OSFI publishes final guideline on climate risk management for federally regulated financial institutions
On March 7 2023, the Office of the Superintendent of Financial Institutions (OSFI) published its final Guideline B-15 on climate risk management (“Guideline”) applicable to Federally Regulated Financial Institutions (FRFIs).
It will be effective from 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, it will be effective from fiscal year-end 2025. Foreign bank branches are excluded.
It will be effective from 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, it will be effective from fiscal year-end 2025. Foreign bank branches are excluded.
Summary of the Guideline
The Guideline comprises two chapters which set out principle-based expectations that are interrelated and mutually reinforcing. In implementing these expectations, FRFIs should adopt a proportional and risk-based approach that will enable them to compete effectively while prudently managing its climate-related risks.
Chapter 1: Governance and risk management
Area | Principles |
Governance | Have appropriate governance and accountability structures in place to manage climate-related risks. This includes reviewing senior management compensation policies to incorporate climate-related risk considerations. |
Incorporate implication of physical risks from climate change and risks associated with transition to a low greenhouse gas (GHG) economy to business model and strategy. This includes developing and implementing a Climate Transition Plan, assessing this Plan under different climate-related scenarios and monitoring progress made against the Plan. | |
Risk management | Manage and mitigate climate-related risks in accordance with the risk appetite framework. This includes integrating climate-related risks into risk management framework to identify, measure, manage, monitor, and report on existing risk types (e.g. credit, market, operational, liquidity and insurance risks). |
Climate scenario analysis and stress testing | Use climate scenario analysis to assess the impact of climate-related risks on risk profile, business strategy and business model. When selecting suitable climate scenarios, consider industry-accepted sources (e.g. Network for Greening the Financial System (NGFS)) as well as domestic and global policies and laws (e.g. the Canadian Net-Zero Emissions Accountability Act). |
Capital and liquidity adequacy | Maintain sufficient capital and liquid buffers for climate-related risks. This involves incorporating climate-related risks into Internal Capital Adequacy Assessment Process (ICAAP) or Own Risk and Solvency Assessment (ORSA) processes and the assessment of liquidity buffers adequacy. |
Chapter 2: Disclosures
The Guideline sets out the following principles for effective disclosures of climate-related risks:
- Disclose relevant information. This includes providing information specific to the current and potential future impact of climate-related risks and opportunities on the FRFI’s market, strategy, business model and future cash flows.
- Disclose specific and comprehensive information. This includes including historical and future-oriented information as well as using data that is consistent with what is used for investment and risk management decision making.
- Disclose clear, balance and understandable information. This includes ensuring an appropriate balance of qualitative and quantitative information and providing straightforward explanations of risks and opportunities.
- Disclose reliable and verifiable information. Though independent external assurance of disclosures is not expected at this time, it may be expected in the future.
Disclosure expectations align with the Taskforce for Climate-related Financial Disclosure (TCFD) recommendations. OSFI will later determine the cross-industry and industry-metrics to be disclosed as part of the supplement “Metrics and Targets”. FRFIs can decide where to locate their disclosures. Disclosures must be made available no later than 180 days after the fiscal year-end.
Background
The Guideline comes after OSFI received 4,300 submissions from consultation of its draft guideline which ended September 2022.
OSFI intends to review and amend the Guideline as practices and standards evolve including updates to the International Sustainability Standard Board (ISSB) disclosure requirements.
Next steps for FRFIs
In-scope FRFIs should perform an as-is assessment and develop a coordinated roadmap to adequately integrate climate risk management across their business. This will involve updating governance, processes, policies, risk practices, systems, and data management to incorporate climate risk considerations. FRFIs can leverage on best practices and industry guidance from Europe and UK to gain insights into what financial institutions in these regions are doing to achieve compliance with similar expectations from their regulators.
For in-scope FRFIs already producing TCFD-aligned disclosures, expectations on climate-related financial disclosures in the Guideline do not represent a major change. However, FRFIs producing these disclosures for the first time should start preparing from now (addressing resource planning, capability building, roles and responsibilities allocation and system updates).
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