associate editor at Corporate Knights. He is based in Montreal. 

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Trump’s second administration has frozen billions in funding for research and laid off thousands of people working at science agencies. The president’s loyalists are enforcing a keyword-directed censorship campaign to expunge research tied to culture-war hobgoblins like diversity, equity, inclusion and accessibility. Also targeted for suppression: the study of climate change – the basic physical process of global warming that has been accurately understood and described since the early 19th century. 

Ideologues and allies of the oil and gas industry may find it convenient to suppress two centuries of atmospheric science, but many large investors are finding such denialism increasingly unworkable, and for reasons that are not “woke” by any stretch. Simply, the fiscal threats posed by climate change and the energy transition are emerging more and more clearly into view. 

The emergence of climate risk reporting

Among the various political, social and technological revolutions now unfolding in our polarized world, there is one that promises to more effectively neutralize the anti-science agenda and satisfy investors along the way: mandatory climate-risk disclosure. This clumsy four-word phrase is the closest thing to shorthand for the suite of international regulations that require companies to report their exposure to the material financial risks from climate upheaval. 

Climate-risk reporting isn’t new. Various forms of voluntary disclosure have been around for decades, used by companies that want to get a leg up in the clean economy and appeal to sustainable investors. But the lack of common standards and real accountability has created uncertainty and enabled greenwashing. Which is why large jurisdictions like the European Union and Australia have made it compulsory, and many others are moving inexorably in that direction. 

Mandatory climate-risk disclosure is short on cheerleaders. Opponents see it as red tape and a constraint on competitiveness, while many climate campaigners say it’s the bare minimum. But compulsory risk reporting has the potential to provide a real propellant to the energy transition, because it is the main vehicle by which climate scientists are getting their message across in the place that sets the pace for decarbonization: the global financial market. 

Enormous efforts are underway by Big Oil’s political servants to halt this transformation in the finance sector, but despite the delays, the demand for credible climate-risk reporting is not going away, especially as those risks continue to become realities. As realism gains ground, denialism’s days are numbered. There’s too much money at stake. The question, as always, is whether the change will happen fast enough. 

A sea change in the financial sector

To think about how the financial sector is responding to climate risk, it’s useful to set a frame of reference from your own understanding of what to expect on a warming planet, and how that has evolved. Whether you accepted the science of climate change decades ago or tend to see it as a hobbyhorse for left-wing alarmists, your feelings have no doubt changed as the drumbeat of droughts, heat waves, storms and floods grows louder. Think about how you felt 10 years ago compared to how you felt watching Los Angeles burn in January, during what was supposed to be its rainy season. Now take that trajectory and extend it forward: five years, 15 years, 50. 

Or just find a temperature graph of the past century, put your finger on the bottom left corner, and move it rightward. Keep going when you get to the end. 

Something like that is happening in the financial world, albeit with more complexity and jargon. The shift began with the Paris Agreement in 2015, when the Task Force on Climate-Related Financial Disclosures (TCFD) was created. The focus of the TCFD has been to guide how companies generate useful information about their impact on the climate, but the utility goes the other way too: showing investors how climate change may affect companies. 

Most countries in the world are committed to transitioning their energy systems away from fossil fuels. It’s the financial impacts associated with that transition that shift value assumptions and value projections.

– Kyra Bell-Pasht, Director of Research and Policy, Investors for Paris Compliance

The creation of the TCFD began the process of financial institutions “starting to wrap their heads around the fact that their climate risk isn’t the energy they use in their brick-and-mortar locations or how much gas they use driving to work,” says Kyra Bell-Pasht, the director for research and policy at Investors for Paris Compliance, an organization that seeks to hold Canadian companies accountable to their net-zero commitments.

The TCFD guidelines drove home the realization that responding to climate isn’t just a feel-good exercise to create fodder for marketers. The framework helped more institutions recognize that “the financial risk they’re being exposed to is through the financial activities they’re undertaking – the core of their business,” Bell-Pasht explains. 

The work of the TCFD paved the way, in 2021, for the launch of the Net-Zero Banking Alliance (NZBA), an international cohort of banks committed to transitioning their financed emissions. At its peak, the NZBA included 140 banks representing around US$64 trillion in assets. For the first time, large institutions were publicly acknowledging the material financial risk to their shareholders from climate change. 

The NZBA unravelled after Trump’s re-election, with most of the member banks exiting the alliance over a period of a few months, seemingly in response to Republican pushback and lawsuits to prevent investment managers from considering environmental, social and governance (ESG) factors in their decisions. The banks say they have not abandoned their net-zero commitments, and certainly all the economic drivers – and hazards – still apply. 

What are the risks? 

In its 2025 global risk report, the World Economic Forum warned that extreme weather events, biodiversity loss and ecosystem collapse are all expected to worsen in the next 10 years. The earth is on the cusp of crossing multiple climate and ecological tipping points, each of which would impose destructive, self-reinforcing loops with severe consequences for food and water security, public health and political stability. 

For example, scientists now warn that the Atlantic Meridional Overturning Circulation – the system of currents that circulates water and redistributes heat in the Atlantic Ocean – is at “significant risk” of collapse in the coming decades. In that scenario, modelling by researchers at the University of Exeter suggests that roughly half of viable land worldwide for staple crops like wheat and maize would disappear.

This and many other risks from climate change have led the Institute and Faculty of Actuaries in the United Kingdom to forecast a 50% loss in gross domestic product for the global economy between 2070 and 2090, if we continue with business as usual.

But as the retreat of property insurers from huge swaths of at-risk real estate demonstrates, the threats aren’t just far away – they’re near-term, too. 

This perilous landscape points to one basic category of threat that businesses face and that investors might want to know about: physical risks, such as losing assets to storms and fires, or supply chain disruptions from geopolitical turmoil over resource competition and mass migration (see: Trump’s tariffs). 

But there is another category of risk that speaks to financial actors more directly: “transition risks” for carbon-intensive companies, especially those with no plans to divert from business as usual. These companies – and the investors who buy their securities – are on a collision course with the inevitable. 

If you’re a pension and you’re going to spend billions on a new asset, if you don’t have a climate expert in the room throughout the whole process, you’re crazy.

– Adam Scott, Director, Shift Action for Pension Wealth and Planet Health

Policies, markets, supply chains and technologies are all evolving and adjusting to the reality of climate change, and businesses that fail to keep up with these developments risk losing customers. “Most countries in the world are committed to transitioning their energy systems away from fossil fuels,” Bell-Pasht explains. “It’s the financial impacts associated with that transition that shift value assumptions and value projections.”

There are other important risks for companies and investors to consider, too, and legal liability is chief among them. Lawsuits against high-emitting companies are multiplying, and a host of favourable rulings are sparking optimism among climate activists – and fear in the oil and gas sector. 

The global outlook on climate risk disclosure

Mandatory climate disclosures have already come online in several countries and are set to launch soon in others, while more countries are moving inexorably in that direction. Established in 2021, the International Sustainability Standards Board launched a set of global standards in 2023 that have been instrumental in facilitating worldwide adoption. 

The key jurisdictions where these rules already apply include Australia, where new mandatory disclosures came into effect for 6,000 large companies in January, and New Zealand, which now mandates disclosures for large companies, insurers, banks and investment managers; California passed a law last September that requires companies doing “significant business” in the state to disclose greenhouse-gas emissions data and climate-related financial risks; and the EU has the Corporate Sustainability Reporting Directive (CSRD), which is the most advanced regime so far, despite recent erosions.

Canada doesn’t yet have federally mandated climate disclosure obligations for corporations, but in December the Canadian Sustainability Standards Board published a non-binding disclosure framework that lays the groundwork for future obligations. Meanwhile, Canada’s Office of the Superintendent of Financial Institutions has implemented climate-related disclosure requirements for the banks and pension funds that it supervises.

Hong Kong, Singapore and Japan all have climate disclosure schemes that are set to expand. Brazil’s mandatory ESG reporting regime for publicly traded companies will come into effect in 2026. China, too, has established requirements for sustainability reporting. And elsewhere around the world, countries are developing their own disclosure frameworks, such as South Africa, Kenya and India. 

Setbacks aplenty, but demand is fixed

There are, of course, plenty of mixed signals. In February, the European Commission introduced an omnibus bill that aims to dramatically reduce the requirements and the number of companies affected by CSRD to such a degree that labour unions, environmentalists and sustainable investors say the legislation has been effectively gutted. Companies with more than 1,000 employees will still have to report (see p. 10). 

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In the United States, the Securities and Exchange Commission had adopted new mandatory climate disclosure rules in March 2024, citing investor demand. These were met by a suite of legal challenges. To the surprise of no one following Trump’s election, the SEC halted its defence of the rules in February. Mark Uyeda, who was appointed acting chairman of the SEC in January, said in a statement that the benefits don’t outweigh the costs. 

But the delays and setbacks might not be as devastating as they seem. “The signals to the market are very important,” Bell-Pasht says. “Even if it’s a few years off, if companies know that it’s coming, they will start receiving increased demand from their investors to say how are you getting there.”  

Likewise, many companies operate internationally, notes Hemanth Setty, founder of Zero Circle, a sustainability reporting platform based in New York: “They’re not going to change their policy based on one country’s decision.” 

New opportunities, more contradictions

Large investors are looking at the combined business risks from stricter regulations, supply chain disruptions and market shifts toward sustainability, and it makes them want more information, not less. “Corporations are staffing up,” Bell-Pasht says. “There’s a huge hunger for expertise on this stuff.”

Pension funds in particular, with their longer horizons, are more naturally inclined to heed climate science and more likely to employ climate-risk experts in-house. “If you’re a pension and you’re going to spend billions on a new asset, if you don’t have a climate expert in the room throughout the whole process, you’re crazy,” says Adam Scott, director of Shift Action for Pension Wealth and Planet Health. 

In February, one of the largest pension funds in the United Kingdom, The People’s Pension, pulled £28 billion in assets from the U.S. asset manager State Street over its poor record of tackling social and environmental issues. The pension transferred those funds to management companies with a stronger sustainability focus. 

But the push for climate reporting can create some dizzying contradictions. The global head of J.P. Morgan’s climate advisory unit, Sarah Kapnick, wrote in February that success depends on the firm’s ability “to integrate climate considerations into daily decision-making.” Kapnick, who was the chief scientist at the National Oceanic and Atmospheric Administration, is an example of climate scientists gaining influence in financial institutions. At the same time, JPMorgan Chase – the large banking conglomerate that operates J.P. Morgan for its investment business – is the world’s top funder of fossil fuels. Clearly, those climate considerations are not yet reaching the top to a meaningful extent. 

Just as large investors are staffing up, big companies are reaching out for climate services and analytics to help them complete their reporting. Service providers are piling into this gap and jostling for market share as more and more companies start to make climate disclosures, in what has been called a “climate intelligence arms race.” 

But many of these providers have been criticized for lack of accuracy and validation, and for making claims that aren’t scientifically rigorous. As they are finalized and implemented, mandatory disclosure regimes will impose some order on the Wild West of climate services providers. 

What comes next for climate disclosure

At the end of the day, mandatory disclosures are the foundation, not the destination, Shift’s Scott says. Relative to phasing out fossil fuels and transitioning to a clean energy economy, reporting climate risks is “the first baby step.” Most pension funds are ahead of the curve, but “a lot of them are still partway through that process of actually coming to grips with what this means.” 

Banks, too, are still at the beginning of their journey. “We do believe that mandatory disclosure rules are what’s going to be the difference between what we have today and a full net-zero transition plan of a major bank or insurer,” Bell-Pasht says. 

For now, Scope 3 emissions – from fossil fuels burned up and down the supply chain or by users of the product – have been left out of the reporting regimes, but they need to be included, climate advocates say. “Everybody complains: ‘They’re not my emissions,’” Scott says. “For an investor, this is the most crucial category. This is where you see transition risk.” 

To make this work, companies need to start seeing more carrots than sticks, Setty says. Zero Circle walks companies through the reporting process to give them better access to things like ESG funds and sustainability-linked loans. “It has to be tied back to incentives, opportunities and growth.” 

Mark Mann is a journalist and editor at Corporate Knights. He is based in Montreal. Explore his portfolio of essays and reporting here. 

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In Canada, cities like Toronto, Montreal and Vancouver are leading the way in disclosing climate-related financial risks and leveraging municipal green bonds, fixed-income investments issued by cities to finance infrastructure resilience and climate initiatives. Toronto alone had raised more than US$1 billion in green bond issuances as of November 2023, the World Economic Forum (WEF) writes.

But the heightened risk is still out there. On January 14, in an industry first, S&P Global Ratings downgraded the Los Angeles Department of Water and Power (LADWP) two notches from a very secure AA- rating to an A, which remains secure, but with vulnerabilities.

S&P cited the “increasing frequency and severity of highly destructive wildfires within LADWP’s service territory.” One week earlier, ferocious urban firestorms had broken out across Los Angeles County. At least 29 people died, and damage estimates ran as high as US$275 billion.

Safe haven no longer

The immediate impact of the downgrade was that “bond values fell, default risk rose, and some bondholders sold at a loss,” E&E News wrote in February. But J.P. Morgan remained optimistic on long-term impacts: On February 18, the bank published an analysis titled “Municipal Bonds Today Offer U.S. Taxpayers a Rare, Compelling Opportunity.”

“We do not forecast any payment defaults to occur for any city, county, or school district adversely impacted by the Los Angeles fires,” North America’s largest bank wrote – a green flag for the individual investors who own 40% of U.S. municipal bonds, earning a yield that, for now, is exempt from federal taxes.

U.S. Senator Chuck Grassley (R-IA) expressed similar confidence one year earlier at a Senate Budget Committee hearing on climate risks to municipal bonds. The US$4-trillion municipal bond market, which is said to finance 70% of U.S. infrastructure – including schools and water and sewer systems – “is very resilient,” Grassley said in January 2024. “Where there have been defaults in municipal bonds, it’s been in places that have been mismanaged for decades,” he added, citing the city of Detroit as an example.

Grassley added that he was sure that U.S. municipalities were up to the challenges climate change poses: “Climate doomsday isn’t around the corner,” he said, adding that municipalities understand the risks and “are uniquely qualified to so adapt.”

But LADWP’s downgrading may herald “the beginning of a crack” in the country’s municipal bond market, Alice Hill, who served as U.S. National Security Council senior director for resilience policy in the Obama administration, told E&E. “We know that with climate change, there’ll be bigger and worse disasters that will affect communities’ abilities to repay those bonds.”

Municipalities in climate’s crosshairs

At the same Senate hearing, environmental data analyst Chris Hartshorn expanded on how climate impacts can strain municipal finances, warning of the delayed onset of harms following disasters like wildfires or hurricanes.

Five years after a fire, affected communities are “25% more likely” to experience a budget deficit due to declining revenue and increasing expenditures, while hurricane-stricken municipalities can see financial blowback up to a decade later, Hartshorn said.

Chronic impacts like heat – “a critical issue across much of the municipal U.S.” – can add to the financial grind, he added. K–12 schools are a particularly urgent concern, with an estimated US$40 billion of new air conditioning installation required to keep schools safe and productive for children in the United States.

Meanwhile, insurers are retreating from “higher climate risk,” Hartshorn said, citing states like Florida and California. The withdrawal has a domino effect on property values, which in turn reduces the property tax stream that underpins municipal debt servicing.

The diminishing of this “historically critical pillar of past disaster recovery” will heighten financial pressure on the municipal system after disasters, Hartshorn warned.

FEMA backstop pulled

At the hearing, Senator Sheldon Whitehouse (D-RI) compared municipal bonds to the 30-year mortgage, calling them “a bedrock” of the American economic system.

For decades, the U.S. Federal Environmental Management Agency (FEMA) has reinforced this bedrock by stepping in to fund disaster recovery, municipal market analyst Thomas Doe told E&E. “FEMA money would come in and provide the support for the rebuilding, and everybody’s made whole and the world goes on,” he said.

That status quo was more fragile than it might appear, Doe warned at the Senate hearing. “An industry pivot could be hastened if FEMA changes its criteria and raises more hurdles between disasters and federal aid, undermining traditional views of FEMA as a credit stabilizer.”

Now, making good on his presidential campaign promises, and his threats after the L.A. wildfires, Donald Trump is taking the axe to FEMA. Hundreds of FEMA staff have been laid off, and more losses are to come, especially among those who work on climate and resilience, the Natural Resources Defense Council wrote in February.

Canadian cities awaken to climate risk

In Canada, awareness of climate-related financial risk is gaining momentum. Gaby Kalapos, executive director of the Clean Air Partnership, sees a growing number of Canadian municipalities disclosing these risks as part of their financial planning.

A decade after the G20 created the Task Force on Climate-Related Financial Disclosure (TCFD), and four years after Canada’s pledge to integrate TCFD into financial reporting across the economy, cities like Toronto, Montreal and Vancouver are “leading the pack,” Kalapos told The Energy Mix.

Toronto’s $1 billion will finance its goal of achieving net-zero emissions by 2040, WEF writes. Funded by the Green Debenture Program, eligible capital projects will boost renewable-energy-generation capacity, energy efficiency and green building projects in the municipality.

Such positive developments are occurring even as climate damages rapidly worsen, Kalapos said. “It is not a matter of if climate impacts affect municipalities credit rating, but when,” she warned. “The risks are real, and repeated impacts will greatly reduce a community’s ability to recover.”

Strengthening climate resilience

Ujala Qadir, director of strategic programmes at the U.K.–based Climate Bonds Initiative, sees the sector-wide focus on climate risk as a positive shift, citing the move by S&P as the “shakeup” everyone needed to recognize that “the risks we thought were 20 years away are actually starting to materialize already.”

Qadir told The Mix that the conversation must now turn to “future-proofing” both municipalities and municipal bonds. This will naturally create a “virtuous circle” that builds resilience for both communities and bond markets.

Municipalities that embrace climate adaptation through green municipal bonds – as Toronto is doing – will further secure their credit ratings even as they protect households, businesses and infrastructure from destructive climate impacts.

“There’s a lot you can do, right? There’s so much evidence that investments in resilience and adaptation can actually prevent major losses,” Qadir said.

The Climate Bond Initiative is at the forefront of the green bond market’s evolution, with Qadir herself working to develop a “resilience bond,” the rigorous parameters of which would require issuers to “demonstrate a clear impact on reduction of climate risk.”

“We see this as a huge opportunity to expand the market of green and climate bonds to explicitly include resilience and really integrate that across the board,” she said.

This article was originally published by The Energy Mix. It has been edited to conform with Corporate Knights style. Read the original article here. 

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Canada’s national pension plan is getting poor marks for failing to pursue its commitments on climate change, even as some of the country’s top plans are taking concrete steps to meet their ambitious goals, says the watchdog group Shift Action for Pension Wealth and Planet Health in a new report.

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In the report, CCI suggests that permissive land-use policies coupled with a pervasive lack of awareness of climate risks could lead to more than 760,000 homes being built in areas prone to flooding or fire – an outcome that could cost Canadians as much as $3 billion in damages each year.

“The most affordable home is the one you don’t have to rebuild after a disaster,” Ryan Ness, the CCI’s director of adaptation, said in a release. “Our new report outlines the tools policymakers have to steer new housing to safer ground and support affordability in the process.” Wielding those tools could deliver savings, especially in flood zones: “redirecting just 3% of new homes away from the highest-risk flood areas to safer ground could save nearly 80% of all losses by 2030,” the report authors write.

British Columbia is far and away the most exposed, with new housing facing $2.2 billion in annual damages from flood and wildfire combined under a worst-case scenario. Out of the 20 municipalities most exposed to wildfire threat in Canada, 16 are in its westernmost province. Constructing new houses in the wrong places could more than double wildfire losses in Canada, tripling them in B.C.

Manitoba comes next, facing $360 million in damages to new housing, mostly in flood zones.

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“Building more homes in unsafe places would be an incredibly costly mistake,” CCI president Rick Smith says in the release. “Fortunately, there are ways to build millions of much-needed homes that avoid these future costs.”

Policy gaps contribute to increased climate risks

The report finds major gaps in land-use policies across much of Canada, where most provincial and territorial governments delegate responsibility and decisions to municipalities that “often lack the capacity and political leverage to prioritize long-term risk prevention over immediate housing needs and local economic pressures.”

Ontario and Saskatchewan buck the trend here, both provinces named as leaders in land-use policies.

“Provincial and territorial governments should urgently enact or enhance land use regulations that explicitly direct development away from the most flood- and wildfire-prone areas,” the report authors say.

Other policy gaps stand to further increase the odds of new housing being built in hazard zones. Infrastructure funding programs that lack a climate lens will worsen the problem, as will insufficiently restrictive disaster-assistance programs that encourage municipalities to “rely on post-disaster recovery rather than proactive risk avoidance.”

As well, Canadians at large, including municipalities, developers and homeowners, remain severely under-informed about the climate risks to housing, the report warns. The authors call on all levels of government to develop accurate, up-to-date flood and wildfire hazard maps and make them freely accessible.

The CCI also urges all jurisdictions to “leverage data from private firms to guide housing decisions” and recommends that real estate and insurance regulators mandate disclosure of flood and wildfire risks in all sales and rental transactions.

Indigenous communities face unique housing challenges

Minimizing flood and fire risk to new homes in Indigenous communities is particularly challenging. Key obstacles include the acute need for housing, capacity and funding challenges, and infrastructure issues that range from isolation to melting permafrost. “Policies and practices that are having success include training programs, cultural burns, [and] merging Western science and Indigenous traditional knowledge,” the report states.

To address the specific challenges faced by Indigenous communities looking to build climate-resilient homes in safe places, CCI commissioned a companion report on Indigenous housing and climate resilience.

This article was first published by The Energy Mix and has been edited to conform to Corporate Knights style. Read the original story here.

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The joke is a good reminder of the limitations of the climate-scenario exercise about to be conducted by Canada’s financial regulator, the Office of the Superintendent of Financial Institutions (OSFI). All federally regulated financial institutions, including banks and insurance companies, will be required to participate during 2024 in an echo of a pilot project conducted with similar methodology last year with a handful of financial institutions volunteering.

Scenario analysis is a structured way of asking “What if?” based on possible versions of the future so that risks can be assessed and managed. In the climate context, possible future scenarios centre on physical risk, transition risk or both. Physical risk is the tangible impacts of climate change, like fires and flooding, while transition risk is the impact that climate policy has on the economy, technology and consumer demand.

The good news is that OSFI’s exercise will help to bolster acceptance of climate risk within Canadian financial institutions as a counterbalance to the sector’s prevailing focus on short-term profit. Last year’s pilot project arrived at some remarkable conclusions about the potential loss of value of carbon-intensive assets like oil and gas and the significant rise in the probability of debt default in those companies. Canada has a polluting, high-carbon economy, so it’s no surprise that the economic institutions that finance and facilitate these sectors face high transition risk.

The bad news is that to run the exercise, OSFI is assuming a can opener. In part, this is inevitable since all scenario analysis will assume away large amounts of complexity to have a workable model. As the analysts say, “All scenarios are wrong, but some are useful.” The question is whether the particular assumptions OSFI is making in its exercise lead to a result that enlightens more than it obscures.

One major choice OSFI is making is to essentially ignore physical risk. While its model assesses real-estate exposure to physical risk, it doesn’t actually assign a financial cost to that exposure. In other words, this means that climate change itself is assumed away. Only the implications of economic policy response will be factored into the possible future impacts on asset prices and credit risk.

This effectively bypasses the raging debate in the climate-scenario community about the pace and scale of climate impacts on the economy. Mainstream economists have generally pegged these impacts as relatively small and manageable, ignoring both the litany of climate catastrophes – this year was the worst on record for billion-dollar climate disasters in the U.S. alone – and  the increasingly dire findings of climate scientists. Should the world breach climate tipping points or experience so-called second-order impacts such as mass migration or wars, the impact on the economy could be catastrophic.

That’s a lot to leave out and strains the plausibility of the model on its face. Dig deeper, and we see that physical risk also affects the assumptions that go into a pure transition risk model, such as macroeconomic factors like growth, or sector-specific pathways like for agriculture, which will be significantly affected by floods and drought, or for the power sector hit by water availability.

Moreover, OSFI’s transition scenarios are bloodless narratives that don’t sound much like the real world. For example, one says we keep current policies constant, while another says we reach compliance with under 2°C of warming after initial foot-dragging. But none talks about the whiplash of policy that we see because of things like the war in Ukraine or conservative politicians resisting change. The International Monetary Fund just published a paper analyzing how the “polycrisis”  – the simultaneous experience of multiple global disruptions like inflation and armed conflict – challenges transition scenarios. Overall, transition scenarios need to place more emphasis on extreme volatility and explore how that will affect financial institutions.

OSFI is accepting feedback on its proposed exercise until December 22. We’ll never have perfect climate scenarios, and odds are OSFI will press ahead with the model it has proposed without much revision. It’s important to keep its limitations front and centre and to keep asking about what it includes, and what it doesn’t.

Ultimately, though, we need to ask what the climate-scenario exercise will actually accomplish. OSFI seems to believe that better information will mitigate climate risk. It won’t by itself. While the exercise can be useful, the history of financial crises shows that the financial sector won’t properly manage risk unless it is regulated to do so. OSFI has stronger tools than climate-scenario analysis in its toolbox once that realization hits home. The safety and soundness of the financial system in the face of climate change depends on their use.

Matt Price is executive director of Investors for Paris Compliance, a shareholder advocacy organization holding Canadian companies accountable to their net-zero commitments.

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A new analysis by U.K.-based think tank InfluenceMap of the 45 biggest asset managers, which collectively hold US$72 trillion in assets under management, found that many are not only far off track from meeting their climate goals – they have regressed.

While most have set net-zero targets, nearly all of the equity fund portfolios that were assessed – some 95% – are “misaligned” with the goal of net-zero emissions by 2050 that much of the world is chasing, as a tipping point in climate appears ever nearer.

Late last month, amid rolling heat waves in Europe and scorching wildfires in North America, United Nations Secretary-General António Guterres declared that the “era of global boiling” was upon us.

“Climate change is here. It is terrifying. And it is just the beginning,” said Guterres, on the same day that scientists announced that July 2023 was tracking to be the hottest month ever recorded in human history. “It is still possible to limit global temperature rise to 1.5C [above pre-industrial levels] and avoid the very worst of climate change. But only with dramatic, immediate climate action.”

This message has yet to get through to those who hold the global purse strings, it seems.

“Since FinanceMap’s 2021 report, asset managers’ portfolios are still misaligned with net zero targets, environmental stewardship efforts have stagnated, and asset managers are not supporting effective sustainable finance policy,” said Daan Van Acker, program manager for FinanceMap, an online, publicly available platform produced by InfluenceMap.

The FinanceMap analysis examines more than 13,000 individual equity funds and applies a “climate lens” to their earnings by examining portfolios, investor engagement processes and shareholder resolutions. It considers two metrics: fund exposure to fossil fuel companies and “green” companies, along with how funds are aligned with net-zero goals – a conclusion it bases on estimations of how much companies will produce in the future in climate-relevant sectors, such as the automotive industry, upstream oil and gas production, coal mining and electric power.

FinanceMap’s 2023 report analyzed $16.5 trillion (all figures in U.S. dollars) in equity fund portfolios. The asset managers scrutinized hold 2.8 times more equity in fossil fuel production companies ($880 billion) than in green investments ($309 billion), while the percentage of those carrying out “truly ambitious and effective climate stewardship practices” has shrunk by 45% since 2021: just 18% received an A grade this year, versus 33% in 2021.

The report notes that North American asset managers’ lack of climate progress coincides with the ‘anti-ESG’ trend in the US. Several state governments have taken action to discourage the use of ESG factors by financial institutions and to limit state business with financial actors deemed to be boycotting fossil fuel companies.”

An InfluenceMap spokesperson told Corporate Knights that “Canadian managers’ portfolios are similarly misaligned with net zero as those of US managers, and are underperforming relative to European portfolios. This is largely reflective of the wider misalignment of North American markets.”

Canadian managers average a stewardship score of C. BMO Global Asset Management led the pack at B+, while TD and ScotiaBank trailed with D+.

There are brighter spots: European asset managers scored notably better when it came to engagement with investee companies on climate. BNP Paribas Asset Management and Schroders had 2.7 times higher exposure to green investments than the average asset manager. Indeed, it was the smaller European portfolios that fared better. The U.K.’s Legal & General Investment Management and the asset management arms of France’s BNP Paribas, and Switzerland’s UBS all scored As, as well as the U.S.’s Federated Hermes. Japan’s equity portfolios were among those most misaligned with net-zero, the analysis found.

U.S. managers, which have traditionally lagged behind European counterparts on environmental leadership, saw many of their stewardship scores drop: BlackRock went from a B in 2021 to a C in 2023, while Vanguard netted a D+, Fidelity Investments an E+ and State Street Global Advisors a C+.

“The four largest asset managers in the world overwhelmingly opposed climate-aligned resolutions in the 2022 voting season,” according to the report. Scotia Global Asset Management demonstrated the lowest level of climate resolution support (0%).

The average Canadian manager supported 58% of such resolutions in 2021 but only 38% in 2022 (in Europe, the average manager supported 81% of climate resolutions in 2021 and 76% in 2022).

This amounts to a missed opportunity, as “asset managers can – and should – play a crucial role in building alignment” between climate commitments of companies and investors and the actions they carry out, said Jake Barnett, managing director of sustainable investment strategies, for Wespath, in a press release.

Neither U.S. nor European funds are matching their rhetoric of sustainable finance policies with real action. BlackRock, Vanguard and J.P. Morgan Asset Management were unsupportive Scope 3 emissions disclosure as part of the U.S. Securities and Exchange Commission’s climate disclosure rule, for example. And 86% of the asset managers in the report are members of at least one industry group that opposes the sustainable finance policy required to enable decarbonization pathways, the report notes.

“It is not enough to challenge companies to dramatically reduce emissions and create strategies to drive that goal,” said Christina Herman, senior director for climate change and environmental justice at the Interfaith Center on Corporate Responsibility, in a press release.

“If large investors say addressing global warming is important, then they too need to step up and do the necessary work to steer our economy down a less-chaotic path.”

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Backed by government taxing powers, Canada’s provincial and territorial bond market receives high scores from credit rating agencies. The $1-trillion market for these bonds helps to finance schools, hospitals, social services and other provincial spending. Institutional investors have traditionally had little concern about environmental, social and governance (ESG) risks on these bonds since they are used to provide needed public services.

But climate risks are beginning to change this picture, according to a new report released last month by the Principles for Responsible Investment (PRI), a global network of more than 5,000 investors representing US$121 trillion in assets.

This is especially the case in Alberta and Saskatchewan, where provincial governments are determined to maintain fossil fuel production, despite the scientific consensus that carbon emissions must be curbed.

“Climate transition risks are significant for Canadian provinces with substantial fossil fuel sectors,” says Jasper Cox, a fixed-income analyst with PRI, in an email interview.

“Provinces’ economies and revenues can be heavily exposed to these industries, and to any fall in demand or more stringent regulations.”

With such heavy dependence on the fossil fuel industry, Alberta and Saskatchewan are susceptible to declines in their tax bases and growing transition costs due to changes in fossil fuel demand or regulation. The report notes that revenues from oil sands bitumen account for 17% of Alberta’s total revenues.

As the province with the largest greenhouse gas (GHG) emissions, Alberta faces the largest risk. In 2019, it released 58,000 tonnes of GHGs per 1,000 population, or 755,000 tonnes per 1,000 units of gross domestic product (GDP) (units are expressed in constant U.S. dollars).

Saskatchewan’s emissions were lower than Alberta’s, equating to 56,000 tonnes of GHGs per 1,000 population, but represented a higher proportion of its economy, at 834,000 tonnes per 1,000 units of GDP.

By comparison, Quebec emitted 9,000 tonnes of GHGs per 1,000 population (the lowest emissions per capita in Canada), with Ontario close behind at 10,000 tonnes per 1,000 people. By GDP size, both provinces came in at 179,000 tonnes per 1,000 units.

“Investors must assess the practical ability of provinces and municipalities first to meet net-zero targets and secondly to succeed economically during and after the low-carbon transition,” the report says.

Higher borrowing costs coming, just not yet

The strong implication in the report is that climate transition risks are likely to make debt from provinces with large fossil fuel industries less attractive to investors, eventually forcing these governments to issue bonds at higher interest rates to stay competitive in Canadian and international bond markets.

“Higher credit risk would put upwards pressure on borrowing costs, although the latter will also depend on a range of other factors,” Cox says.

High on the list of other factors is the price of oil and gas, which, at least for the time being, is far more significant to issuer ratings than ESG risk.

In January, Moody’s Investors Service upgraded Alberta’s credit rating, citing “high oil prices above pre-pandemic levels.”

Last September, DBRS Morningstar upgraded its trend on Alberta bonds from stable to positive, noting recent “strong energy prices” and plans to reduce the government’s deficit. The company acknowledged that Alberta has the largest provincial emissions but noted it has achieved a recent decline in emissions intensity.

For Saskatchewan, DBRS Morningstar recently confirmed its stable trend, also noting a “recovery in resource revenue” and deficit-reduction measures. However, it noted that Saskatchewan’s carbon and GHG costs pose “modestly negative” risk, citing its dispute with the federal government over Ottawa’s plans to phase out of coal-fired electricity by 2035.

Current high oil and gas prices could be a temporary situation as the world adjusts to shortages created by the war in Ukraine. This could mean raters are underpricing climate transition risk, especially if there is a rapid decline in oil and gas prices or the global climate continues to deteriorate badly.

This is a possibility that was raised at a PRI webinar in June on Canadian government bonds.

Climate transition risk “has faded a bit into the background at the moment,” said Saad Qazi, associate portfolio manager at Manulife Investment Management. “From a longer-term perspective, you could argue that it is being mispriced.”

Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance.

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