Thank you very much.

Good afternoon, Chair and members. My name is Hugh Miller. I'm a sustainable finance analyst at the Organisation for Economic Co-operation and Development, where I work on climate and broader environmentally related financial risks.

It is well recognized, both internationally and in Canada, that climate change and environmental issues pose risks to the financial system through physical and transition risk channels. Moreover, the financial system will play a crucial role in financing the necessary activities to achieve regional and global decarbonization targets to mitigate future fiscal risks from climate change.

However, there is a misalignment between when the majority of climate-related financial risks will materialize and when the necessary financing of low-carbon activities needs to occur. To meet regional and global net-zero targets, significant and urgent upscaling of finance is necessary to fund the energy transition and the shift towards low-carbon technologies, with $125 billion to $140 billion needed per year for Canada to achieve its 2050 target.

Conversely, the financial risks stemming from climate change and other environmental issues are only starting to materialize and may only become significantly material later on in the transition. Hence, there is a potential timing mismatch between the materialization of financial risks and the investment required to mitigate the risks from climate change.

To help overcome the long-time horizon of climate-related financial risks, we need to bring these risks forward into the time frame that impacts the investment decisions of market participants. This will require transitioning from a point-in-time assessment of climate risks towards a forward-looking assessment.

Indeed, the Canadian financial system has already started to embark on a forward-looking assessment of these risks with the joint climate transition scenario analysis pilot project between the Bank of Canada and the Office of the Superintendent of Financial Institutions.

However, there are limitations to the currently available scenarios and their ability to analyze the potential risks from climate change, thereby limiting the ability of financial institutions to account for these risks in their decision-making functions. There are several actions that would advance the ability to assess the materiality of these forward-looking risks and capture them within time frames relevant for financial actors.

First is the development of transition plan standards, akin to those developed under the U.K. Transition Plan Taskforce, UKTPT, as well as others, and the implementation of credible, comparable and transparent transition plans to help financial market participants more accurately identify and manage climate-related financial risks. Financial institutions may incorporate forward-looking information, such as company-level emission targets, into their risk management functions. Moreover, these plans may provide input into the narrative of climate transition scenarios and help develop more realistic assumptions.

Second is a clear classification system to identify both green and transitioning activities for which financing can be clearly earmarked in the form of a taxonomy, which I'm aware that Canada is already in the process of developing. This should clearly outline the economic activities that qualify for financing earmarked by either green or transition labels whilst avoiding carbon lock-in. This should be complemented with clear guidelines on how funds should be classified as green, based on the definitions in the taxonomy.

Finally, environmental risks are broader than just climate change. Recently, we have seen several central banks, including the Dutch, French, Mexican, Brazilian and Malaysian central banks all publish initial impact and dependency studies related to nature-related financial risks. The global economy—and, by extension, the financial system—is dependent upon the ecosystem services provided by biodiversity and broader natural capital.

Currently, we are seeing a rapid decline in biodiversity and natural capital, which may exacerbate the risks presented by climate change. Hence, to assess the potential impacts of climate, a broader scope is required to understand how different environmental risks may interact and magnify one another.

An initial step for the Canadian financial system on this front would be to undertake a similar impacts and dependencies assessment, similar to the work done in other jurisdictions. Here, the OECD can help provide support for this technical analysis with a supervisory framework, which offers a four-step guide to central banks and financial supervisors on how to technically assess nature-related financial risks.

Thank you very much for your time and interest. I look forward to your questions.