71337734-123RF

The Office of the Superintendent of Financial Institutions is publishing its draft guidelines for federally regulated financial institutions, including defined benefit pension plans.

Guideline B-15: climate risk management proposes a climate-sensitive prudential framework that recognizes the impact of climate change on managing risk. The guidelines won’t be adopted until after officials review stakeholder responses received during a review period set to conclude on Aug. 19, 2022.

“There is no one-size-fits-all approach for managing climate-related risks given the unique risks and vulnerabilities that will vary with a federally regulated financial institution’s size, nature, scope and complexity of its operations and risk profile,” said the draft guidelines. “The guideline should be read — and implemented — from a risk-based perspective that allows the federally regulated financial institution to compete effectively while managing its climate-related risks prudently.”

Read: ACPM calling on OSFI to clarify how pension plans can strengthen investment risk management

In broad terms, the OSFI intends for the guidelines to help lead to three desired outcomes for financial institutions: for the organizations it oversees to understand and mitigate the impact of climate-related risks on business models and strategies; to encourage the development of appropriate governance and risk management practices at financial organizations, enabling them to identify climate risks and; to encourage the resilience of the financial sector in Canada should the most severe climate change scenarios come to pass.

Under the draft guidelines, financial institutions within the OSFI’s purview would be required to implement appropriate processes for identifying and measuring exposure to climate risks over appropriate time horizons. It also expects institutions to collect accurate climate risk data related to greenhouse gas emissions and physical risk exposure, which should be used to inform risk management decision-making. Where there are gaps in data availability, institutions would be expected to consider using reasonable proxies.

Read: PIAC warns of ‘unintended consequences’ of pension super-priority bill

Beyond data collection, the OSFI expect institutions to implement relevant tools and models, including ones related to climate scenario analysis. In situations where institutions use models developed by third parties, internal employees should understand the methodology, assumptions and limitations of these external tools.

These tools, in aggregate, should be used to produce internal reports on climate exposure, including geographic and sector concentrations. To minimize physical risks, institutions would be required to consider all severe, plausible climate-related disaster scenarios in their decision-making around operations and to develop disaster recovery and operational continuity plans.

Beyond the draft guidelines, the OSFI is also adopting new rules related to climate-related financial disclosures, which institutions under its remit will now need to produce each year. These disclosures, mandated by the federal government, are meant to contribute to public confidence in the Canadian financial system by increasing transparency.

Read: PIAC urges flexibility in OSFI’s pension investment risk guidelines