OSFI announces intention to release climate risk management guidance

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Feb 1, 2022

Coastline

On January 14, 2022, the Office of the Superintendent of Financial Institutions (OSFI) announced via press release that it intends to release later this year for consultation a draft guideline on climate risk management for federally regulated financial institutions (FRFIs). The news of this guidance was announced on the same day that OSFI, in partnership with the Bank of Canada, released its findings on the joint pilot project on climate change transition risk scenarios.

OSFI notes that its main objective with this initiative “is to support FRFIs in their efforts to build awareness and capability in managing climate-related financial risks.”

The draft guideline will outline OSFI’s risk management expectations for FRFIs on climate-related financial risks to achieve the following five outcomes:

1. Awareness

Climate-related financial risks and their impact are understood throughout the FRFI.

2. Governance and strategy

Climate-related financial risks are embedded in the FRFI’s overall strategy and risk appetite, and integrated into the FRFI’s risk governance regime, including appropriate management and oversight.

3. Risk management

Material climate-related financial risks are integrated into the FRFI’s enterprise risk management processes and managed accordingly.

4. Financial resilience

The FRFI remains adequately capitalized and liquid through severe yet plausible climate risk scenarios over extended time horizons.

5. Operational resilience

The FRFI continues to deliver critical operations through disruption due to climate-related disasters.

 

In the guideline, OSFI intends to focus on six additional initiatives for meeting its objective in building awareness and capability to promote climate resilience amongst FRFIs.

These initiatives are:

  1. Climate data and analytics
    • Improve the availability of decision-useful data and analytical capabilities in climate change risk measurement and assessment. OSFI expects to finish its analysis of data gaps in regulatory returns later this year, as well as investigate the availability of additional climate-related quantitative and qualitative data to strengthen its climate risk analytics capabilities.
  2. Scenario analysis for climate-related financial risks
    • OSFI intends to build awareness amongst FRFIs relating to the potential vulnerability to climate-related financial risks. OSFI intends to build on the 2021 Bank of Canada-OSFI joint pilot project on transition risk scenarios to develop standardized climate scenario analysis and stress testing exercises.
  3. Climate-related capital and liquidity considerations
    • OSFI will reinforce its expectation that FRFIs evaluate and measure their capital available to protect against material risks, which will include climate-related financial risks. OSFI intends to reflect its assessments in the banks’ Internal Capital Adequacy Assessment Process or the insurers’ Own Risk and Solvency Assessment. Finally, OSFI will also reinforce its expectation that FRFIs consider the implications of both physical and transition risks on their liquidity buffers.
  4. Climate-related financial disclosures
    • OSFI will continue to consider climate-related financial disclosures within the scope of its mandate. It will also monitor the progress of domestic and international initiatives to standardize such disclosures. Additionally, OSFI will evaluate market readiness for mandatory climate-related financial disclosures associated with the Task Force on Climate-Related Financial Disclosures recommendations.
  5. Stakeholder engagement
    • OSFI intends to actively look for opportunities to broaden its stakeholder engagement. With respect to stakeholder engagements, its focus will be within and outside the financial industry to collaborate and share insights on a range of best practices.
  6. Expanding OSFI’s own capability
    • OSFI notes that it will continue to expand its capability in the regulation and supervision of climate-related financial risks (which will be consistent with the priorities set out in its Blueprint for transformation). Further, with its newly-created “Climate Risk Hub”, OSFI will continue to deepen its expertise supervising FRFIs’ management of climate-related financial risks.

While the eventual guidance will not be directed specifically at federally regulated pension plans, the guidance likely will be welcome news for many plan administrators. At this time, very little guidance has been provided by any pension regulator as to how plan administrators should consider, evaluate and integrate climate change risk management practices into their investment strategy and management of plan assets.

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