OSFI and the Bank of Canada announced a pilot project to use climate-change scenarios to better understand the financial system risks in the context of transition to a low-carbon economy. A small group of institutions from the banking and insurance sectors will participate voluntarily in the project and these institutions are Intact Financial, Manulife, Royal Bank of Canada, Sun Life Financial, TD Bank Group, and The Co-operators Group Limited. Early in 2021, OSFI plans to launch a discussion paper on preparing for, and building financial resilience to, climate-related risks.
Scenario analysis is a useful tool for identifying potential risks in an environment of considerable uncertainty. Climate-change scenarios related to a transition to a low-carbon economy explore different pathways for emissions reductions—driven by changes in policy, technology, and consumer and investor preferences—and their implications for the economy and financial system. Building on the previous work on climate-change scenarios for the global economy, OSFI and the Bank of Canada will first develop a set of climate-change scenarios that are relevant for Canada. Using these scenarios, participants will explore the potential risk exposures of their balance sheets. The project aims to:
- build the climate scenario analysis capability of authorities and financial institutions and support the Canadian financial sector in enhancing the disclosure of climate-related risks.
- increase authorities’ and financial institutions’ understanding of the financial sector’s potential exposure to risks associated with a transition to a low-carbon economy.
- improve authorities’ understanding of financial institutions’ governance and risk-management practices around climate-related risks and opportunities.
OSFI and the Bank will publish a report, planned for the end of 2021, sharing details on the specific scenarios, methodology, assumptions, and key sensitivities. This project is not intended to serve as an assessment of individual financial institutions’ exposure to climate-related risks or the broader financial sector’s resilience to transition risks. Additionally, the selection of project participants is not an endorsement of their current approaches to the management or disclosure of climate risks. The climate-change scenarios to be developed for the project will build on the work conducted by researchers at the Bank of Canada, as presented in the discussion paper on scenario analysis that was published in May 2020. The OSFI work on climate-related risks focuses on potential impact on the financial soundness of individual banks, insurers, and private pension plans and on the stability of the financial system. OSFI is working with international counterparts as an active participant in the Sustainable Insurance Forum, a UN-sponsored grouping of financial regulators.
Keywords: Americas, Canada, Banking, Insurance, Climate Change Risk, ESG, Climate Change Scenarios, Bank of Canada, OSFI
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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