OSFI proposes climate risk guidance

Federal financial regulators issued new guidance to address climate-related financial risks, including mandatory disclosure requirements.

The Office of the Superintendent of Financial Institutions (OSFI) issued a new draft guideline Thursday that sets expectations for federally regulated financial institutions.

“This guideline proposes a prudential framework that is more climate sensitive and recognizes the impact of climate change on managing risk,” OSFI said in a release.

Under the guideline, institutions must ensure they’re adequately assessing and managing risks stemming from climate change, including the physical risks that arise from the effects of global warming and the risks of transitioning to a lower-carbon economy.

At this point, however, the framework does not impose specific capital charges for those risks.

In a briefing with reporters, the agency suggested that changes to capital requirements to reflect climate risk will be developed down the road, as the approach to climate-related risks evolves.

In the meantime, as part of the new framework, the regulator proposed that firms be required to provide increased disclosure following the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Those requirements would be phased in over time and not fully implemented until 2027.

OSFI proposed beginning enhanced disclosure with qualitative reporting and moving to increased quantitative disclosure over time. Ultimately, this would result in full disclosure of Scope 3 emissions (the broadest category of emissions disclosure) and scenario analysis by smaller banks and insurers in 2027.

The new disclosure requirements are intended to “incentivize improvements in the quality of the institutions’ governance and risk management practices related to climate,” the regulator said, adding that the increased transparency will also boost public confidence in the Canadian financial system.

“Building financial resilience against intensifying climate-related risks requires institutions to address vulnerabilities in their business model, their overall operations, and ultimately on their balance sheet,” the regulator said in a letter to the industry.

However, the approach was criticized by environmentalists as too timid.

“OSFI wants Canadians to have confidence in the financial system, but they continue to allow banks to overfinance the fossil fuel industry, further fueling the climate crisis and increasing our exposure to major disasters like last year’s floods and wildfires in B.C.,” said Alex Speers-Roesch, climate policy analyst at Greenpeace Canada, in a statement.

The proposed guidance is out for comment until Aug. 19, and OSFI said it aims to issue the final version in early 2023.

It also signalled that the guidance will be revised “as practices evolve and standards harmonize.”

“Ensuring that the financial system remains resilient in the face of climate change demands that we address its threats with a greater sense of urgency, vigour and effort,” said Peter Routledge, superintendent at OSFI, in a release.

“With the release of this draft guideline, we are taking deliberate steps towards addressing climate-related risks in our broader regulatory and supervisory activities.”