Canada’s Office of the Superintendent of Financial Institutions (OSFI) has released new climate risk rules for federally regulated banks, insurance companies, and pension funds.
In the new guideline, dubbed B-15, the Canadian regulator says federally regulated financial institutions (FRFIs) will need to publicly disclose their climate-related financial information and develop plans to identify, assess, and manage their climate risks. The largest Canadian institutions will have to comply starting the end of fiscal year 2024, while most other companies covered under the guideline will need to comply from 2025 onward.
The new rule closely aligns with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), the world’s leading climate reporting framework. It comes ahead of other imminent international climate disclosure standards, which are expected to be released later this year.
In its new guideline, OSFI says it intends to support FRFIs as they develop climate risk management plans and climate resilience. It also says FRFIs should implement OSFI’s climate risk rule from a “risk-based perspective” that allows them to “compete effectively” and manage climate risks at the same time.
What is OSFI?
Canada’s OSFI is an independent federal agency that was set up to help ensure the “safety and soundness” of the Canadian financial system.
OSFI oversees and regulates federally registered banks, insurers, pensions plans, and trust and loan companies.
OSFI climate risk rule
On March 7, OSFI issued its new guideline on climate risk management for FRFIs.
The rule is divided into two parts. The first outlines the regulator’s expectations surrounding climate governance and risk management, while the second describes its expectations for companies’ climate-related financial disclosures.
Through OSFI’s climate rule, the regulator calls on FRFIs to both understand and mitigate the impacts of climate risks to their business models and strategies, develop proper climate governance and risk management practices, and maintain financial and operational resilience amid potential climate disasters.
OSFI climate rule: Chapter 1
OSFI outlines five principles under the first part of its guideline under the categories of governance, risk management, climate scenario analysis, and capital and liquidity adequacy.
Under governance, OSFI’s first principle says FRFIs should have proper climate governance and accountability structures in place, while its second principle indicates FRFIs should incorporate the impacts of climate physical and transition risks into their overall business models and strategies.
The third principle, under risk management, says FRFIs should manage and mitigate climate risks in ways that are aligned with their own risk appetite frameworks. The latter term refers to the broad amount of risk that organizations are willing to accept as they move toward their strategic objectives. Also under risk management, OSFI says FRFIs should integrate climate risks into their overall risk management processes. It notes that proper procedures should be in place to both identify, assess, and manage these risks.
The fourth principle says FRFIs should use climate scenario analysis to determine how climate risks will affect their business operations and strategies. It says FRFIs should consider a range of potential climate scenarios that explore physical and transition climate-related risks over the short, medium, and long term. OSFI asks FRFIs to complete standardized climate scenarios and to report their results to OSFI on a periodic basis.
The first chapter’s fifth and final principle notes that FRFIs should maintain a capital and liquidity buffer to protect themselves from the climate-related risks that their businesses face.
OSFI climate rule: Chapter 2
The second chapter of OSFI’s climate risk guideline describes the regulator’s expectations for FRFIs’ climate-related financial disclosures. It says climate disclosures will help OSFI meet its mandate to maintain public confidence in Canada’s financial system and to protect depositors, creditors, and policyholders.
OSFI says the information in companies’ climate disclosures should be:
- Specific and comprehensive;
- Clear, balanced, and understandable;
- Reliable and verifiable;
- Appropriate for its size, nature, and complexity; and
- Reported consistently over time
At minimum, OSFI’s climate risk rule says disclosures should describe how companies’ boards oversee climate risks and opportunities, as well as management’s role in assessing and managing them.
The guideline also tells FRFIs to describe the climate risks and opportunities they’ve identified over the short, medium, and long term, as well as how these will affect companies’ businesses, strategies, and financial planning. In addition, FRFIs will be expected to disclose their climate transition plans and to describe their resilience to different climate scenarios, including one that’s aligned with a 1.5°C temperature rise.
With regards to risk management, OSFI tells organizations to disclose how they identify, assess, and manage climate risks, as well as how these processes are integrated into their overall risk management strategies and procedures.
FRFIs will also need to report their absolute Scope 1, 2 (direct), and 3 (indirect) greenhouse gas emissions, as well as the metrics used to calculate their climate risks and opportunities. Moreover, companies are expected to describe their climate targets and their performance against these targets.
OSFI has indicated it will develop specific cross-industry and industry-specific metrics that companies will eventually be required to report by a to-be-determined date.
OSFI climate risk rule implementation date
OSFI’s climate risk guideline will take effect at the end of fiscal year 2024 for Canada’s big six banks and internationally active insurance groups (IAIGs) that write premiums in three or more jurisdictions. For all other FRFIs, OSFI’s climate change rule will take effect at the end of fiscal year 2025.
The disclosure of firms’ Scope 3 emissions will only be expected in fiscal year 2025 for Canada’s big banks and IAIGs and in fiscal year 2026 for all other FRFIs. However, OSFI still hasn’t set deadlines for companies to disclose their climate transition plans, and strategies’ resilience.
How Manifest Climate can help
Manifest Climate is the leading Climate Risk Planning solution. Our proprietary software and in-house climate experts help businesses identify, assess, and manage their climate-related financial risks and opportunities in line with OSFI’s new guideline. Our software also helps organizations build internal climate competence, better align their disclosures with global reporting frameworks, and stay on top of market developments and peer actions. Request a demo to learn more.