OSFI lays out climate risk rules for big banks and insurers

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Canada’s large banks and insurance companies will have to run stress tests and disclose key aspects of their plans to manage climate change risk by the end of next year, according to guidance issued Tuesday by the Office of the Superintendent of Financial Institutions.

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Following a months-long consultation, OSFI laid out a framework for financial institutions to manage and disclose the physical risks posed by climate change as well as the risks to their business lines from a transition to lower-carbon economies.

The prudential regulator laid out five key principles that include stress testing for a range of company-specific and market-wide “severe, yet plausible, climate-related stress events” when assessing the adequacy of its liquidity buffers, and having appropriate governance and accountability structure in place to manage climate-related risks.

OSFI pushed back on industry requests to wait for international bodies to set disclosure requirements, and also deflected calls to set limits on fossil fuel financing and introduce consequences for institutions that violate regulations, or penalties for delaying capital allocation to infrastructure projects intended to respond to or address climate risk.

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Some financial institutions suggested “premature” disclosures could prove counterproductive and increase the risk of incorrect decisions, while others were concerned that some disclosure expectations set by OSFI could put some companies at a competitive disadvantage.

But the regulator said waiting to introduce Canadian guidelines could also be harmful, and added that domestic rules would be subject to adjustments based on the final standards set by groups such as the International Sustainability Standard Board.

“OSFI believes that timely transparency of FRFIs’ (federally regulated financial institutions’) climate-related risks and risk management is necessary to help foster confidence in the Canadian financial system,” the regulator said. 

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While acknowledging “challenges” financial institutions face in navigating the evolving landscape of climate-related disclosure, the regulator said it “expects FRFIs to work towards refining and increasing the robustness of their climate-related disclosure practices.”

OSFI’s guidelines also call for banks and insurers to bolster risk management and decision-making by gathering accurate and timely data pertaining to physical risks such as “geophysical location of exposures” and transition risks including carbon emissions data relevant to its business activities.

“Where data gaps exist, the FRFI should consider alternative data sources or reasonable proxies to bridge the gap,” the regulator said.

Smaller financial institutions will have more time to adapt to the new guidelines. The regulator gave them until the end of 2025.

The large financial institutions also have an additional year to disclose Scope 3, or end use, greenhouse gas emissions they finance, facilitate or insure on an absolute basis.

Senior OSFI officials said this extension was intended to align with the timing of international standards.

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