Canada’s Office of the Superintendent of Financial Institutions (OSFI) has published Guideline B-15: Climate Risk Management, which sets out OSFI’s expectations for the management of climate-related risks.
Climate change and the global response to the threats it poses have the potential to significantly impact the safety and soundness of the Canadian financial system says OSFI; and the Guideline on Climate Risk Management seeks to help maintain the resilience of this sector.
Climate-related risks are broadly categorized as physical and transition risks by OSFI.
‘Physical risks’ refer to the financial risks from the increasing severity and frequency of climate-related extremes and events (i.e., acute physical risks); longer-term gradual shifts of the climate (i.e., chronic physical risks); and indirect effects of climate change such as public health implications (e.g., morbidity and mortality impacts).
‘Transition risks’ refer to the financial risks related to the process of adjustment towards a low-greenhouse gas (GHG) economy. These risks can emerge from current or future government policies, legislation, and regulation to limit GHG emissions, as well as technological advancements, and changes in market and customer sentiment towards a low-GHG economy.
Other key points in the guidance include:
- Physical and transition risks can also lead to liability risks, such as the risk of climate-related claims under liability policies, as well as litigation and direct actions against financial institutions for failing to manage their climate-related risks.
- Climate-related risks may manifest over varying time horizons, and are likely to intensify over time, especially if the global economy undergoes a disorderly transition. They can drive financial risks, such as credit, market, insurance, and liquidity risks. They can also lead to strategic, operational, and reputational risks. In severe instances, climate-related risks can threaten the long-term viability of a FRFI’s business model.
- Building resilience against climate-related risks requires FRFIs to address vulnerabilities in their business model, their overall operations, and ultimately on their balance sheet. This entails forward-looking approaches that are holistic, integrated, and built on reliable empirical data and sound analyses. It also necessitates FRFIs to continuously monitor and incorporate developments in climate-related risk management, such as improving data quality and evolving risk measurement methodologies, into their governance and risk management practices.
The publication of Guideline B-15 follows one of the most extensive consultations in OSFI’s history. OSFI received over 4,300 submissions from a wide range of respondents, including Federally Regulated Financial Institutions (FRFIs).
The Guideline will be effective fiscal year-end 2024 for Domestic Systemically Important Banks (DSIBs) and Internationally Active Insurance Groups (IAIGs) headquartered in Canada. For all other in-scope FRFIs, the Guideline will become effective at fiscal year-end 2025.
