OSFI proposes new regulatory guidance concerning the management of climate-related risks: What federally regulated institutions should know

On May 26, 2022, the Office of the Superintendent of Financial Institutions (OSFI) released Draft Guideline B-15: Climate Risk Management (Draft Guideline B-15). Draft Guideline B-15 addresses the changes in risks associated with climate change and its impact on federally regulated institutions (FRIs).

This article provides an overview of Draft Guideline B-15.

Purpose of Draft Guideline B-15

Draft Guideline B-15 applies to all FRIs and provides such institutions with OSFI’s expectations in connection with the management of Climate-Related Risks (as defined below), as such risks have become an increasing area of concern. Climate-Related Risks may impact other types of risks such as credit, market, insurance, and liquidity risks. The proposed guideline aims to assist FRIs in understanding Climate-Related Risks and the potential impact on their overall strategy, by developing a plan which includes governance and risk management practices to better manage and mitigate such risks and ensure FRIs remain financially and operationally resilient.

OSFI classifies “climate-related risks” in two categories: physical risks and transition risks (Climate-Related Risks):

1. “Physical risks” refer to the financial risks arising from the increasing severity and frequency of extreme climate change-related weather events; longer-term gradual shifts of the climate; and indirect effects of climate change, such as public health implications.
2. “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.

Once finalized, what would FRIs need to do to comply with Draft Guideline B-15?

1. OSFI would expect FRIs to incorporate the implications of climate change and the transition to a low-GHG economy in their business model and strategy. FRIs should have the appropriate governance, policies and practices in place to manage Climate-Related Risks.
2. FRIs should have processes in place to adequately price climate risk-sensitive assets and liabilities and manage these exposures in accordance with their Risk Appetite Framework. FRIs should mitigate the impact of climate-related disasters on their critical operations.
3. FRIs should use climate scenario analysis to assess the impact of climate-related risk drivers on their risk profile, business strategy, and business model.
4. FRIs should maintain sufficient capital and liquidity buffers for their Climate-Related Risks.

What are OSFI’s expectations regarding climate-related financial disclosures?

OSFI expects FRIs to:

1. Identify Climate-Related Risks;
2. Develop a Climate Transition Plan; and
3. Integrate Climate-Related Risks into their  existing Risk Appetite Framework, Internal Control Framework, and Enterprise Risk Management Framework, among others.

According to OSFI, effective climate-related financial disclosure involves disclosing:  

1. Relevant information;
2. Specific and complete information;
3. Clear, balanced, and understandable information;
4. Reliable, verifiable, and objective information;
5. Information appropriate for its size, nature, and complexity; and
6. Information consistently over time.

Will there be any prescribed requirements pertaining to climate-related financial disclosures?

OSFI has indicated that it will permit FRIs to exercise discretion in determining the format and the location of the disclosures. Disclosures may be made by a formal report issued to shareholders (if disclosure is made to the public), or a stand-alone report. Ultimately, the disclosures must be publicly available, completed on an annual basis, and provided no later than 180 days after the FRIs fiscal year-end.

FRIs would be expected to provide the disclosures required by Draft Guideline B-15 on or before October 1, 2023.

Takeaways and next steps for FRIs

Given the evolution and increasing economic significance of climate change, the introduction of guidance specific to climate-related risks is appropriate. The introduction of Guideline B-15 is aligned with various international approaches to the management of risks associated with climate change. In particular, the financial disclosure requirements coincide with the Task Force on Climate-related Financial Disclosures framework. Other international regulators have requested that banks and insurers test various climate scenarios including the combination of physical and transition risks. The proposed guidance is also consistent with OSFI’s principles-based supervisory approach.

A final version of Draft Guideline B-15 is expected to be issued by early 2023. FRIs should submit any comments or feedback on Draft Guideline B-15 to OSFI before August 19, 2022, at media-medias@osfi-bsif.gc.ca.

Dentons Canada’s Insurance Regulatory group is pleased to assist with any submissions to OSFI and to discuss any questions FRIs may have regarding Draft Guideline B-15.