New federal rules call for financial institutions to bolster climate disclosure, risk management

Canada’s big banks and insurance companies should combine efforts to minimize climate-related risks in their overall business strategies, and they should tie top executives’ pay to meeting those objectives, the industry’s federal regulator says in a new set of climate-risk guidelines released on Tuesday.

But in the new guidelines, the Office of the Superintendent of Financial Institutions, or OSFI, stops short of prescribing specific increases in capital buffers to deal with a range of physical and policy risks stemming from climate change, including potential fallout from shifts in the economy related to meeting national commitments to decarbonization.

Instead, OSFI says, financial institutions should incorporate potential consequences of climate change into their risk profiles and account for a range of possible climate-related outcomes when assessing whether the capital they hold in reserve is adequate. The regulator also ruled out a proposal by environmental activists to assign higher risk factors and capital requirements to fossil-fuel lending and investments.

A senior OSFI official explained the regulator’s restraint by saying its job is to make sure financial institutions are identifying, quantifying and managing risk, and that OSFI does not stray into providing incentives and disincentives for investments. Institutions themselves are accountable for such decisions, the official said, speaking during an OSFI media briefing held on the condition that the presenter not be named.

The regulator launched the process of creating the guidelines last year, saying climate change, and responses to it, have the potential to disrupt the stability of Canada’s financial system.

OSFI said in a news release on Tuesday that the two-chapter guideline document is the result of one of the most extensive consultation efforts in its history, which drew more than 4,300 submissions. It has said the rules are aimed at bolstering public confidence in the financial system by increasing transparency.

OSFI will require financial institutions to beef up their climate-risk disclosures and put serious plans in place for the transition to a low-carbon economy. The guidelines say the institutions should “consider whether and how” climate risk should be reflected in compensation for senior management.

The guideline document “balances the concerns of stakeholders in all regions of Canada and remains in line with the expectations of global and domestic investors who fund Canadian federally regulated financial institutions,” OSFI superintendent Peter Routledge said in the news release.

Institutions are expected to start the first phases of detailed disclosure at the end of the 2024 fiscal year, and most of the remaining requirements will come into effect in 2025.

The institutions will get an extra year to tally the most difficult reporting requirement: Scope 3 emissions, meaning those stemming from their borrowers and portfolio companies. And some disclosure requirements will be updated once the International Sustainability Standards Board, set up in 2021 to bring global uniformity to environmental, social and governance accounting, publishes its first set of reporting practices at the end of June.

The guidelines say banks and insurers should be able to show their business strategies and finances will be resilient as the world works to limit temperature increase to 1.5 degrees above preindustrial levels, the most ambitious target set out in the Paris Agreement.

As a part of the policy, OSFI will require institutions to adopt more detailed disclosure of climate-related data and run analyses of how they would fare over a range of physical, policy, market and credit changes. That will include details of governance, strategy and internal processes for managing such risks.

Julie Segal, a senior program manager at Environmental Defence, an advocacy group, said in a statement that Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland should set rules for the finance sector about which investments align with a 1.5-degree temperature increase limit.

“Canada’s financial institutions should cut emissions, not just count them. In a sinking boat you have to plug the leaking holes, not just disclose them,” Ms. Segal said. “Without government leadership to align financial flows with climate targets, our economy risks sinking.”

OSFI said some of the responses to its consultation process expressed concerns that the time horizons for plotting climate-related risks were many years longer than the timelines financial institutions consider in capital planning. And some respondents said they were worried climate-related scenario planning could generate inaccurate information for gauging how much capital to keep in reserve over the long term.

The Canadian Bankers Association said in a statement that its members were assessing the guidelines to understand their implications. It added the industry is committed to doing its part to address climate change.


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