A study by the University of Waterloo suggests the Trudeau government’s efforts to fight climate change are creating large financial risks, especially for the resource sector..The paper exposes the “grave uncertainty” facing the Canadian economy and the value for financial lenders and regulators to assess carbon emissions and carbon price scenarios as part of the credit risk assessment procedure. .As carbon costs rise, high-emitting industries such as mining and energy are at the greatest risk of default, placing total assets of $256 billion in jeopardy and almost a quarter of Canadian GDP exposed..Adeboye Oyegunle, PhD candidate in the School of Environment, Enterprise and Development, warned of the financial consequences..“Canadian banks are deeply involved in lending to carbon-intensive clients and have increased lending to those companies by billions of dollars despite their public commitments to support global climate goals,” Oyegunle said in a press release..“If we are not proactive, these investments could create increased costs, default rates and bad debt when you put these investments into context of the changing market and new government regulations.”.Using Toronto Stock Exchange data between 2010 and 2020 as a sample, the researchers applied the Canadian government’s carbon price regime of $0 to $170 to analyze variables for predicting bankruptcy until 2030. While the results show that high-emitting carbon borrowers and banks are at the greatest risk, their loss could gravely affect the rest of the economy and affordability within Canada, as companies tend to pass on increased costs to consumers..The researchers said lenders must consider a real and a shadow carbon price in their credit risk assessments to set an appropriate interest rate for loans. Researchers further proposed that central banks and other financial sector supervisors should start introducing indicators that measure the financial sector’s exposure to climate-related credit risks..Olaf Weber, professor in the School of Environment, Enterprise and Development, did not oppose the carbon pricing, and called for more and faster measures..“Implementing a carbon price is a first step, but not the last one if we are to achieve an orderly transition to a low-carbon economy with minimal disruption to credit,” Weber said. “For Canada, we must analyze the financial consequences, develop risk assessment tools and indicators, and accelerate the transition to a low carbon economy.” .The study Carbon Costs and Credit Risk in a Resource-Based Economy: Carbon Cost Impact on the Z-Score of Canadian TSX 260 Companies appears in the Journal of Management and Sustainability.
A study by the University of Waterloo suggests the Trudeau government’s efforts to fight climate change are creating large financial risks, especially for the resource sector..The paper exposes the “grave uncertainty” facing the Canadian economy and the value for financial lenders and regulators to assess carbon emissions and carbon price scenarios as part of the credit risk assessment procedure. .As carbon costs rise, high-emitting industries such as mining and energy are at the greatest risk of default, placing total assets of $256 billion in jeopardy and almost a quarter of Canadian GDP exposed..Adeboye Oyegunle, PhD candidate in the School of Environment, Enterprise and Development, warned of the financial consequences..“Canadian banks are deeply involved in lending to carbon-intensive clients and have increased lending to those companies by billions of dollars despite their public commitments to support global climate goals,” Oyegunle said in a press release..“If we are not proactive, these investments could create increased costs, default rates and bad debt when you put these investments into context of the changing market and new government regulations.”.Using Toronto Stock Exchange data between 2010 and 2020 as a sample, the researchers applied the Canadian government’s carbon price regime of $0 to $170 to analyze variables for predicting bankruptcy until 2030. While the results show that high-emitting carbon borrowers and banks are at the greatest risk, their loss could gravely affect the rest of the economy and affordability within Canada, as companies tend to pass on increased costs to consumers..The researchers said lenders must consider a real and a shadow carbon price in their credit risk assessments to set an appropriate interest rate for loans. Researchers further proposed that central banks and other financial sector supervisors should start introducing indicators that measure the financial sector’s exposure to climate-related credit risks..Olaf Weber, professor in the School of Environment, Enterprise and Development, did not oppose the carbon pricing, and called for more and faster measures..“Implementing a carbon price is a first step, but not the last one if we are to achieve an orderly transition to a low-carbon economy with minimal disruption to credit,” Weber said. “For Canada, we must analyze the financial consequences, develop risk assessment tools and indicators, and accelerate the transition to a low carbon economy.” .The study Carbon Costs and Credit Risk in a Resource-Based Economy: Carbon Cost Impact on the Z-Score of Canadian TSX 260 Companies appears in the Journal of Management and Sustainability.
