OSFI published a discussion paper on climate-related risks that can affect the safety and soundness of federally regulated financial institutions (FRFIs) and pension plans (FRPPs). The discussion paper considers how climate-related risks can drive financial, operational, strategic, and reputation risks of federally regulated financial institutions and pension plans. The paper shares the OSFI insights on possible prudential tools for enhancing preparedness and resilience to these risks. This includes a discussion of the respective roles of capital requirements, the supervisory review process, and market discipline in promoting resilience to climate-related risks. OSFI welcomes comments on the discussion paper by April 12, 2021. OSFI also published remarks of the OSFI Superintendent Jeremy Rudin on technology and climate-related risks.
The discussion paper identifies and categorizes climate-related risks and how these risks could impact the safety and soundness of federally regulated financial institutions and pension plans. It also sets out the ways in which federally regulated financial institutions could prepare for, and build resilience to, climate-related risks. The paper also the ongoing work of OSFI on climate-related risks. To promote federally regulated financial institution preparedness and resilience to climate-related risks, OSFI is exploring the role of the following:
- Capital requirements—Exploring whether there are climate-related considerations beyond what is in the existing capital framework that should be considered.
- Supervisory review process—Considering whether climate-related risks should be incorporated more specifically into guidance on risk assessment processes, such as Internal Capital Adequacy Assessment Process and Own Risk and Solvency Assessment, scenario analysis, and stress testing.
- Market discipline—Reviewing the role climate-related financial disclosures can play in supporting the prudential oversight of climate-related risk management.
The paper highlights that traditional risk management approaches and stress testing tools may not be sufficient for identifying and accounting for a federally regulated financial institution's climate related risk exposures due to the uncertain outlook and long-horizon of climate change. New, advanced, or adapted risk analysis tools—such as sophisticated climate modeling and climate specific scenario analysis—could help to identify and assess material climate-related risks. These tools can also be helpful in setting or evaluating climate-related risk strategy and/or stress testing resilience to economic shocks from climate change. Additionally, financial risk models can play an important role in assessing federally regulated financial institution's material risk exposures. For climate-related risks, financial modeling can present a challenge to federally regulated financial institutions in a number of ways: current assumptions may not capture the impact of climate-related risks on the future direction of the risk exposure; historical loss rates due to climate related risks are not currently available; and climate data available may be insufficient in granularity.
Comment Due Date: April 12, 2021
Keywords: Americas, Canada, Banking, Insurance, Climate Change Risk, ESG, Regulatory Capital, Stress Testing, Disclosures, OSFI
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