In a letter to the federally regulated financial institutions and pension plans, the Office of the Superintendent of Financial Institutions (OSFI) published a summary of the feedback received to the January 2021 discussion paper on ways to address climate risks. To promote institutions' preparedness and resilience to climate risks, OSFI is exploring the role of capital requirements, supervisory review process, and market discipline. OSFI received feedback from over 70 respondents, who, in general, supported the OSFI focus on climate-related risks. OSFI received a range of suggestions on climate-related scenario analysis, disclosure, taxonomy, and measurement metrics, among other things.
Respondents indicated that standardizing taxonomy, measurement methodologies, and metrics across industry can help regulated entities improve their definition, identification, measurement, and management of of climate-related risks. Many respondents believe OSFI has an important role to play in facilitating such standards. The respondents indicated that the availability of decision-useful data, analytical tools, and skills are key challenges for institutions while the use of climate-related scenario analysis and stress testing are still at early stages for many institutions. However, some federally regulated institutions have developed risk management tools and approaches that are aligned with the circumstances of their business activities to manage their new and existing climate-related exposures. Respondents cited stakeholder interest as a key driver of voluntary climate-related financial disclosures. They indicated that stakeholders such as investors, shareholders, rating agencies and regulators drive voluntary disclosures. While there are different forms of climate-related financial disclosures, most who disclose follow the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
In their responses, many federally regulated institutions indicated that they are in the early stages of assessing and quantifying these risks. There was a general agreement that any new OSFI climate-related guidance should be principles-based and aligned with global standards, where they exist, while considering the Canadian context. OSFI agrees that the guidance on climate-related risks should be principles-based and should consider the Canadian context as well as international developments. Furthermore, any such guidance would be best informed by results from the Bank of Canada-OSFI joint pilot project on climate risk scenarios, for which stakeholders can expect further communication later this year. OSFI expects to communicate next steps on its climate-related policy work early next year. Meanwhile, OSFI will continue to monitor, through its supervision of federally regulated financial institutions, other Environmental, Social, and Governance (ESG) factors for potential linkages to safety and soundness of federally regulated financial institutions.
Keywords: Americas, Canada, Banking, Climate Change Risk, ESG, Scenario Analysis, Stress Testing, Regulatory Capital, Disclosures, TCFD Recommendations, Green Taxonomy, OSFI
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