© Jason Hafso
Canadian financial institutions must do more to measure and manage climate risk to protect financial stability, the country’s financial regulators said after they conducted a climate scenario exercise to assess the resilience of the financial sector.
The examination of more than 250 financial institutions was conducted jointly by the Office of the Superintendent of Financial Institutions (OSFI) and the Autorité des marchés financiers (AMF).
“As climate-related risks intensify, strengthening the ability of Canada’s financial system to measure, manage, and price these risks has become increasingly important,” said Stéphane Tardif, managing director of the OSFI’s catastrophic risk division.
The climate stress tests showed that Canada’s financial institutions seem able to absorb losses from physical and transition risks over the short to medium term. However, the OSFI said many physical hazards intensify in non-linear ways over the long term, when small increases in warming can trigger disproportionately large impacts.
“Such escalation through more frequent extreme events could amplify losses and strain resilience, particularly for institutions with concentrated regional or sectoral exposures,” the OSFI said.
“Strengthening approaches to the measurement, assessment and management of climate-related financial risks remains essential for supporting confidence in the Canadian financial system.”
Rosa Galvez, an independent senator for Quebec, welcomed the move to better understand the risks that climate change poses to Canada’s financial sector.
“This exercise has demonstrated that the assets of our financial institutions are increasingly vulnerable to extreme weather events such as floods and wildfires, and that our institutions are over-exposed to sectors vulnerable to transition-related risks, such as oil and gas,” she said.
“The results underscore the urgent need to continue building institutional capacity to fully integrate climate-related risks into financial decision-making that impacts the Canadian economy.”
Increased vulnerabilities from climate change
OSFI and the AMF said they would incorporate the findings into ongoing supervisory expectations and risk management guidance and focus future work on assessing financial institutions’ ability to measure and price these risks.
The climate stress tests revealed that property and casualty insurers were generally more advanced in the assessment of risks such as flood and wildfire, while deposit-taking institutions and life insurers were behind in these capabilities.
“With just 40% of Canadian homeowners purchasing optional flood insurance, and limited consideration of flood risk in mortgage underwriting, banks face heightened exposure to catastrophic flood events,” it said.
The analysis found that institutions face a rising vulnerability to wildfires and noted that they hold a significant portion of their commercial exposures in sectors vulnerable to transition-related risks, especially in the case of a delayed transition.
Galvez urged speedy action to tackle the escalating impact of the crisis, including the timely implementation of updated capital adequacy requirements to account for acute transition risks, such as financing for fossil fuel infrastructure, a cornerstone of the climate-aligned finance act that Galvez introduced.
“Recognizing climate risk is an essential first step. Now we must ensure that it leads to concrete regulatory action to safeguard Canadians’ financial future,” she said.
This page was last updated September 24, 2025
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Emma Thomasson is a British journalist, consultant and trainer based in Berlin. She is an expert in economics, politics, business and technology. She previously worked for Reuters as a correspondent and bureau chief in Germany, Switzerland, the Netherlands, South Africa and the UK.
