OSFI Releases Draft Guideline B-15 on Climate Risk Management – Financial Services

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On May 26, 2022, the Office of the Superintendent of Financial Institutions (“OSFI”) released a draft Guideline B-15: Climate risk management (the “Draft Guideline”). The draft guideline sets out OSFI’s expectations regarding the management of climate-related risks by federally regulated financial institutions (“FRFIs”) and aims to help FRFIs develop greater resilience and better management of these risks.1

The draft guideline incorporates findings from a number of other OSFI initiatives related to climate-related risk management, including the publication and consultation of a discussion paper titled “Navigating the uncertainty of climate change
[PDF] and a joint climate scenario pilot project with the Bank of Canada, the results of which were published in a report titled “Using scenario analysis to assess the risk of climate transition” [PDF] on January 14, 2022. The draft guideline focuses on two main areas, the first being governance and risk management practices and the second being disclosure requirements. The draft guidelines also identify areas that could be further developed in the future.

Governance and risk management practices

The draft guideline sets out a number of OSFI’s expectations of FRFIs with respect to governance practices and risk management, including:

  1. Integrate the impacts of climate change and the transition to a low greenhouse gas emission economy on the IFF into its business model and strategy. OSFI expects FRFIs to develop and implement a climate transition plan, consistent with their business plan and strategy, that guides their management of increasing physical risks related to climate change (i.e. climate, longer-term gradual changes in climate and indirect effects of climate change such as implications for public health) and the risks of transitioning to a low greenhouse gas emission economy (i.e. the risks related to current or future government policies, laws and regulations, developments and changes in the market and customer sentiment).

  2. Put in place appropriate governance, policies and practices to manage climate-related risks.

  3. Have instituted processes to adequately assess assets and liabilities sensitive to climate risk and manage these exposures in accordance with their risk appetite framework.

  4. Mitigate the impact of climate-related disasters on critical operations, including consideration of severe, but plausible, climate-related disaster scenarios in decision-making and business continuity and disaster recovery plans.

  5. Use climate scenario analysis to assess the impact of climate-related risk factors on risk profile, business strategies and business models, including as part of the IFF stress testing framework. OSFI will develop a standardized climate scenario analysis exercise to assess overall exposure to physical and transition risks and compare FRFI approaches to climate scenario analysis. FRFIs will be required to run these scenarios and report their results to OSFI.

  6. Maintain sufficient capital and liquidity buffers for climate-related risks and integrate climate-related risks into the internal capital adequacy assessment process or internal risk and solvency assessment process of the IFF, as the case may be.

Disclosure

The draft guideline also sets out a number of principles that guide OSFI’s expectations for climate-related financial risk disclosure. These align with the framework of the Task Force on Climate-Related Financial Disclosures and aim to encourage improvements in the quality of governance and risk management practices of climate-related institutions. These principles require FRFIs to disclose relevant information (for example, the potential impact of climate-related risks and opportunities on the FRFI’s markets, business and financial information, and, where appropriate, an explanation as to their importance, and that the disclosure is: (i) specific and complete; (ii) clear, balanced and understandable; (iii) reliable, verifiable and objective; (iv) appropriate to the size, nature and complexity of IFF; and (v) consistent over time so that users can understand the development and evolution of the impact of climate-related issues as well as to enable inter-period comparisons.

The required disclosure must be implemented for fiscal years ending on or after October 1, 2023. FRFIs can determine where the disclosure is made (for example, in shareholder reports or in stand-alone reports). OSFI expects them to be made public at least annually and no later than 180 days after the FRFI’s fiscal year-end.

Next steps

Comments on the draft guideline can be submitted to OSFI until August 19, 2022. OSFI expects to issue a final version of Guideline B-15 by early 2023.

Footnote

1. Office of the Superintendent of Financial Institutions, “Guideline B-15: Climate risk management” (May 2022).

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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