Canada’s leading financial regulators are warning that the country’s financial institutions need to act more quickly to measure and manage climate risk, thereby protecting long-term stability. After a climate scenario exercise involving over 250 firms, the Office of the Superintendent of Financial Institutions (OSFI) and the Autorité des marchés financiers (AMF) found that systemic vulnerabilities are growing as climate risks become more severe.
Stress Testing the System
The joint climate stress test evaluated how banks, insurers, and other financial institutions would perform under various physical and transition risk scenarios. While the results indicated that the sector can withstand losses in the short to medium term, regulators cautioned that risks become much more severe in the long run, where even small amounts of warming can cause disproportionately large impacts.
“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 OSFI’s catastrophic risk division. The regulators noted that escalating extreme weather events such as floods and wildfires could amplify losses and strain resilience, especially for institutions heavily concentrated in vulnerable regions or industries.
Uneven Readiness Across the Sector
The results also revealed disparities in how well different parts of the financial sector are preparing. Property and casualty insurers were found to be more advanced in modeling physical risks, such as floods and wildfires. In contrast, deposit-taking institutions and life insurers were less developed in their ability to incorporate climate risk into underwriting and capital planning. The analysis further showed that, with only 40 percent of Canadian homeowners purchasing flood insurance and little consideration of flood exposure in mortgage underwriting, banks remain highly vulnerable to catastrophic flood losses.
Overexposure to Transition Risks
The stress tests also revealed that many institutions have significant exposures to sectors most vulnerable to the low-carbon transition, especially the oil and gas industry. In a delayed transition scenario, these risks could escalate, placing strain on balance sheets and eroding confidence in the financial system.
Senator Rosa Galvez of Quebec, a long-time supporter of climate-aligned finance, welcomed the assessment but stressed the urgency of action. “This exercise has shown that the assets of our financial institutions are increasingly at risk from extreme weather events like floods and wildfires, and that our institutions are overly exposed to sectors vulnerable to transition-related risks, such as oil and gas. The results highlight the urgent need to build institutional capacity and fully incorporate climate-related risks into financial decision-making.”
Next Steps for Regulators and Institutions
Both OSFI and AMF confirmed they will incorporate the findings into supervisory expectations, risk management guidance, and future assessments. Galvez urged regulators to accelerate the implementation of capital adequacy requirements that reflect climate risks, particularly the acute transition risks associated with financing fossil fuel infrastructure.
Canada’s financial regulators send a clear message. Recognizing climate risks is just the beginning. Now, decisive regulatory action is necessary to guarantee resilience and safeguard Canadians’ economic future.
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