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Canada's Road to Net Zero, and the Potential Impact on the Ratings of the Insurance Sector

Canada has committed to attaining net-zero greenhouse gas (GHG) emissions by 2050 and subsequently set its target goals into law in June 2021. It joins only about a dozen other jurisdictions around the world that have introduced net-zero laws. Canadian insurance companies are also increasingly making commitments to achieve net zero emissions in their operations and in their investment portfolios by 2050.

Key highlights include:

-- Canada's transition to net-zero greenhouse gas emissions will be more challenging than for many other countries because of its carbon-intensive economy.

-- Canadian insurance companies that have committed to meeting net-zero emissions in their investment and underwriting portfolios may do so at a pace that allows them to engage with, rather than divest from, companies with large carbon footprints.

-- So far, environmental risk factors assessed as part of credit ratings analysis have not affected any of DBRS Morningstar's credit ratings on insurance companies.

-- In the future, GHG emissions-related costs may rise, depending on the type of public policies developed to meet Canada's carbon-neutral goals.

-- In the case of Canadian insurance companies, to date only one of the three environmental risk factors, Factor #3 (Climate and Weather Risks), has been flagged as relevant for insurers that have a direct exposure to severe weather event claims. However, for the insurance companies in the DBRS Morningstar rating universe, climate risk exposures have not changed any credit ratings or trends in the past.

“In our view, Factor #1 (Emissions, Effluents, and Waste) will likely never be an applicable risk factor for insurance companies because of the nature of their service-based operations. However, we may see Factor #2 (Carbon and GHG Costs) become more important as Canada embarks on its road to reduce GHG emissions, most likely by using a combination of public policy tools, such as regulations, carbon-pricing, and tax incentives. The way that the Canadian government employs its public policy tools as it moves toward the net-zero economy will determine the relevance of Factor #2 in our credit rating assessments,” said Nadja Dreff, Senior Vice President, Insurance.