The Office of the Superintendent of Financial Institutions (OSFI) in Canada is consulting, until August 19, 2022, on the guideline on climate risk management (Guideline B-15) for federally regulated financial institutions and pension plans (referred to as institutions hereafter). The guideline proposes a prudential framework that is more climate-sensitive and recognizes the impact of climate change on managing risk. As part of this guideline, OSFI is also introducing mandatory climate-related financial disclosures, aligned with the international Task Force on Climate-related Financial Disclosures (TCFD) framework.
The guideline on climate risk management
- outlines governance and risk management expectations for climate-related risks and complements other OSFI guidance that directly or indirectly addresses various elements of climate risk management.
- specifies that institutions should have processes in place to adequately price climate risk-sensitive assets and liabilities and manage these exposures in accordance with the Risk Appetite Framework.
- informs that OSFI will be developing a standardized climate scenario analysis exercise to assess aggregate exposures to physical and transition risks and compare institutions' approaches to climate scenario analysis; institutions will be required to apply these scenarios and report their results to OSFI.
- stipulates that institutions should maintain sufficient capital and liquidity buffers for their climate-related risks; they should incorporate climate-related risks into their Internal Capital Adequacy Assessment Process (ICAAP) or Own Risk and Solvency Assessment (ORSA) process as well as into their liquidity risk profile, in addition to integrating a range of institution-specific and market-wide severe, yet plausible, climate-related stress events when assessing the adequacy of its liquidity buffers.
- sets out six principles for effective disclosure of climate-related risks, along with the minimum climate-related risk disclosure expectations and the associated timelines by institution category (in Annex 2).
Institutions are categorized as domestic systemically important banks (D-SIBs), Category 1, 2, and 3 small and medium-size deposit-taking institutions (SMSBs), Internationally Active Insurance Groups (IAIGs) headquartered in Canada, and all other federally regulated insurers, OSFI plans to issue the final version of this guideline by early 2023, along with a non-attributed summary of comments received. OSFI expects to begin implementing the annual disclosures required by this guideline, effective fiscal periods ending on or after October 01, 2023; however, institutions may voluntarily adopt disclosure expectations earlier than this date. The implementation roadmap outlines incremental implementation of disclosure requirements, leading up to the implementation of full set of disclosures by 2027. Given the pace of change in climate risk management, OSFI also intends to review and amend this guideline as practices evolve and standards harmonize. In the future, OSFI will consider adding new chapters with enhanced expectations in areas such as climate scenario analysis and capital and liquidity adequacy in the future iterations of the guideline.
Keywords: Americas, Canada, Banking, Insurance, Basel, Regulatory Capital, Stress Testing, ESG, Climate Change Risk, TCFD, Disclosures, Credit Risk, Market Risk, Liquidity Risk, Guideline B-15, Scenario Analysis, Governance, OSFI, Headline
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