Canada’s Office of the Superintendent of Financial Institutions (OSFI) has published guidelines setting out its expectations for the management of climate-related risks by federally regulated financial institutions (FRFIs), which include banks and insurers.
The federal government agency, which regulates and supervises more than 400 FRFIs and 1,200 pension plans, published B-15: Climate Risk Management this week following “the most extensive consultation efforts in its history”, which saw 4,3000 submissions.
For “domestic systemically important banks (DSIBs)”, the guideline will be effective fiscal year-end 2024. The category includes Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank.
It also covers “internationally active insurance groups (IAIGs)”, including Sun Life Assurance Company of Canada, Manufacturers Life Insurance Company, Canada Life Assurance Company and Intact Financial Corporation.
For all other FRFIs, the guideline will become effective at fiscal year-end-2025.
OSFI’s expectations are divided into two chapters. One addresses governance and risk management expectations, while the other addresses OSFI’s expectations for the disclosure of climate-related risks.
Chapter one is sub-divided into five key principles requiring – among other things – institutions to have an appropriate governance and accountability structure in place to manage climate-related risks, to maintain sufficient capital and liquidity buffers for their climate-related risks, and to use climate scenario analysis to assess the impact of climate-related risks on their risk profile, business strategy and business model.
As well as being expected to conduct an internal climate scenario analysis to understand the resilience of their business model and strategy, institutions will be required to complete standardised climate scenario exercises and report their results to OSFI on a periodic basis.
According to the guideline: “These exercises will enable OSFI to assess aggregate exposures to physical and transition risks and compare FRFI approaches to climate scenario analysis.”
The first of these mandatory exercises will take place in 2024.
OSFI has also outlined its expectations for the disclosures, noting that institutions should subject them to internal governance processes and controls that are the same or “substantially like” those used for financial reporting.
The disclosures “are not expected to be subject to independent external assurance at this time” – but the guideline adds that FRFIs “should work towards a future state in which external assurance is expected”.
On the content of the disclosures, the inclusion of institutions’ Scope 3 greenhouse gas (GHG) emissions, as well as the reporting standard used by the institution to calculate and disclose the GHG emissions, are among the minimum requirements.
As with other disclosure requirements, the year in which this is expected depends on the institution. DSIBs and IAIGs will have to disclose by 2025, while for others the deadline will be 2026.
OSFI has said it intends to review and amend the guideline as practices and standards evolve. This includes considering updates to chapter two’s disclosure expectations when the International Sustainability Standard Board (ISSB) publishes their Standard IFRS S2 Climate-related Disclosures.
Sarah Keyes, CEO of ESG Global Advisors, highlighted the guideline’s overall alignment with other leading climate change disclosure, measurement and reporting frameworks, including the TCFD, the SEC’s proposed climate disclosure regulation and PCAF.
Speaking to Responsible Investor, she said: “Financial institutions should begin preparing today for new minimum disclosure rules to come into effect in 2024 and beyond, starting with governance and risk management processes and moving quickly to the measurement and reporting of Scope 1, 2 and 3 GHG emissions.”
On Tuesday, OSFI also announced that in the coming months it will issue a mandatory self-assessment questionnaire for financial institutions to gauge their level of readiness to meet the guideline expectations. It will publish a thematic summary of the results before the end of the year.
This year will also see the publication by OSFI of the results of a climate scenario analysis exercise currently underway in partnership with the Bank of Canada, which is assessing the impacts of floods on banks’ residential mortgage portfolios.
OSFI also announced this week that it will begin incorporating the guideline expectations in supervisory assessments and risk ratings for large FRFIs. This will start in 2026 for all other institutions.
The Canadian Banking Association told RI that it – and its members – were assessing B-15.
“Climate change is a critical issue of our time and banks in Canada are committed to doing their part to address it,” a spokesperson said. “That’s why banks are taking real action to address climate-related factors, evolving their risk management frameworks and accelerating clean economic growth through combined efforts with their peers, industry sectors, governments and civil society.”
Senator Rosa Galvez welcomed the guidelines as a first step in establishing strong disclosure in the Canadian market. In particular, she welcomed the specific inclusion of a scenario “which limits warming to the level aligned with … 1.5C above pre-industrial levels, based on the 2015 Paris Agreement” when assessing strategy resilience.
However, she added: “If Canada is to meet its obligations under the Paris Agreement, or even its 2026 emissions reduction target of 20 percent below 2005 levels, regulators must not only require Canadian institutions to disclose their climate risks but to actively align their operations with climate commitments.”
In 2022, Galvez introduced The Climate Aligned Finance Act, which would give exposure to new fossil fuel infrastructure and extraction the highest possible risk-weighting for capital requirements, while all other exposure to the sector would be given an increased weighting.