Banks, insurers falling behind on climate risk

Many of Canada’s big banks and insurers aren’t on track to meet regulatory deadlines for climate risk management, according to the Office of the Superintendent of Financial Institutions (OSFI).

Guidance around climate risk management issued by OSFI last year set implementation deadlines of October 2024, 2025, and 2026 for various elements.

The federal financial regulator issued a report detailing the results of a survey of financial institutions to assess their readiness for those deadlines, finding that most firms have “started, or have planned work, to manage their climate-related risks.”

Yet some financial institutions “are at very early stages of considering climate-related risks and how they will manage them, and more work is needed to accelerate progress in time for the guideline implementation dates.”

In particular, OSFI found that, while financial firms are making progress at adding climate considerations to their governance processes, they haven’t made as much headway when it comes to quantifying the impacts of climate-related risks.

“Climate-related risks are forward-looking risks, where empirical data and traditional risk management approaches and tools may not sufficiently identify and account for these risks. This could, in turn, lead to an inadequate capture of the potential risks and risk response,” the report said.

Among other things, the regulator found the industry still needs to ramp up its assessments of the impact of climate risks on their other financial and non-financial risks.

For example, about half of the survey’s respondents have assessed less than 20% of their various portfolios for climate-related risks. “This signals that [firms] need to accelerate their assessments across all key risk categories,” the report said.

It also found that financial institutions aren’t yet factoring climate considerations into their capital and liquidity adequacy assessments, and most haven’t started building climate transition plans.

The regulator reported that over 40% of financial firms have started, or plan to, use scenario analysis to assess climate-related risks, “with slightly more progress reportedly made on physical risks than transition risks.”

OSFI also found that between 75% and 85% of respondents said they are using a five-year timeline to assess climate-related risks, with fewer firms looking out longer than five years.

“More life insurers reported examining climate-related risks for longer-term time horizons than [banks] and P&C insurers,” it said. “However, this is expected given the nature of life insurers’ assets and liabilities.”

Despite climate risk assessments being at early stages, most firms indicated they are prepared to meet climate-related financial reporting requirements, the report also noted.

In the meantime, OSFI said it has embarked on several initiatives that aim to help financial firms improve capacity to assess climate risks, including its upcoming standardized climate scenario exercise.

Additionally, the regulator said it will engage with the industry later this year on the results of its readiness survey, while also monitoring evolving practices and standards to assess the need for additional guidance.