On March 7, 2023, the Office of the Superintendent of Financial Institutions (“OSFI”) issued its first prudential climate-related framework - Guideline B-15: Climate Risk Management (the “Guideline”). The Guideline sets out OSFI’s expectations on climate-related risk management and disclosure by federally regulated financial institutions (“FRFIs”) such as banks and federally regulated insurers. The Guideline applies to all FRFIs except foreign bank branches.
The Guideline, which followed a public consultation that generated over 4,300 submissions, will be effective at fiscal year-end 2024 for the six largest Canadian chartered banks (“D-SIBs”) and four largest insurers (“IAIGs”) and at fiscal year-end 2025 for all other in-scope FRFIs. However, certain disclosure requirements will not immediately apply. For example, Scope 1 and Scope 2 greenhouse gas (“GHG”) emission disclosure is required beginning at fiscal year-end 2024 for the D-SIBs and IAIGs and at the end of fiscal year 2025 for other FRFIs, but Scope 3 GHG emission disclosure is required beginning at fiscal year-end 2025 for D-SIBs and IAIGs and at fiscal year-end 2026 for the remaining FRFIs. In addition, the requirements to disclose a description of the FRFI’s climate transition plan and climate scenario analysis and stress testing have no specific timetable in the Guideline.
FRFIs will be required to make their disclosures in compliance with the Guideline on an annual basis and within 180 days of the relevant year-end. The Guideline also allows FRFIs discretion in respect of both the location and the format of the disclosure.
OSFI has described the Guideline as its first prudential framework that is climate sensitive and recognizes the impact of climate change on managing risk in Canada’s financial system. It represents a principles-based approach to climate risk management and disclosure and aligns with the recommendations of the Task Force on Climate-Related Financial Disclosures (“TCFD”). A FRFI is expected to achieve three outcomes by complying with the Guideline:
- the FRFI understands and mitigates against potential impacts of climate-related risks to its business model and strategy;
- the FRFI has appropriate governance and risk management practices to manage identified climate-related risks; and
- the FRFI remains financially resilient through severe, yet plausible, climate risk scenarios.
The Guideline is the latest in a series of actions by OSFI in recent years related to climate change, including its January 2022 report in collaboration with the Bank of Canada on their climate-change scenario analysis pilot project (the “OSFI-BOC Report”) and its publication of draft Guideline B-15. Our review of the OSFI-BOC Report can be found here.
Notably, OSFI has stated that it expects to update the Guideline’s chapter on climate-related financial disclosures once the International Sustainability Standard Board (“ISSB”) has published Standard IFRS S2 Climate-related Disclosures (“IFRS S2”) in its final form, which is anticipated to occur during Q2 of this year. Our coverage of the ISSB’s efforts to develop global baseline sustainability disclosure standards, including the release of the initial draft standards and subsequent updates, can be found here and here respectively.
Climate-Related Governance and Risk Management
The Guideline sets out five principles in respect of OSFI’s governance and risk management expectations for climate-related risks, as well as guidance relating to each of these principles:
- Governance – Principle 1: The FRFI should have the appropriate governance and accountability structure in place to manage climate-related risks.
The Guideline states that senior management has overall accountability for the FRFI’s climate risk management and that the FRFI should consider whether and how compensation policies for senior management incorporate climate-related risk considerations.
- Governance – Principle 2: The FRFI should incorporate the implications of physical risks from climate change and the risks associated with the transition to a low-GHG economy to the FRFI in its business model and strategy.
The FRFI should identify and understand the impact of climate-related risks on the FRFI’s short and long-term strategic, capital and financial plans and must develop and implement a climate transition plan to guide its actions to manage increasing physical risks from climate change and the risks associated with the transition toward a low-GHG economy. The Guideline refers FRFIs to the TCFD for further guidance on elements to consider in the process of transition planning.
- Risk Management – Principle 3: The FRFI should manage and mitigate climate-related risks in accordance with the FRFI’s Risk Appetite Framework.
The FRFI should integrate climate-related risks into its risk appetite framework and enterprise risk management, as well as its internal control frameworks. Specifically, the FRFI should identify, collect and use reliable, timely and accurate data pertaining to physical risks and transition risks relevant to its business activities and implement tools and models, including scenario analysis, to measure and assess its climate-related risks. The FRFI should also integrate climate-related risks and data into its internal monitoring and reporting functions.
- Climate Scenario Analysis and Stress Testing – Principle 4: The FRFI should use climate scenario analysis to assess the impact of climate-related risks on its risk profile, business strategy, and business model.
The Guideline imposes internal climate scenario analysis and stress testing on FRFIs and also states that FRFIs will be required to complete standardized climate scenario exercises and report their results to OSFI on a periodic basis. The Guideline mentions that OSFI may develop this section into a separate chapter in a future iteration of the Guideline.
- Capital and Liquidity Adequacy – Principle 5: The FRFI should maintain sufficient capital and liquidity buffers for its climate-related risks.
The FRFI is expected to incorporate climate-related risks into its internal capital adequacy assessment process or own risk and solvency assessment process and to assess the impact of climate-related drivers on its liquidity risk profile. The Guideline mentions that OSFI may also develop this section into a separate chapter in a future iteration of the Guideline.
Climate-Related Financial Disclosures<
The Guideline sets out six principles in respect of climate-related financial disclosures and provides disclosure recommendations for each principle.These principles are designed to enable users of disclosures to understand the financial impact of climate change on FRFIs by achieving high quality and decision useful disclosure.
- Principle 1: The FRFI should disclose relevant information.
Information disclosed should be specific to the current and potential future impact of climate-related risks and opportunities on value creation and should present sufficient detail to enable users to assess its exposure and approach to addressing climate-related risks on its markets, businesses, corporate or investment strategy, financial statements and reports and future cash flows.
- Principle 2: The FRFI should disclose specific and comprehensive information.
Disclosure should include the FRFI’s exposure to current and potential future impacts of physical and transition risks. Any scenario analyses should be based on data used by the FRFI for investment decision-making and risk management.
- Principle 3: The FRFI should disclose clear, balanced, and understandable information.
The disclosure must provide straightforward explanations of risks and opportunities, use an appropriate balance between quantitative and qualitative information and be designed to serve a wide range of users.
- Principle 4: The FRFI should disclose reliable and verifiable information.
High-quality reliable neutral information is expected but no independent external assurance is expected at this time, although FRFIs should work toward a future external assurance expectation.
- Principle 5: The FRFI should disclose information appropriate for its size, nature, and complexity.
OSFI introduces the principle of proportionality (which is also expected in IFRS S2), For example, in general the volume and level of detail of disclosure should be greater for a FRFI that is larger.
- Principle 6: The FRFI should disclose information consistently over time.
OSFI’s expectations around GHG emissions accounting are also outlined in the Guideline, at Annex 2-1. Specifically, FRFIs are expected to use the latest GHG Protocol Corporate Accounting and Reporting Standard, GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard and Partnership for Carbon Accounting Financials’ (“PCAF’s”) Global GHG Accounting and Reporting Standard for the Financial Industry (PCAF Standard).
Consultation Feedback for Draft Guideline B-15
Coinciding with the issuance of the Guideline, OSFI published a summary of its public consultation feedback following its issuance of draft Guideline B-15. OSFI noted certain themes and recurring issues from the consultations, including the following:
- Concerns that the guidance may be premature: Some respondents suggested that the Guideline be delayed in order to (1) “harmonize disclosure expectations/timelines with those of relevant standard setting bodies and regulators, and key initiatives” (including the ISSB, Canadian Sustainability Standards Board, Canadian Securities Administrators, PCAF, and the Glasgow Financial Alliance for Net Zero initiatives), (2) “permit an iterative and progressive approach to disclosures”, and (3) “mitigate the potential for unintended consequences of disclosures”.
OSFI responded that it will continue to refine and evolve the Guideline, including to achieve consistency with ISSB requirements. OSFI Superintendent Peter Routledge also mentioned in a recent speech that OSFI would be taking an approach of “bias towards action” and that this approach could be seen in OSFI’s approach on climate-related risks.
- Concerns about proportionality and materiality: Some respondents suggested that the concept of proportionality should be embedded throughout the Guideline, that a phased-in approach be used and/or that the Guideline should only apply to “material climate-related risks”. OSFI confirmed that it will consider proportionality and apply a principles-based approach to supervision in respect of climate-related risks.
- Concerns about climate-related capital and liquidity requirements: Some respondents suggested that OSFI’s current capital and liquidity guidance was sufficient to address climate-related risks. OSFI stated that it “continues to assess whether its regulatory capital framework captures the unique features of climate-related financial risks” and expects the guidance to evolve.