Bank of Canada Disclosure of Climate-Related Risks 2023

Message from Governor Tiff Macklem

I’m very pleased to provide the Bank of Canada’s second annual climate risk disclosure report. With this report, we continue to evaluate and communicate the climate risks we face as an institution. We also provide an update on what we are doing to manage those risks and the steps we are taking to reduce our own greenhouse gas emissions.

Climate change is happening—it is a reality that we cannot hide from. The Bank does not set climate policy—that is the purview of government. Nor do we have a formal climate change mandate. However, our job is to promote the economic and financial welfare of Canada. And to do that job, we need to understand how climate change can affect our economy and the financial system.

Let me explain.

Our planet’s climate is shifting rapidly, and that poses risks here in Canada and around the world. The risks fall into two broad categories. The first is the physical impact of climate change: wildfires, floods and other severe weather events. These physical risks can have a heavy cost, such as the loss of homes, businesses and biodiversity. They also lead to damages to infrastructure and delays to trade. And increasingly, they can lead to the loss of lives.

The second category includes risks that are more difficult to predict: the disruptions that will emerge as the world transitions to greener economic activity. The transition to net-zero emissions will affect almost every corner of the Canadian economy. How we transition to a low-carbon economy will influence Canada’s economic performance, inflationary pressures and financial stability, and how the Bank achieves low, stable inflation.

As Canada’s central bank, we need to understand how climate change could impact the economy, inflation and the stability of our financial system. Assessing climate risk is not like evaluating more familiar risks. This is why we continue to invest in a suite of models and remain focused on our collaboration with other organizations, like the Office of the Superintendent of Financial Institutions. Together, we can better understand and assess climate risk to preserve price and financial stability.

We also have a responsibility to assess, disclose and manage our own organizational climate-related risks. We have taken a leadership role on this front. By being transparent about our own exposure, we hope to inspire other organizations—public and private—to take similar steps. Better climate disclosures throughout the economy will support a smoother transition to net-zero emissions. And that will mean better economic outcomes for all Canadians.

Global standards are emerging for declaring sustainability- and climate-related risks. At the Bank, we are exploring how we can align our climate disclosures with these emerging standards. We are also considering international recommendations for reporting and acting on evolving nature-related risks which affect the ecosystems that societies and economies rely on.

We also continue to collaborate with our central bank peers, both through our research and through forums for sharing ideas. We are contributing to global efforts to better understand how climate change could affect world economies and financial systems. This includes developing economic models that incorporate the impacts of climate change and are suitable for analyzing monetary policy. And we are fostering conversations between central banks on their strategies for greening their operations and adapting to a net-zero economy.

To wrap up, this report is an update on both the risks we face from climate change and the work the Bank is doing to manage those risks. Climate change is and will continue to affect all Canadians. We must therefore take it into consideration as we pursue low, stable and predictable inflation and financial stability. Our work on climate change is still unfolding, and we will continue to reduce our own carbon footprint while improving our understanding of the broader economic and financial implications of climate change.

Executive Summary

Each year, the impacts of climate change become more wide-ranging and severe. As part of its price and financial stability mandates, the Bank of Canada monitors how the changing environment and the global transition from fossil fuels are affecting the financial and economic welfare of Canadians.

To that end, the Bank published its first annual report on climate risk in April 2023. The report outlined various risks and opportunities related to climate change and the Bank’s approach to addressing them.

This report builds on that work. It details how the Bank formally incorporated climate change into its existing risk management framework in 2023. It also provides an update on the Bank’s climate-related goals and actions across three key areas: physical operations, financial operations and the Bank’s pension plan.

In 2023, the Bank improved how it measures the emissions from its physical operations and continued working to reduce them. The Bank also studied how the creation, transportation and destruction of bank notes contribute to greenhouse gas (GHG) emissions and affect water consumption and waste generation. In addition, the Bank enhanced its understanding of vulnerabilities to climate change at four of its facilities and evaluated ways to reduce water consumption and solid waste generation.

Because the Bank's balance sheet is central to how it conducts monetary policy and promotes the health of the financial system, the Bank continued to identify and measure the impact of climate-related risks on its holdings in 2023.

Finally, in gauging the impact of climate risk on its pension plan, the Bank continued to exercise due diligence in selecting and monitoring external asset managers in 2023. The Bank also took the additional step of including investments in private funds in its assessment of climate-related risks to its pension plan.

Whether through extreme weather events or the impact of transitioning to a low-carbon economy, the financial and economic consequences of climate change are far-reaching. Everything from inflation to employment to the broader financial system are affected. This report represents a step forward in the Bank’s monitoring and reporting of climate-related risks. By improving our assessment practices and making more information available, the Bank hopes to provide a model for financial institutions and businesses as they incorporate climate change risks into their planning and decision-making.

Climate change and the Bank of Canada

Climate change and the transition to net-zero carbon emissions can pose risks to the Canadian economy by impacting economic growth trends and inflation. The transition could also have implications for the financial system.

Responsibility for policies designed to smooth the path to net-zero and those intended to mitigate the physical risks of climate change lies with elected governments. However, the Bank must assess the transition’s impact on the economy to fulfill its mandate of promoting the economic and financial welfare of Canada.

Work on understanding this impact has evolved over the past year. We have completed our initiatives to develop climate scenarios and climate change impact on the financial system. Section 2.1 summarizes the work completed in 2023. In section 2.2 we lay out the work we will be doing to assess climate change impact on the economy and the implications for achieving our 2% inflation target.

Collaboration on climate risk analysis

Given its mandate to foster a stable and efficient financial system, the Bank has been working closely with the Office of the Superintendent of Financial Institutions (OSFI), provincial regulators, the financial sector and its international peers to understand and assess the implications of climate change and the transition to a low-carbon economy to the financial sector.

Recently, the Bank expanded its work to assess physical and transition risks (Box 1). This work builds on a successful pilot project with OSFI and several Canadian financial institutions that analyzed the impacts on the financial sector from a set of climate transition scenarios. The insights from these analyses were instrumental in informing OSFI’s draft climate regulatory returns and its standardized climate scenario analysis exercise in 2024.

The Bank's assessment of climate-related risks to financial stability is well-advanced. Therefore, the Bank is now pivoting to modelling the implications of climate changes on the macroeconomy and monetary policy.

Impact of climate change on the economy and inflation

As previously mentioned, climate change impacts economic activity through:

• more frequent and severe climate events (e.g., wildfires, floods)
• policies that affect the transition to a low-carbon economy

The transition will influence Canada’s economic performance with implications for the Bank’s goal of keeping inflation low and stable. To better understand the effects on output and inflation, the Bank started to develop a suite of models appropriate for jointly analyzing monetary policy and the effects of climate policies (Box 2).

The Bank will also assess the macroeconomic effects of more frequent disruptions from severe weather events, including the implications for potential output, the labour market and inflation.

Implications of climate risks

From an economic perspective, the effects of climate risks could pose challenges to the Bank’s ability to:

• accurately forecast potential economic output, long-term economic growth and, by extension, inflation
• conduct monetary policy and promote financial stability

In addition to their broad economic implications, physical and transition risks affect the Bank in the following ways:

• Physical risks pose a direct threat to the Bank’s physical assets (e.g., buildings) and to those of its supply chain partners and counterparties.
• Transition risks affect the value and creditworthiness of the assets the Bank holds as investments or collateral.

The Bank must proactively address climate risks and the challenges they pose. The following section highlights the Bank’s commitment to incorporating climate risk into its governance and decision-making framework.

Governance

Introduction

The Bank continuously examines its governance structures to find new opportunities to improve and streamline its operations. Climate change considerations have been integrated into the Bank’s governance, decision-making processes and risk management practices to effectively tackle climate-related risks—including those faced by the Bank’s financial and physical operations. The approach to climate governance contained in this report is as at December 31, 2023.

Approach to climate governance

Summary of climate governance structure

The Bank has a well-established governance framework in support of its primary mandate to promote the economic and financial welfare of Canada. The Bank of Canada Act:

• designates the Governor as both Chief Executive Officer and Chair of the Board of Directors
• grants the Governor statutory authority for directing and controlling the Bank’s operations on behalf of the Board

The Executive Council supports the Governor in setting the Bank’s strategic direction and overseeing its core functions.

To proactively respond and reduce risks related to climate change, the Bank has integrated climate change considerations into its governance framework (Table 1).8

Climate-related governance

In addition to the four bodies described above, the Bank has taken steps to integrate a climate-focused lens into its governance and decision-making processes through two internal committees.

Climate Change Steering Committee

The Bank established the Climate Change Steering Committee to be a core component of the Bank’s climate governance structure. The Climate Change Steering Committee shaped the Bank's approach to climate-related risks to and opportunities for achieving net-zero emissions by 2050.9

The committee was co-chaired by:

• the Deputy Governor responsible for policy-related work on climate change
• the Chief Operating Officer, who oversees the greening of physical operations

The committee also included other members of the Executive Council to guide the Bank’s major areas of climate work. Additional members drawn from the Bank’s leadership contributed their expertise and represented various responsibilities related to the Bank’s climate change priorities.

The Climate Change Steering Committee played a key role in:

• providing strategic and policy guidance to working groups committed to greening the Bank’s operations
• promoting transparency and accountability among working groups
• reviewing policy documents, work plans, budgets and potential new regional and international collaborations
• leading strategic decision-making on the Bank’s disclosure of climate risk, including reviewing the report ahead of publication
• reviewing implementation plans to optimize resources and achieve climate goals

The Bank has now embedded climate considerations into its core business and operational and policy decisions due to the committee's strategic guidance. Therefore, the Bank dissolved the Climate Change Steering Committee at the end of 2023. Going forward, the Bank’s climate-related work and decision-making will fall under the oversight of:

• the Chief Operating Officer for operational work
• the Executive Director of Policy for policy changes and development

Pension Plan governance

Governance around climate risk and opportunities is integrated into the overall governance for the Bank of Canada Pension Plan.10 The Bank administers the Pension Plan, but the Bank’s Board of Directors has final responsibility for overseeing the Pension Trust Fund (Pension Fund),11 including setting strategy related to environmental, social and governance (ESG) considerations.

The Pension Fund Investment Committee oversees the Pension Fund’s day-to-day investment activity. As part of its work, the Committee evaluates and incorporates ESG-specific risks and opportunities, including those related to climate change.

To build capacity to measure climate risk and gain visibility into climate risks faced by the Bank of Canada and the Canadian economy

To enhance the level of financial market transparency by following the principles and guidelines of the Task Force on Climate-related Financial Disclosures and encouraging other market participants to do so

To advance toward the goal of net-zero GHG emissions by 2050 in the Bank of Canada’s physical operations

To support these objectives, the Bank is:

• building capacity to measure climate risks and gain visibility by:
  • developing expertise within the Bank to analyze and address climate risks
  • sharing information and best practices with other central banks
• enhancing the level of financial market transparency by serving as an example to:
  • encourage financial institutions to make climate-related information publicly available
  • integrate climate metrics into existing financial reporting frameworks
• advancing toward the goal of net-zero GHG emissions by 2050 by:
  • adopting reduction focused policies and practices
  • empowering employees and partners through education and awareness

The following sections further outline the Bank’s strategy for its physical operations, balance sheet (financial operations) and Pension Plan.

Physical operations

The Bank’s strategy to address climate-related risks to its own operations and across its value chain includes GHG reduction actions and stakeholder collaboration. The Bank is committed to:

• achieving its targets for GHG emissions, water consumption and waste reduction
• advancing reduction-focused policies, investments and practices
• empowering staff to make environmentally conscious decisions by promoting greater awareness

To reduce climate-related risks, the Bank has been making changes to its day-to-day operations for several years. The Bank’s approach to reducing the environmental footprint from its operations focuses on four primary areas:

• buildings
• corporate travel
• bank notes
• supply chain

See the Bank’s 2022 climate disclosure report for the Bank’s strategy concerning those areas. Highlights on the progress made in these areas are discussed in the sections below.

Progress highlights—Buildings, scope 1 and 2

The Bank measures and reports all scope 1 and 2 emissions (Section 6.1.7).14 Efforts to reduce these emissions have focused on Bank buildings. The Bank implemented measures that reduced energy use at its Ottawa Support Centre location, including converting to LED lighting and improving the heating, ventilating and air conditioning (HVAC) system (Box 3).

Progress highlights—Supply chain, scope 3

The Bank measures and reports some of its scope 3 emissions (Section 6.1.7). The Bank assessed scope 3 emissions in its supply chain by:

• analyzing the annual procurement of goods and services to identify primary sources of GHG emissions in the Bank’s supply chain
• benchmarking industry practices and completing market research of green procurement activities that reduce the consumption of energy and water, as well as the generation of waste and GHG emissions

In the future, the Bank will take steps to reduce its scope 3 emissions in its supply chain by:

• collaborating with suppliers and contract managers to gauge supplier progress on setting GHG emission targets (aligned with science-based target initiatives), reducing GHG emissions and reporting progress
• exploring solutions to streamline the tracking and reporting of emissions from the Bank’s supply chain
• developing targets and identifying reduction opportunities for scope 3 emissions

Box 4 describes the progress made in reducing impacts in the Bank’s bank note supply chain.

Progress highlights—Water and waste

The Bank is taking the following actions to make progress toward its water consumption and waste reduction targets:

• developing a water reduction strategy based on the findings of the water audits conducted in 2023 at all four Bank-owned facilities
• assessing GHG emissions from water treatment (for both municipal water and wastewater) to identify opportunities for improvement
• conducting waste audits at all four Bank-owned facilities to better understand waste diversion rates and identify opportunities for improvement

Balance sheet

The Bank’s balance sheet supports the implementation of its core functions using the assets and liabilities on its balance sheet to fulfill its mandate.

In normal times, the composition and evolution of the balance sheet are driven by the Bank’s liabilities, primarily:

• Canadian bank notes
• Government of Canada deposits
• Settlement balances

The Bank acquires assets to match its liabilities. These purchases are mainly debt securities issued or guaranteed by the Government of Canada. Additionally, the Bank provides routine liquidity to reinforce its key policy rate and to enable settlement in the payment system through its Standing Liquidity Facility.

In exceptional circumstances, the Bank may actively change the size and composition of financial assets on its balance sheet to meet objectives for monetary policy or financial stability. The Bank may also supply exceptional liquidity to financial institutions that are facing liquidity stress. To guide these actions, the Bank has established a framework for market operations and liquidity provision. Each tool in this framework is affected by—and in turn influences—the size, structure and management of the Bank’s balance sheet. As a result, the Bank’s balance sheet is structured to meet this mandate, not to minimize the climate risk associated with its assets.

Pension Plan

The Pension Fund’s investments are diversified across asset classes, geographies and sectors and are managed largely through external asset managers. These investments are exposed to both physical and transition risks in the short, medium and long term. Evidence shows that ESG factors, including climate change, can have a material impact on risk and return. This means that considering such factors is consistent with the Bank’s fiduciary duties, which require exercising caution and making investment decisions in the best interests of Pension Plan members.

The Bank ensures that external asset managers incorporate ESG factors—including risks and opportunities related to climate change—into investment decision-making processes to improve long-term risk-adjusted returns. Part of the Bank’s due diligence in selecting and monitoring asset managers involves reviewing how each asset manager incorporates ESG factors across asset classes and investment strategies. The Bank expects external asset managers to engage with the companies they lend to or invest in on ESG topics, including climate risks. Finally, the Bank encourages asset managers to adopt industry best practices, such as following the recommendations of the Task Force on Climate-related Financial Disclosures.

In 2023, the Pension Committee reviewed different approaches to integrating ESG considerations in Pension Fund investment decisions.15 This review supported:

• continuing current practices
• gradually evolving Bank processes with respect to:
  • evaluating external managers
  • reporting relevant climate metrics and risks for the fund’s various investments

The Bank will refine its approach to climate-related disclosures and investment management practices as global standards and best practices continue to evolve.

Risk management

Introduction

In 2023, the Bank refreshed how it classifies risks, which led to climate being categorized as a strategic risk. As well, the Bank conducted a climate risk assessment to improve its understanding of climate-related risks and issues. The outcomes of this assessment have:

• aligned climate work efforts across the Bank
• resulted in more effective and efficient climate risk monitoring and reporting

The Bank’s climate risk management approach must reflect its organizational responsibility to adapt to, mitigate and manage physical and transition risks. While the Bank will begin a thorough assessment of transition risks in the near term, it is already aware of and managing many of these risks. For example, the impact of transition risks on the Bank’s physical operations is mainly due to increased capital and operating costs.

Physical operations

The Bank has invested significantly in its resilience by decentralizing critical operations and integrating redundancy where possible. Furthermore, the Bank continually assesses and strengthens the resilience and availability of key infrastructure using its Continuity of Operations Plan. The Bank evaluated how prepared its physical operation are for extreme weather by applying a hazard identification and risk assessment lens to its existing resiliency measures. Overall, the assessment results show that the Bank’s current resilience measures adequately mitigate the potential risks of extreme weather.

Box 5 outlines the Bank’s main resilience measures.

The Bank is exploring its risks in other areas of operational emissions that include its scope 3 emissions. The Bank continues to monitor and manage physical and transition risks to its physical operations to ensure that it can continue to serve Canadians without interruption.

Balance sheet

The Bank’s balance sheet differs from those of other financial institutions. This is because the goals of monetary policy and financial stability, rather than profit, drive the Bank’s management of its assets and liabilities. The Bank’s balance sheet plays a key role in achieving these goals and ensures the Bank’s independence.

Securities issued or guaranteed by the Government of Canada continue to represent the single most significant asset on the balance sheet. Provincial bonds and corporate bonds make up only a small portion of the balance sheet and will mature in the near term.

Risk assessment

Based on available external data, the Bank has assessed a range of metrics that characterize the carbon footprint of key asset groups on the Bank’s balance sheet and Pension Plan, as well as their exposure to climate-related physical and transition risks. Given that climate risk analysis is an emerging field in finance, several caveats accompany this assessment, such as incomplete data coverage and unaudited data. The metrics disclosed in this report provide only initial estimates of the balance sheet’s exposure to climate risks.

Scope of assets

As at December 31, 2023, Government of Canada securities comprised close to 97.1% of the assets on the Bank’s balance sheet that are in scope for this disclosure.16 The remainder of the assets in scope for this disclosure are:

• provincial bonds, comprising about 2.9% of assets
• corporate bonds, comprising less than 0.1% of assets

Both of these bond portfolios were acquired as part of the Bank’s response to the COVID-19 pandemic.

Table 2 provides the breakdown of the Bank’s assets that are in scope for this disclosure.17

Pension Plan

Risk assessment

Climate-related financial risks—and ESG-related risks broadly—are currently assessed and managed through the Bank’s due diligence process for selecting and monitoring external asset managers. Another important element in managing these risks is diversifying the Pension Fund portfolio across sectors, geographies, asset classes and investment strategies.

Assessments of asset managers are quantitative and qualitative. They evaluate the degree to which an asset manager integrates material ESG factors—including climate change—into the investment decision-making process.

Scope of assets

The Pension Fund assets that are disclosed for climate-related risk totalled Can$1.98 billion as at December 31, 2023 (Table 3). The assets incorporated in this report include:

• Canadian and global public equities
• Government of Canada securities that mainly consist of real return bonds and treasury bills
• provincial and corporate bonds

This year the report includes disclosure for the fund’s equity stakes in real estate and infrastructure. The Pension Fund’s remaining private holdings, composed of real estate debt and private debt, are excluded from this report due to limited data available for those private assets.

Metrics and targets

Physical operations

Introduction

The Bank’s targets are aligned with those of the Government of Canada and support the objectives of the Paris Agreement.18 The Bank’s targets are as follows:

• achieve 100% renewable electricity for buildings by 2022 (complete)
• reduce building emissions by 40% by 2025 and 80% by 2030, relative to 2018 levels
• divert at least 75% (by weight) of non-hazardous operational waste by 2030
• divert at least 75% (by weight) of plastic waste by 2030
• divert at least 90% (by weight) construction and demolition waste and strive for 100% by 2030
• achieve near-zero water use by 2035 or sooner
• achieve net-zero waste production by 2040 or sooner
• achieve net-zero operational emissions by 2050 or sooner

The Bank has developed metrics that allow the tracking of progress toward these targets. While most of these metrics are measured and reported below, the Bank is establishing procedures for the annual measurement and reporting of some of these targets (e.g., operational emissions from corporate travel and purchased goods and services). The sections below present the metrics associated with each target and disclose numbers when they are available. Section 6.1.7 provides a breakdown by scope of GHG emissions that the Bank has quantified to date.19

Renewable electricity procurement

Table 4 outlines metrics monitored to support the Bank’s annual renewable electricity procurement target.

The Bank has procured 100% renewable electricity for its buildings (Head Office, Ottawa Support Centre, and the Montréal and Toronto Agency Operation Centres) since 2022. In 2023, this target continued to be met.

Building emissions

To support the overarching target of net-zero emissions, the Bank has interim targets to reduce emissions from its buildings by 40% by 2025 and 80% by 2030 compared with 2018 levels. Table 5 presents annual emissions from the Bank’s buildings.

In addition to procuring 100% renewable electricity, the Bank has been making significant gains to reduce its building emissions through other energy efficiency measures. A few highlights include:

• In 2018, the Bank switched the primary heat source for its Head Office to an electric heat exchanger, which has significantly reduced steam use.
• In 2023, the OSC recalibrated its HVAC units, adjusted the building’s control system to varying occupancy levels, utilized waste heat from the data centre and replaced natural gas heaters with electric heaters. These changes significantly reduced its natural gas use. Other energy efficient changes made at the OSC can be found in section 4.2.

The Bank continues to integrate energy efficient measures through its asset management planning.

Waste diversion

The Bank has set four waste-related targets and is in the process of selecting a suite of metrics for tracking each target. These metrics will track the generation and diversion rates of the Bank’s waste, including plastic, construction and demolition, and other non-hazardous waste. The Bank undertook a waste audit in 2023, and the results will allow the Bank to calculate these metrics and disclose them in future reports.

Water use

The Bank’s target is to achieve near-zero water use by 2035 or sooner. To assess progress toward this target, the Bank uses total water consumption in cubic metres (m³). Table 6 presents annual water consumption for the Bank’s buildings.

Water consumption dropped between 2018 to 2021 due to lower building occupancy rates during the pandemic. In 2022, the Bank moved to a hybrid work model.

The Bank is exploring opportunities to reduce its overall water consumption (section 4.2.3).

Bank notes

Some of the environmental effects of bank notes are included in the reported emissions from the Bank’s buildings (e.g., emissions from Agency Operations Centres that are dedicated to processing and distributing bank notes). However, the Bank has developed metrics to separately track the environmental performance of bank note production and distribution.

The Bank has quantified the environmental effects (i.e., GHG emissions, water consumption and waste generation) of its bank note supply chain for the 2018 and 2022 reporting years.20 This work included quantifying the upstream production and transportation of raw materials as well as the printing, processing and wholesale distribution of bank notes from the Montréal and Toronto Agency Operations Centres. Table 7 presents the metrics produced for 2018 and 2022.21

The quantity of bank notes produced and distributed, which varies annually based on end-user demand, influence the total GHG emissions metric.

The Bank also monitors and reports on GHG intensity metrics for:

• bank note production (including the upstream production and transportation of raw materials, and the printing of bank notes)
• wholesale distribution (including distribution, processing at Agency Operations Centres and transportation to end-of-life treatment)

These figures account for the quantity of bank notes produced and distributed in a year, providing a more representative comparison of environmental performance between years.

The GHG intensity for bank note production decreased by 22% between 2018 and 2022. The GHG intensity of bank note distribution decreased even further, by 55%. These decreases in GHG emissions observed between 2018 to 2022 resulted from:

• an increased yield in bank note production by using raw materials more efficiently
• implementation of a new inventory management strategy for wholesale distribution, resulting in less air and land transport
• external factors such as grid decarbonization, particularly at upstream raw material production sites

The Bank also monitors metrics about waste and water use across the Agency Operations Centres and the bank note supply chain. While water use decreased between 2018 and 2022, work to modernize the Agency Operations Centres in 2022 contributed to a 9% increase in waste during the period assessed.

Greenhouse gas emissions

To monitor progress towards its target to achieve net-zero operational emissions by 2050, the Bank continues to develop and expand its inventory of operational GHG emissions across all three scopes of emissions.22 Table 8 provides a breakdown of GHG emissions by scope that the Bank has quantified to date.

The following are the caveats for the data on greenhouse gas emissions.

• These results conform with the corporate GHG emission accounting and reporting standards set by the World Business Council for Sustainable Development and the World Resources Institute.23 The underlying data and methodologies for estimating emissions continue to evolve and improve, as demonstrated through updates to Canada’s National Inventory Report. Therefore, the Bank’s emissions reporting methodology may change in the future.
• The Bank’s current scope 1 and 2 emissions footprint captures emissions from owned buildings only and does not include leased buildings, which account for 4% of the Bank’s overall footprint of buildings.
• Variations in the Bank’s annual fuel use can be attributed to:
  • fluctuations in seasonal weather
  • equipment replacement and recalibration
• The Bank purchased renewable energy certificates from Bullfrog Power in 2023 for 100% of the electricity used at the four Bank-owned buildings located in Ontario and Quebec, which is equivalent to 523 tonnes of carbon dioxide (tCO₂e). Using location-based emissions, the Bank calculates the total scope 2 emissions for 2023 to be 965 tCO₂e.
• The most recent bank note supply chain inventory results available at the time of preparing this report are for 2022. There is a one-year delay in the inventory due to the time required to collect data from suppliers. Therefore, the scope 3 data for 2023 will be included in the Bank’s 2024 disclosure report.
• The 2018 and 2022 results have been slightly adjusted due to rounding.

Balance sheet

The Bank uses a suite of backward- and forward-looking metrics to understand and measure its balance sheet exposure to climate risks. Metrics the Bank uses are informed by guidance from bodies such as the TCFD and the International Sustainability Standards Board (ISSB), and disclosures by other central banks.

• Backward-looking metrics are lagging indicators that measure the climate exposure at a point in time based on the entity’s historical performance (e.g., weighted average carbon intensity, or WACI)24
• Forward-looking metrics are leading indicators that provide insight into an entity’s future exposures to climate risk and pathways to decarbonization. They can be further broken down into:
  • transition risk metrics that estimate the impacts associated with a shift toward a low-carbon economy
  • physical risk metrics that measure an entity’s exposure to acute and chronic climate risks25

Exposure quantification approaches

Sovereign and provincial exposures

The Bank uses emissions data calculated on a production-based accounting method for its sovereign and provincial holdings, including holdings of the Pension Plan.26

Corporate exposures

The Bank’s exposure to corporate bonds is small compared with its exposure to sovereign bonds. Based on the security holding weights, about 40% of the Corporate Bond Purchase Program (CBPP) portfolio has scope 1 and 2 emissions. To increase data coverage, the Bank derives the remaining data from emissions estimation models developed by its data vendors and through parent mapping.27 Table A-1 in the Appendix outlines how the Bank addresses issues related to the quality of data on emissions for the balance sheet and Pension Fund.

Backward-looking metrics

To assess the exposure to climate risk of its balance sheet and Pension Fund, the Bank continues to calculate the WACI.28 The TCFD recommends calculating the WACI to measure a portfolio’s exposure to carbon-intensive entities. This metric enables comparisons of different portfolios across varying asset classes.29 Higher carbon-intensive portfolios may be more vulnerable to climate transition risks.

Chart 1 shows the WACI of the Bank’s balance sheet portfolios within the scope of this report as at December 31, 2023.

• The WACI of Government of Canada (GoC) securities declined to 289 tonnes of carbon dioxide equivalent per million dollars of GDP (tCO₂e/$million) from 298 tCO₂e/$million one year earlier, a year-over-year decrease of 3%.31 Canadian GDP in 2021 (the denominator of the WACI) increased in real terms by 5%, more than the 2% rise in GHG emissions (the numerator). The WACI of GoC securities remains significantly higher than the G7 average (186 tCO₂e/$million), primarily due to the relatively large size of Canada’s carbon-intensive oil and gas industry.32 The WACI of GoC securities is expected to decrease in step with the Government of Canada’s actions toward meeting its goal of net-zero emissions by 2050.33 The 2022 WACI for the GoC securities and provincial securities portfolios have been updated based on the latest revisions of GHG emissions and GDP data.34 According to Canada’s 2021 National Inventory Report, which was released in 2023, national emissions in 2020 were revised down by 2.02%, or 13.6 megatonnes of carbon dioxide equivalent (MtCO₂e). These revisions resulted from improved estimation methodologies and updated energy data.35 Nominal GDP for Canada in 2020 decreased by nearly $11 billion, or 0.5%.36
• The WACI of provincial securities increased to 311 tCO₂e/$million from 307 tCO₂e/$million the previous year, a year-over-year increase of 1%.37 This increase was primarily driven by relatively larger maturities of securities from less carbon-intensive provinces in the Provincial Bond Purchase Program (PBPP) portfolio.38 The WACI for provincial securities is indicative of the PBPP’s strategy of market neutrality and can deviate from the WACI for GoC securities. The WACI for provincial securities is also expected to decrease as the Canadian economy decarbonizes. The PBPP was implemented in response to the COVID-19 pandemic and has since been discontinued. The temporary nature of the PBPP reduces the Bank’s exposure to this portfolio’s transition risk.
• The WACI of corporate bonds declined to 229 tCO₂e/$million from 245 tCO₂e/$million, a 7% year-over-year decrease. Maturing bonds from entities that are more carbon intensive primarily drove this large decrease. However, an increase in carbon-intensity of the remaining entities within the CBPP partially offset this decrease. All corporate bonds held on the Bank’s balance sheet were acquired through the CBPP, which was implemented in response to the COVID-19 pandemic. The CBPP was discontinued on April 2, 2021, and remaining assets will mature and disappear from the Bank’s balance sheet by the end of June 2025.39 The temporary nature of the CBPP reduces the Bank’s exposure to this portfolio’s transition risk.

To better assess the impact of climate risks in the future, forward-looking metrics further complement these backward-looking metrics.

Forward-looking metrics

The Bank continues to explore forward-looking methodologies to estimate the future effects of climate-related risk on assets held on its balance sheet. The Bank expects these methodologies to improve over time as climate risk disclosures become more prevalent and more guidance on quantifying forward-looking metrics is developed.

Physical risks to assets on the Bank’s balance sheet

To measure the impacts of physical climate effects, the Bank continues to use physical risk scores from Moody’s ESG Solutions.40 These include:

• acute risks caused by more severe and frequent extreme weather events, such as hurricanes or floods
• chronic risks caused by long-term shifts in weather patterns, such as rising temperatures or sea levels

Furthermore, the data obtained from the external provider to derive physical risk scores associated with the Bank’s financial holdings are typically updated with a lag and may not reflect the latest trends observed. This implies that these indicators remain estimates that are best understood when monitored over time and cross-referenced with additional information.41

The Bank’s corporate securities portfolio continues to have a moderate exposure to physical risks (Chart 2). The total risk score of the Bank’s corporate securities dropped to 30 from 37 one year ago. This decrease was driven by maturities of corporate bonds in 2023 from issuers that have relatively high physical risk scores.42 Of the specific factors that contribute to operations risk, floods continue to represent the greatest physical risk (with a risk score of 71, up five points from 2022, indicating high risk today and an increasing exposure level).43 The remaining factors represent a moderate-to-low risk to operations. A further breakdown of these scores for the Bank’s corporate securities reveals that:

• 72.4% have a total risk score that is less than or equal to 25
• 26.3% have a total risk score that is between 26 and 75
• 1.4% have a total risk score that is equal to or greater than 7544

The physical risk scores of the Bank’s GoC securities portfolio are relatively low (Chart 3). The total score for the portfolio is 23, which is less than half of the G7 average of 47.45 Floods and rising sea levels represent the highest physical risk scores for the portfolio.

The physical risk scores of the Bank’s provincial securities portfolio remain relatively unchanged from the previous year and continue to be moderate (Chart 4).46 Each of the six climate risk factors have scores below 40, and the total score is 32. As with the Bank’s GoC securities portfolio, the physical risk from floods remains elevated for the Bank’s provincial securities portfolio relative to other physical risks. A further breakdown of these scores reveals that:

• 42% of the Bank’s provincial and territorial bond holdings have a total risk score that is less than or equal to 25.
• The remaining 58% of the assets, have a score that ranges between 26 and 75.47

Transition risks to assets on the Bank’s balance sheet

Forward-looking assessments of transition risks allow the Bank to evaluate the impacts of these changes and to better anticipate when, where and how they might occur. These assessments help the Bank determine whether to include additional forward-looking metrics for transition and physical risks. The recent standards published by the ISSB further reinforce the TCFD guidance to use climate-related scenario analysis to report on climate resilience and identify climate risks.

Pension Plan

The WACI of assets in the Pension Fund falls within the scope of this report. The WACI of each portfolio (Chart 5) is as follows:

• 289 tCO₂e/$million for GoC securities
• 243 tCO₂e/$million for provincial securities
• 216 tCO₂e/$million for corporate bonds
• 123 tCO₂e/$million for public equities

The WACI of GoC securities decreased by 3% between 2022 and 2023.48 Note that the WACI of the provincial securities portfolio is lower than that of the GoC securities portfolio. This is different than reported for the balance sheet in section 6.2.2 and reflects the different composition of provincial bond holdings in the Pension Fund. The WACI for the provincial securities portfolio increased by 1% from last year due to slightly higher weights for provincial bonds from Alberta and Saskatchewan.49

The WACI for the corporate bonds portfolio increased by 9% between 2022 and 2023. This resulted from changes in the composition of the portfolios of the Pension Plan’s external managers. Bonds that were sold or matured had lower WACIs than new bonds purchased during the year due to an increase in exposure to the energy sector.

The WACI for public equities decreased by 14%. A significant portion of that decrease was due to reduced WACI metrics for some of the Pension Plan’s largest holdings in the energy, utilities and materials sectors.

Table 9 provides climate metrics for the Pension Fund’s real estate equity assets held through private funds, focusing on core real estate properties in Canada, the United States and Europe. The Bank will continue tracking these figures based on the composition of the Pension Fund investment portfolio.

Box 6 explains how the Bank addressed the disclosure standards for financed emissions, as stipulated by the International Sustainability Standards Board.

Table 10 provides financed emissions for the Pension Fund’s infrastructure equity holdings held through private funds, focusing on core infrastructure assets in developed countries.

Physical Risks

The physical risk scores of the Pension Fund’s portfolio of GoC securities are generally quite low.50 The Pension Fund’s public equity portfolio has a moderate exposure overall to physical risks—with a total risk score of 50—and to specific factors that contribute to operations risk (Chart 6). The portfolio’s exposure to heat stress represents the greatest physical risk with a score of 56. Year-over-year changes for the equity portfolio’s physical risk scores were minimal across all categories.

The data obtained from the external provider to derive physical risk scores associated with the Pension Fund’s holdings are typically updated with a lag and may not reflect the latest trends observed. This implies that these indicators remain estimates that are best understood when monitored over time and cross-referenced with additional information.51

The physical risk scores show that the Pension Fund’s corporate bond portfolio has a moderate exposure to physical risks with a total risk score of 38 (Chart 7). Of the specific factors that contribute to operations risk, floods represent the greatest physical risk with a score of 65, a small reduction from the previous year’s result. The remaining factors represent moderate to low risk.

The physical risk score of the Pension Fund’s provincial bond holdings is also moderate (Chart 8). All six climate risk factor scores are below 50, and the total score is 33. Floods are the greatest physical risk for provincial holdings with a score of 42 (unchanged from 2022).

The physical risk score of the Pension Fund’s real estate equity holdings is also relatively low with a total score of 22 (Chart 9). All seven climate risk factor scores are below 50. Wildfires are the greatest physical risk for real estate holdings with a score of 45. This is primarily due to some of the Pension Fund’s exposures in the United States.

Appendix: Assessment of data quality for the Bank of Canada’s balance sheet and Pension Fund portfolios

Table A-1 outlines the data emissions quality for the balance sheet and Pension Fund portfolios.

* Based on net asset value
† Based on net asset value.
‡ Emissions data provided by the Pension Fund’s external managers have been aggregated for private assets.

The use of vendor-modelled emissions data increases overall coverage but introduces some additional uncertainty around the accuracy of metrics. For 2023, the percentage of modelled emissions data was 7% for the balance sheet assets in scope for disclosure, and 15% and 20% for the Pension Fund’s equity and fixed-income portfolios, respectively.

In addition, parent mapping was conducted again for the balance sheet’s corporate bond segment and the Pension Fund’s fixed-income portfolio, increasing coverage by 51% and 16%, respectively.

Endnotes