On May 26, 2022, following consultation with key industry stakeholders, the Office of the Superintendent of Financial Institutions (“OSFI”) issued draft Guideline B-15: Climate Risk Management (the “Draft Guideline”).[1]
The Draft Guideline represents OSFI’s response to the risks posed by the ever growing threat of climate change to the Canadian financial system and obligation of federally regulated financial institutions (“FRFIs”) to develop resilience against such risks. There have been international efforts by many states and their regulatory bodies to make changes in the wake of the signing of the global 2015 Paris Agreement on climate change.
The Draft Guideline focuses on two key topics: disclosure requirements and governance and risk management procedures. The Draft Guideline also notes areas that may require further development in the future.
Governance and risk management expectations
Chapter 1 of the Draft Guideline sets out OSFI’s expectations about governance and management of climate-related risks by FRFIs. The Draft Guideline stipulates that each FRFIs, shall amongst other things:
- incorporate the implications of climate change and the transition to a low greenhouse gas economy to the institution in its business model and strategy, including by developing and implementing a Climate Transition Plan that guides the management of increasing physical risks and sets internal metrics and targets such as GHG emissions;
- integrate climate-related risks into its Risk Appetite Framework, Internal Control Framework, Enterprise Risk Management framework and relevant policies and practices;
- implement tools to measure climate-related risks and develop capabilities to aggregate the data to identify and internally report on climate-related exposure;
- develop a climate scenario analysis, which uses a hypothetical future state of the world to assess the impact of climate-related risks on the FRFI’s operation, as part of its Stress Testing Framework; and
- maintain sufficient capital and liquidity buffers for its climate-related risks, by incorporating these risks into its Internal Capital Adequacy Assessment Process and Own Risk Solvency Assessment process.
The Draft Guideline states that OSFI will provide a standardised climate scenario analysis exercises that FRFIs can utilise to determine their overall exposures to physical and transition risks. FRFIs will be expected to implement these scenarios and inform OSFI of their findings.
Climate-related Financial Disclosure expectations
Chapter 2 of the Draft Guideline specifies a number of principles that give direction on OSFI’s expectations for disclosure of financial risks related to climate change. These are in line with the framework developed by the Task Force on Climate-related Financial Disclosures and are meant to encourage institutions to enhance the standard of their governance and risk management procedures with regard to climate change. These principles mandate that FRFIs disclose pertinent information (such as the potential impact of climate-related risks and opportunities on the FRFI’s markets, businesses, and financial information, and, where applicable, an explanation of its significance), and that the disclosure be made in the following ways:
- Relevant information – information that is important to other stakeholders such as investors, analysts, and the public at large;
- Specific and complete information – information specific to the potential impact of climate-related risks and opportunities on its markets, businesses, corporate or investment strategy, and future cash flows;
- Clear, balanced, and understandable information – to provide sufficient detail to enable users to assess their exposure and avoid generic or “boilerplate” disclosures that do not add value to users’ understanding of issues
- Reliable, verifiable, and objective information – provide high-quality reliable information, free from bias and future-oriented and consistent with what is used in the FRFIs investment decision-making and risk management strategies;
- Information appropriate for its size, nature, and complexity; and
- Information consistently over time.
The Draft Guideline notes a number of technical details regarding disclosures. For many FRFIs disclosure will be expected as soon as the effective fiscal periods ending on or after October 1, 2023. Although disclosures will be required annually and are expected to be available to the public and by no later than 180 days after the FRFIs fiscal year end, FRFIs will be able to exercise discretion in determining the format and the location of the disclosures. Disclosures may be made by a formal report issued to shareholders (if made to the public), or a stand-alone report.
Final thoughts and next steps
The implementation of the Draft Guideline B-15 is in accordance with several international strategies for managing climate change-related hazards. Different climate scenarios, including the blending of physical and transition risks, have been tested by banks and insurers at the request of other international regulators. The Draft Guideline is also in line with OSFI’s principles-based supervisory approach.
By the beginning of 2023, the final version of the Draft Guideline is anticipated to be released. Before September 30, 2022, FRFIs should send any feedback or comments on the Draft Guideline to OSFI at media-medias@osfi-bsif.gc.ca.
[1] Office of the Superintendent of Financial Institutions, “Guideline B-15: Climate Risk Management” (May 2022).
