The program, called Climate Risk Matrices, was developed by the Intact Centre on Climate Adaptation at the University of Waterloo, which published a report on it Wednesday.Nick Iwanyshyn/The Canadian Press
Canadian researchers have developed a system for companies to report the physical impact of climate change on operations – from wildfires to floods – with the aim of filling a disclosure gap that leaves investors without important data for managing risk.
The system, called Climate Risk Matrices, spells out potential trouble spots for companies in a range of industries stemming from changing climate and extreme weather. Portfolio managers and others can use the tool to assess the risks when deciding to buy or sell. Longer term, the developers hope that its use becomes commonplace alongside new emissions and sustainability disclosure rules being rolled out globally.
The program was developed by the Intact Centre on Climate Adaptation at the University of Waterloo, which published a report on it Wednesday. It lists climate-related risks for specific sectors, as well as measures that can be taken to reduce them, using six industries as examples. The tool comes at a time when weather-related disasters are becoming more frequent and intense, affecting society as a whole.
“I always say this to business leaders: You can mitigate against greenhouse gas emissions all you want. But your business operations at site level and across supply chains could still be impacted by the physical risk of climate change,” Kathryn Bakos, Intact Centre’s director, climate finance and science, said in an interview.
Various industries face different risks, depending on the goods and services they produce and where their assets are located, said Ms. Bakos, who co-authored the report with the head of the Intact Centre, Dr. Blair Feltmate. As they researched the issue, they discovered there was no tool available that addressed many of those problems, even though there are numerous reporting templates currently in use for disclosing environmental performance.
Initially, the matrices set out major risks faced by the power transmission and distribution, commercial real estate, residential mortgage lending, property and casualty insurance, hydroelectric generation and wind-power generation industries. For power transmission, for instance, risks include flood-induced high water levels, which could leave inadequate clearance for power lines, or wildfires that can cause outages in corridors not adequately cleared of brush.
In commercial real estate, extreme heat can cause HVAC systems to break down, damaging heat-sensitive equipment. In the North, thawing permafrost can cause structural failures. Residential lenders are vulnerable to flooding and hailstorms, which can cause severe damage to homes.
Climate change is taking its toll on the Canadian economy. The report quotes statistics from the Insurance Bureau of Canada showing insured losses ranged from $250-million to $450-million a year from 1983 to 2009. Over the following 14 years, those losses averaged $2-billion annually, driven largely by huge costs for the Fort McMurray, Alta., wildfires in 2016 and flooding in Alberta and Ontario in 2013. In 2022, insured losses hit $3.1-billion.
The report notes that for every dollar of insured losses, there are $3 to $4 of additional losses borne by businesses, individuals and governments.
This year, fires have ravaged immense tracts of forest in British Columbia, Alberta, Quebec and Nova Scotia. Farmers in regions of the Prairies are struggling with drought and, last week, massive rainfall inundated Halifax and other parts of Nova Scotia, causing deadly flooding that disrupted the power grid and cut off rail access to the city’s port.
The Office of the Superintendent of Financial Institutions, which regulates Canada’s major banks and insurance companies, has warned of climate-related disruptions along with other risks to the financial system. They include regulatory and market risks stemming from the transition to low-carbon energy. In a policy announced in March, OSFI said it will require institutions to adopt more detailed disclosure of climate-related data and run analyses of how they would fare over a range of potential changes.
The Intact Centre’s system is designed to complement other widely used protocols, including the one developed by Task Force on Climate-related Financial Disclosures, and those being formalized by the International Sustainability Standards Board. The ISSB last month published its first two measures aimed at setting a global baseline for reporting on carbon emissions and other environmental and social issues.
The report calls for action among financial players, such as the CFA Institute, DBRS Morningstar and the Sustainability Accounting Standards Board, to use the examples as a basis to develop matrices for dozens more industries.
Ms. Bakos said the Intact Centre’s system is primarily aimed at institutional investors. But it is also useful for retail investors, securities commissions, credit ratings agencies and boards of directors.
Jeffrey Jones